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What is Binding Arbitration?

By S. Mithra
Updated May 16, 2024
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As an alternative to judges or courts settling disputes between consumers and businesses, binding arbitration works out a deal through an independent, third-party body. Binding arbitration may save time, money, and energy when two parties disagree over a contract, the performance of a service, or the exchange of goods. The arbitrator's decision is final and cannot be disputed or appealed.

Businesses often prefer to resolve claims through binding arbitration because it is usually more private, and helps to avoid possible bad publicity that could erupt in a trial. They are also not bound to certain legal requirements, such as "discovery," whereby the persons involved in the claim have access to otherwise private information. Increasingly, lenders and distributors are requiring consumers to sign binding arbitration agreements, which might lessen the load on courts, but may also erode a consumer's constitutional rights.

Binding Arbitration Process

A binding arbitration hearing is set up much like a court hearing: all parties may choose whether or not to hire an attorney and each party is given time to present evidence and call on witnesses. After hearing from everyone involved, the arbitrator makes a final and binding decision; while this decision is legal and usually immediately enforced, it can be disputed to the arbitrator or challenged in court. For everyone involved, a resolution will generally be offered sooner than it would take a judge or jury to hear and decide a case; in general, many arbitration hearings can be finalized in one day. This process also saves money, since each party presents their evidence less formally, without necessarily needing an attorney, although some fees for the arbitrator and attorneys may be involved.

Mandatory Versus Voluntary Arbitration

The controversy surrounding binding arbitration revolves around people's rights with respect to mandatory and voluntary arbitration. With mandatory arbitration, a borrower or consumer must agree to use an arbitrator, rather than the courts, to resolve any issues. This is often required as part of getting a loan financed or buying large purchases, such as a car. In voluntary arbitration, after a disagreement arises, both the consumer and the company can agree that they find it mutually beneficial to let a third party intervene.

Consumers waive their constitutional rights to sue as an individual or with a class action suit when they sign a mandatory binding arbitration clause as part of a contract. Advocates point out that many people do not know that they have denied themselves that right. Consumers are also not usually aware that the independent arbitrator may have an interest in siding with a corporation for financial reasons, and may not be entirely neutral. The fee to file a claim may actually be more than hiring a lawyer, therefore some advisers suggest consumers think carefully before agreeing to this course of mediation.

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Discussion Comments
By anon338768 — On Jun 17, 2013

With a bit of research, you'll confirm the following:

Arbitration companies, as a group, tend to favor businesses over consumers. This is simply because it is businesses, not consumers, that get arbitration clauses put into contracts. Consumers are not certainly not clamoring for arbitration instead of small claims courts or class-action suits! It would simply be bad business for the aribtration firm to be a disadvantage to those that feed them.

Arbitrators who favor consumers aren't employed by arbitration firms very long.

By anon179287 — On May 23, 2011

anon70265: "Federal Arbitration Act" Title 9 of U.S. Code. That's how.

By anon70265 — On Mar 13, 2010

I don't understand how a contract can sign away constitutional rights - state and federal law should override any contractual clauses. (Of course, it's then up to a court to actually make this true.) I would have thought it would be similar to how state laws that protect tenants invalidate any sneaky clauses in a lease/rental agreement.

Can I have slaves as long as I had them sign their lives away by X'ing on the dotted line?

By HerePain — On Feb 08, 2010

Your article says a binding arbitrator may have financial reasons for siding with the company. Are there ways to get a truly independent arbitrator?

By HerePain — On Feb 08, 2010

Are there different binding arbitration laws by state and if so, where do I go to find the correct laws in Texas?

By HerePain — On Feb 08, 2010

Is a binding arbitration agreement in the fine print of an employment package that must be signed to start work considered a voluntary agreement?

By anon49206 — On Oct 18, 2009

Our town has a binding arbitration agreement with its police union. how do we get out of it? we are on the verge of bankruptcy and cannot afford any more increases. please help.

By luvgrankds — On Apr 28, 2009

I am scheduled to go to binding arbitration for an accident we had out of state in NC. The other person was at fault and it has been over 4 years but we filed before the statue of limitations ran out.

I am still going through medical problems and still have some emotional things. We were hit head on. We had to go there for deposition and now they want another dep. The last one was in almost a year ago.

How does an arbitrator decide what this case is worth monetarily? ?Is it based on medical bills? I have an attorney but I would like to know so I don't look totally dumb so if anyone has any comment I sure would like to hear it. thanks

By anon15649 — On Jul 17, 2008

In the case of binding arbitration where the plaintiff's attorney chooses one judge, the insurance company chooses one judge and the two judges choose the third judge, do all of the judges have to agree or is it two judges that must agree on the award amount?

By anon6464 — On Dec 29, 2007

What happens when you are awarded money in a binding arbitration to be paid in 10 days, and don't get it? Should we contact the retired judge who was the arbitrator? Thank you!

By ljade — On Jun 29, 2007

Are there situations when an employer can appeal an arbitrator's decision?

By hub21109 — On Jun 01, 2007

Do you have a policy for binding arbitration in an Employer - Employee situation?

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