Arbitration clauses are commonly buried in contracts, enrollment agreements, warranties and other contracts. Arbitration is often marketed as a faster, cheaper, and more private alternative to going to court which may or may not be the case depending on the particular circumstances of each case. What many people overlook is that arbitration comes in two different forms: binding and non-binding.
That distinction matters. It can determine whether you give up your right to a jury trial, your ability to appeal, and, in some cases, any meaningful court review. Before agreeing to arbitration, it is important to understand how it works and what rights you may be waiving.
What is Arbitration?
Arbitration is a private dispute resolution process in which the parties present their case to a neutral third party called an arbitrator instead of a judge or jury. The arbitrator may be a retired judge or an attorney experienced in the subject matter of the arbitration. The process is generally more informal than court litigation and is typically confidential.
What is Binding Arbitration?
In binding arbitration, the arbitrator’s decision is final and legally enforceable. Once issued, the award can be confirmed by a court and treated like a judgment.
Appeals are extremely limited. Courts will usually overturn an arbitration award only in rare cases involving fraud, bias, or serious procedural misconduct. Legal errors alone are typically not enough. In practical terms, the arbitrator’s decision is the end of the case.
What are the Benefits of Binding Arbitration?
- Confidentiality – Disputes are kept out of the public court system.
- No jury trial – A lawyer or retired judge decides the case, which some parties prefer depending on such parties disposition in the case.
- Efficiency – Arbitration can resolve disputes faster than traditional litigation.
What are the Downsides of Binding Arbitration?
- Limited right to appeal – Even serious legal mistakes may not be reviewable.
- Limited discovery – This can disadvantage parties who need extensive evidence.
- Higher upfront costs – Arbitration fees can be substantial and will significantly exceed court costs. In most cases, the arbitration fees are divided between the parties involved.
- Cost-shifting rules – In California and other applicable states, employers must pay the entire arbitration fee.
- Enforceability disputes – Arbitration clauses may be challenged, leading to preliminary litigation.
What is Non-Binding Arbitration?
Non-binding arbitration follows a similar process, but the arbitrator’s decision is advisory only. Either party may reject the outcome and proceed to court. It is often used to encourage settlement or narrow disputed issues before litigation.
What are the Benefits of Non-Binding Arbitration?
- Preserves the right to a jury trial and appeal.
- Provides a neutral evaluation of the dispute.
- Can promote settlement and early resolution.
What are the Downsides of Non-Binding Arbitration?
- No guaranteed final resolution.
- May increase overall time and costs.
- May reduce party commitment to the process.
Arbitration can be an effective dispute resolution tool when it aligns with your goals. Binding arbitration offers privacy, efficiency, and finality, but requires giving up jury trials, broad discovery, and meaningful appellate review. Non-binding arbitration preserves flexibility but may delay resolution.
Because of the cost and other strategic considerations in determining whether arbitration should be pursued, consulting legal counsel before agreeing to or drafting an arbitration provision is essential. Please contact our office to discuss whether arbitration is the right choice for your situation.
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