What is a pre-dispute arbitration agreement?

A pre-dispute arbitration agreement is an agreement made by parties in a contract before any issues or problems arise. The agreement mandates that any disputes that the parties have will be handled not in a court system, but through binding arbitration. Such contracts are extremely common in business transactions. Insurance companies, cell phone providers, car companies or any other corporation or business entity may include an arbitration agreement with customers. Businesses also sometimes include arbitration agreements when they are doing business with each other.

Understanding Binding Arbitration

When an agreement is in place to arbitrate a dispute, that agreement is almost always going to be enforced by the court. There may be some limited exceptions, such as if one party had no power of negotiation and no real choice about the terms of the contract (called an "adhesion" contract), and if the terms of the arbitration within that adhesion contract are unreasonable and/or not advantageous. Except under these limited exceptions, parties to a pre-dispute arbitration agreement won't be allowed to sue; they will have to work with an arbitrator. 

The arbitrator will be an independent third party. S/he will hear arguments presented by both sides and review evidence. Sometimes, the proceedings will be very formal, much like they would be if the issue was being decided in court. After hearing all the information, the arbitrator will make a decision that is legally binding on the parties. This makes arbitration distinct from other forms of alternative dispute resolution (ADR) like mediation. 

The parties can appeal a decision made by an arbitrator, but that appeal isn't going to be successful unless there were procedural or substantive irregularities in the arbitration.

Getting Help

Before signing a pre-dispute arbitration agreement, consult with a lawyer to determine if doing so is in your best interests. If you have already signed one and are now thinking about arbitrating an issue, you should also have a lawyer on your side to help.