DEFINITION of 'Mandatory Binding Arbitration'

A contract provision that requires the parties to resolve contract disputes before an arbitrator rather than through the court system. Mandatory binding arbitration may require the parties to waive specific rights, such as their ability to appeal a decision.

BREAKING DOWN 'Mandatory Binding Arbitration'

When one party in a contract believes that the other party has not upheld the terms of the agreement, it typically has the right to seek redress in court. If the case is not settled before reaching court, the court system may award the plaintiff with monetary damages if it finds that the defendant failed to follow the wording of the contract.

Arbitration is another form of settlement in which the parties to a contract agree to have their case reviewed by a third-party that is not a judge. Mandatory binding arbitration means that the parties are required to use an arbiter, and have to accept the arbiter’s judgment.

Contracts created by banks, credit card issuers, and cell phone companies often contain mandatory binding arbitration in loans and agreements to prevent customers from being able to join class action lawsuits. In effect, the provision removes or limits a party, such as a customer, from suing if s/he feels wronged. Because these provisions may be buried in agreements and because arbitration is often a misunderstood form of settlement, many people don’t know that the contract removes their ability to sue.

Companies that insert mandatory binding arbitration provisions into their contracts often indicate that they do this in order to increase the speed at which issues are resolved, while also reducing costs for all parties. They also claim that the use of mandatory binding arbitration helps reduce the costs of products and services for consumers in general. Critics have pointed out that if mandatory binding arbitration was in fact better for consumers that companies would use that method of resolving disputes instead, since companies would instead prefer to use the method that was best for themselves.

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