How Do Mandatory Arbitration Clauses Work? Three Introductory Issues

  • June 16, 2020
  • Matthew Gordon

In a dispute resolution class during my master’s degree, the instructor, a veteran arbitrator and mediator, asked the twenty or so of us:

“How many of you have signed a contract in which you are subject to a mandatory arbitration clause? Put up your hands.”

About half of us did, me included.

“If you have a cellphone,” the instructor said, “you are.”

Mandatory arbitration clauses are becoming increasingly common in commercial contracts, from large-scale purchase and sale agreements, to independent contractor consulting contracts, to consumer contracts (such as cellphone contracts). Some of them involve two powerful parties, such as two large corporations, or a corporation and a labour union. Others involve a David and Goliath situation, in which a large corporation, often a telecommunication, insurance or car rental company, drafts a standard form agreement to be signed by an individual consumer.

Proponents of these clauses often argue that they ensure more efficient dispute resolution, by allowing parties to save time and money versus fighting in court. Similarly, parties to an arbitration are often free to craft their own procedures rather than be fettered by any particular jurisdiction’s rules.

Detractors of these clauses often argue that they deprive parties of their constitutionally protected right to seek redress in the court system, they entrench systemic bargaining power imbalances, and they are confusing to unsophisticated parties.

Three of the key aspects of a mandatory arbitration clause are the scope of the contract, the arbitrator selection, and the arbitration procedure.

Scope of the Contract

Just because two parties are subject to a mandatory arbitration clause does not mean that every dispute between them is subject to arbitration. The example I like to use is, “let’s say you’ve just signed a cellphone agreement. On the way out of the office, you slip and fall, breaking your hip. You want to sue the cellphone company. This absolutely does not go to arbitration.”

A typical mandatory arbitration clause might say something like, “Any dispute arising out of this contract…” [emphasis mine]

This is where clear, concise contract language is important. Battles over arbitrability (i.e. whether a disputed should be arbitrated or tried in a court) often make disputes costlier, slower, and more damaging to any ongoing relationship between the parties. Whether a dispute should be resolved at arbitration or in the court system is often not as clear-cut as the personal injury example I gave above. Disputes involving third parties, insurers, or defamation claims, among countless other topics, may be the subject of arbitrability battles as well. When the scope of the contract is unclear, this is a crucial point for a party and counsel to review.