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What is Mandatory Binding Arbitration?

Tricia Christensen
Tricia Christensen
Tricia Christensen
Tricia Christensen

Mandatory binding arbitration is a term coming up in discussion more frequently. Essentially, many contracts with companies or service providing individuals (doctors, dentists, auto repair people) may ask you to sign a contract which states if you have a legal dispute with the company or individual, you agree to bypass the public courts system and instead have your dispute heard by a private arbitrator. You also agree to abide by the decision of the arbitrator and cannot appeal your case in a public court.

Sometimes agreements to mandatory binding arbitration are very open. If you’ve joined a new doctor’s office lately, you may have signed one. Other times agreements to mandatory binding arbitration are buried in the small print of a contract, and people aren’t aware they’ve signed this agreement. When you’re unsure how disputes would be solved, it’s a good idea to ask if you are agreeing to arbitration before signing your name.

Businessman with a briefcase
Businessman with a briefcase

When a company asks you to sign mandatory binding arbitration, and is open about it, said company will often explain the arbitration process. One of the things commonly cited is that it is cheaper than going through the public judicial system. Actually, this is not always true. You have to pay fees in order to instigate the process, and these fees can be several hundred US dollars (USD). There are some organizations that offer free non-binding arbitration, such as the Better Business Bureau, but they are considered “first resort” solutions, and their decisions can be easily appealed or overturned.

Unfortunately what businesses may be banking on when they request you agree to mandatory binding arbitration is that lack of available money will keep you from bringing claims against them. If some service or product has resulted in financial damage, you may be in no position to pay fees to a private arbitrator. While companies claim this may help to reduce lawsuits that are malicious and unfounded, consumer activists argue that limiting access by setting up a cost-based system keeps some consumers with legitimate grievances from seeking redress. Critics of this alternate method of solving legal disputes also point to the fact that companies seldom enter into mandatory binding arbitration agreements with other companies, suggesting they see this system as a means of limiting their power to appeal.

There have been some attempts on the federal and state level to cap fees private arbitrators may charge for their services. Additionally some bills have been proposed that would limit the circumstances under which mandatory binding arbitration can be used. Individual states in the US tend to be more successful at limiting arbitration (as between an employee and employer) than has the US government.

The question for the consumer remains as to whether you should sign a binding arbitration agreement. It really depends upon the circumstances. Some companies may deny you sales or service if you won’t sign one. A new doctor may not treat you, or a company may not hire you unless you sign such an agreement. You have to weigh in the balance the importance of the transaction you’re making or work into which you may be entering when you limit your legal rights in this fashion.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent WiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

Learn more...
Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent WiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

Learn more...

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