What Is Mandatory Binding Arbitration?

Mandatory binding arbitration is 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.

Understanding Mandatory Binding Arbitration

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.

For highly important matters with significant impact, arbitration can be performed by an arbitration committee or tribunal that functions similar to a jury.

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 damages 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.

Criticism of Mandatory Binding Arbitration

Contracts created by banks, credit card issuers, and cell phone companies often contain mandatory binding arbitration clauses within loans and agreements in order 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 they feel 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. By burying the clause in the terms and conditions, many people are not aware that their rights become significantly curtailed.

An additional criticism of mandatory binding arbitration, especially in second and third-world countries, is that the customer, user, or singular person has no say or power when it comes to choosing an appropriate arbiter. Companies can use this to their advantage, hiring an arbiter who may seem impartial but is actually linked to the company, and making a judgment based on the goods of their acquaintance, instead of on the objective merit of either case.

In many countries, these practices are watched by organizations such as the Better Business Bureau, ensuring that all judgments are fair, objective, and without prejudice. It is for this reason that judges will recuse themselves from cases if they have a personal attachment. The same punishments apply to companies or individuals who attempt to sway an arbiter. Usually, the overseeing committee will not show much in the way of leniency.

There do not seem to be many advantages to a mandatory binding arbitration clause for individuals. Any issue they have could easily be solved in open court, where the arbiters are truly impartial, and an appeals process exists.