Should I Agree to an Arbitration Clause? What to Consider Before Signing
Arbitration clauses are a standard feature in modern contracts, embedded in business agreements, consumer purchases, employment offers, and leases. Before agreeing to such a clause, and committing your future disputes to private arbitration, it’s vital to understand what you’re signing and how it will impact your legal rights in California and under federal law.
What Is an Arbitration Clause?
An arbitration clause is a provision requiring parties to resolve disputes privately—outside court—through arbitration, where a neutral arbitrator decides the outcome. These clauses are typically enforceable under both the Federal Arbitration Act, 9 U.S.C. §§ 1–16, and California law, Cal. Civ. Proc. Code § 1281. Once agreed, parties generally cannot opt out later except for rare legal defects.
Key Pros and Cons of Arbitration
Arbitration is valued for privacy and speed. Hearings are confidential, and awards are rarely made public. The process is often faster than a traditional lawsuit, avoiding delays and overloaded court dockets. Parties also have more flexibility in selecting an arbitrator—sometimes an industry expert—and in tailoring the procedure.
However, arbitration has significant trade-offs. Awards are binding, and opportunities to appeal are very limited (Cal. Civ. Proc. Code § 1286.2; 9 U.S.C. § 10). Costs can be substantial, requiring parties to split arbitrator fees and administration charges, sometimes matching or exceeding traditional litigation (Cal. Civ. Proc. Code §§ 1281.97–1281.99). Discovery—the process of gathering evidence—may be restricted, which could disadvantage one side. Procedural protections, like a jury trial, often do not apply.
Before Signing: What Should You Look For?
Not all arbitration clauses are the same. Before agreeing, review:
Scope: Does the clause cover every potential dispute, or are some exceptions present?
Arbitrator Selection: Is the process for appointing an arbitrator fair? California law allows court intervention if the parties cannot agree (Cal. Civ. Proc. Code § 1281.6; 9 U.S.C. § 5).
Rules, Forum, and Costs: Who administers the arbitration (AAA or JAMS)? Where will it take place? How will costs be shared or capped?
Opt-Out Period: Some agreements offer a window to opt out—check for this and act promptly if desired.
Careful reading is essential. If the clause is presented as non-negotiable (an “adhesion contract”), it may still be enforceable unless proven unconscionable or contrary to public policy.
Legal Protections and Negotiation
California law and the FAA provide limited tools for challenging arbitration clauses or awards. Agreements may be set aside for fraud, duress, gross unfairness, or impossibility (Cal. Civ. Proc. Code § 1281.2(b); Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83 (2000)). Consumer protection laws sometimes add safeguards, but the vast majority of clauses are enforced as written.
Whenever possible, negotiate terms that ensure fairness:
A neutral party in arbitrator selection.
Clear and reasonable cost sharing.
Realistic timeframes for the process.
Reservations for certain rights (such as injunctive relief or small claims actions).
For important contracts, consulting a lawyer before agreeing to arbitration can help you spot issues and negotiate better terms.
When Is Arbitration the Right Choice?
Arbitration suits those valuing privacy, speed, and specialized decision-makers. It is common in ongoing business relationships or technical commercial matters where public litigation may be risky or undesirable. On the other hand, if you’d prefer broader evidence-gathering, a public hearing, or the power to appeal, arbitration may not serve your interests.
Conclusion
Arbitration clauses often seem routine but carry major legal implications. They change how disputes are resolved, rights to appeal, and sometimes the costs involved. Read every clause thoroughly. Understand whether arbitration fits your priorities, and seek counsel if you have questions—before you sign.
Citations
Cal. Civ. Proc. Code §§ 1280–1294.2
Cal. Civ. Proc. Code §§ 1281, 1281.2, 1281.6, 1281.97–1281.99
Federal Arbitration Act, 9 U.S.C. §§ 1–16
Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal. 4th 83 (2000)
