Arbitration is private dispute resolution outside the court system. Parties agree to submit disputes to one or more arbitrators who render binding decisions. The process is governed by contract, with the Federal Arbitration Act providing the framework for enforcement.
The Arbitration Agreement
Arbitration requires an agreement to arbitrate. Without agreement, courts retain jurisdiction. The agreement may be a standalone contract or a clause within a larger contract. Most consumer and employment arbitration arises from clauses buried in lengthy agreements.
The FAA establishes a strong federal policy favoring arbitration. Courts resolve doubts about arbitrability in favor of arbitration. Challenges to arbitration agreements face an uphill battle.
Scope of the agreement determines what disputes go to arbitration. Broad clauses cover any dispute arising out of or relating to the contract. Narrow clauses may cover only specific types of disputes. Courts interpret scope questions, but broad clauses capture almost everything.
Delegation clauses assign questions of arbitrability to the arbitrator rather than the court. If the parties clearly and unmistakably delegated arbitrability questions, the arbitrator decides whether a dispute falls within the agreement. Most institutional arbitration rules include delegation provisions.
Enforceability Challenges
Unconscionability is the primary ground for challenging arbitration agreements. Procedural unconscionability examines the circumstances of agreement formation. Substantive unconscionability examines the fairness of the terms. Most courts require both.
Procedural unconscionability includes contracts of adhesion, hidden terms, unequal bargaining power, and lack of meaningful choice. A take-it-or-leave-it arbitration clause in a consumer contract has procedural unconscionability. But that alone is usually insufficient.
Substantive unconscionability includes one-sided terms, excessive costs, limitations on remedies, and provisions that favor the drafter. A clause requiring arbitration in a distant forum, imposing prohibitive fees, or limiting discovery may be substantively unconscionable.
Class action waivers are generally enforceable despite arguments that they effectively preclude vindication of small claims. The Supreme Court has repeatedly upheld class waivers in arbitration agreements.
Arbitration Procedures
Arbitrator selection varies by agreement and institution. Parties may select a single arbitrator or a panel. Institutional rules provide selection procedures. Party-appointed arbitrators raise impartiality concerns that neutral selection avoids.
Discovery in arbitration is limited compared to litigation. Depositions may be restricted or prohibited. Document production is narrower. Interrogatories are rare. Limited discovery is a feature for those seeking efficiency and a bug for those needing extensive fact development.
Hearing procedures are flexible. Formal rules of evidence do not apply, though arbitrators may consider relevance and reliability. Witnesses testify, documents are admitted, and arguments are presented. The process resembles a trial but with relaxed formality.
Interim measures including injunctions and asset preservation orders are available from arbitrators in most institutional frameworks. Courts may also grant interim relief in support of arbitration.
Arbitration Institutions
AAA, the American Arbitration Association, is the largest domestic provider. AAA maintains panels of arbitrators, administers cases, and publishes rules for commercial, consumer, employment, and other categories of disputes.
JAMS provides arbitration and mediation services with a roster of former judges and experienced attorneys. JAMS tends toward higher-end commercial disputes.
Industry-specific arbitration exists in securities (FINRA), construction, international trade, and other fields. Each has specialized rules and arbitrator pools.
Ad hoc arbitration without institutional administration is possible but requires the parties to handle all logistics. Institutional administration adds cost but provides structure.
The Award
Arbitration awards are final and binding. Judicial review is extremely limited. Courts do not review the merits. Even serious errors of law or fact do not warrant vacatur.
Vacatur grounds under the FAA include corruption, fraud, evident partiality, arbitrator misconduct, and exceeding powers. The grounds are narrow and rarely successful. Manifest disregard of the law, once a common vacatur ground, has been largely eliminated.
Confirmation converts the award to a court judgment. The prevailing party files a petition to confirm. The losing party may cross-petition to vacate. Confirmation is usually routine absent valid vacatur grounds.
Enforcement of confirmed awards follows normal judgment collection procedures. International awards are enforced under the New York Convention, which provides recognition in over 160 countries.
Employment Arbitration
Mandatory arbitration in employment contracts has become ubiquitous. Employees agree to arbitrate all employment disputes as a condition of employment. Class waivers prevent collective action.
EEOC retains authority to pursue claims regardless of arbitration agreements. An employee bound by arbitration cannot sue, but the EEOC can. Practical relief from the EEOC is limited given resource constraints.
Confidentiality in employment arbitration shields repeat-player employers from reputational consequences of adverse rulings. Employees cannot learn from others’ experiences. Recent reforms in some jurisdictions limit confidentiality for sexual harassment claims.
Arbitrator incentives favor employers who are repeat players selecting arbitrators for future cases. Empirical studies show mixed results on whether this affects outcomes, but the structural concern is real.
Consumer Arbitration
Consumer arbitration typically involves disputes over goods, services, and financial products. The consumer agrees to arbitration through terms of service, credit card agreements, or purchase contracts.
Small claims may be exempt from arbitration under some agreements. The cost of arbitration may exceed the value of small claims, effectively eliminating remedies.
Fee allocation in consumer arbitration often requires the business to pay arbitrator fees. Consumer protocols at major institutions limit consumer costs. But fee provisions vary by agreement.
Effective vindication doctrine once provided relief when arbitration costs precluded pursuing statutory claims. Supreme Court decisions have limited this doctrine significantly.
International Arbitration
International commercial arbitration provides neutral forums for cross-border disputes. Parties avoid home-court advantage concerns by selecting neutral seats and arbitrators.
Choice of law in international arbitration allows parties to select governing law for the contract, the arbitration procedure, and the arbitration agreement itself. These may differ.
Enforcement under the New York Convention is generally reliable. Courts in convention countries must recognize and enforce awards subject to limited defenses.
Investment arbitration under bilateral investment treaties allows investors to bring claims against host states. ICSID and other forums hear disputes over expropriation, fair and equitable treatment, and other treaty protections.
For Service Members
Arbitration agreements affect service members in consumer transactions, employment, and financial services. SCRA provides some protection but does not broadly exempt service members from arbitration.
Default judgments in arbitration, like court default judgments, may be challenged under SCRA if the service member was unable to participate due to military service. The same protections against default that apply in court apply in arbitration.
SCRA’s stay provisions allow service members to postpone proceedings, including arbitration, when military service materially affects their ability to participate. The stay is not automatic and must be requested with proper documentation.
Military lending act restrictions on arbitration apply to covered consumer credit. Creditors cannot require arbitration of disputes under covered loans. MLA coverage is specific to certain credit products and service members on active duty.
Employment arbitration for civilian jobs held before or after service follows standard rules. Arbitration agreements signed as a condition of civilian employment bind service members like other employees.
Defense contractor employment may involve arbitration of workplace disputes. Security clearance issues arising in arbitration may require special handling for classified information.
A military attorney understands how SCRA interacts with arbitration obligations, what protections MLA provides, and how to assert rights when military service affects ability to participate in arbitration proceedings.
Disclaimer
This article is provided for general informational and educational purposes only. Nothing in this article constitutes legal advice, and no attorney-client relationship is formed by reading this content.
Arbitration law involves federal statute, state contract law, and institutional rules that vary by provider and case type. The enforceability of arbitration provisions depends on specific contract language and circumstances. The information presented here may not reflect current law or apply to any specific agreement.
Do not rely on this article to make legal decisions. Arbitration agreements have significant consequences for dispute resolution rights. Whether to agree to arbitration, how to challenge an agreement, and how to conduct arbitration proceedings all require individualized professional guidance.
If you are facing arbitration, considering challenging an arbitration agreement, or negotiating contract terms involving arbitration, consult with a qualified attorney who can evaluate your specific situation.
The authors, publishers, and distributors of this content expressly disclaim any liability for actions taken or not taken based on this information. Reading this article does not create an attorney-client relationship with any person or entity.
For service members affected by arbitration agreements, SCRA and MLA may provide specific protections. Seek counsel familiar with both arbitration law and military-specific consumer protections.