Arbitration clause

An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause.

In the United States, the federal government has expressed a policy of support of arbitration clauses, because they reduce the burden on court systems to resolve disputes. This support is found in the Federal Arbitration Act, which permits compulsory and binding arbitration, under which parties give up the right to appeal an arbitrator's decision to a court.

Furthermore, arbitration clauses are often combined with geographic forum selection clauses, and choice-of-law clauses, both of which are also fully enforceable. The result is that a plaintiff may find himself or herself compelled to arbitrate in a strange private forum thousands of miles from home, and the arbitrators may decide the case on the basis of the law of a state or a nation which the plaintiff has never visited.

An arbitration clause may nevertheless be challenged and held invalid if it designates a biased party as the arbitrator. In Graham v. Scissor-Tail, Inc, 623 P.2d 165 (Cal. 1981), for example the Supreme Court of California found that an arbitration clause in a contract of adhesion which necessarily puts disputes before a body that would tend to be biased towards the defendant, is unduly oppressive, and therefore void as unconscionable. For this reason, many arbitration clauses designate widely recognized neutral organizations such as the American Arbitration Association.

Other terms may void an arbitration clause. In Armendariz v. Foundation Health Psychcare Services, Inc, 24 Cal 4th 83 (2000), a California appellate court held that a one-sided arbitration clause in a contract of adhesion for employment (deemed a necessity) may also be voided as unconscionable because of the relative positions of the parties involved. In that case, the court found there to be procedural unconscionability where an employee was held to arbitration but the employer was not, and substantive unconscionability where the contract limited the damages the employee could recover through arbitration.