Mandatory Arbitration Clause

A term in a consumer contract that sends any dispute to a private arbitrator instead of a court, usually alone rather than as part of a class - and federal law makes most of them enforceable.

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What it means

A mandatory arbitration clause is a provision - in a phone contract, a credit card agreement, a car purchase, a nursing-home admission, an app's terms of service - under which both sides agree in advance that any dispute will be decided by a private arbitrator rather than a judge or jury. Most also contain a class-action waiver, requiring each consumer to arbitrate individually, which is the part with the largest practical effect: a claim worth a small amount to one person is rarely brought at all if it cannot be brought for everyone.

Federal law strongly favors enforcing these clauses. A written agreement to arbitrate is enforceable on the same footing as any other contract term, and the Supreme Court has held that state rules refusing to enforce class-action waivers in consumer contracts are pre-empted. Consumers who did not read the clause, or who had no realistic choice but to accept it, are generally still bound, though a clause can still fall on ordinary contract grounds such as fraud or unconscionability, and the question of whether a contract was formed at all remains for a court.

Arbitration is not the absence of a remedy. It has rules, discovery of a kind, a written decision and, under most consumer clauses, the company bears most of the arbitrator's fees. What it lacks is a public record, a jury, most rights of appeal, and the ability to combine claims. Some clauses let the consumer opt out by written notice within a short period after signing, and those windows are routinely missed.

Where this comes from

When people hire a lawyer for this

Before a dispute, the useful question is whether the contract has an opt-out and when it expires. After one, the questions are whether the clause covers this dispute, whether it is enforceable on ordinary contract grounds, and whether the arbitration forum it names actually costs the consumer anything - consumer lawyers increasingly bring the individual arbitrations the clause requires, and a company that wrote the clause is sometimes the party least pleased to see it used.

Worried about the cost? A lawyer can be hired for one part of a case only (limited-scope representation), may be paid from what a claim recovers (contingency fee), or may be free through a pro bono program or legal aid; a court can also waive its own filing fees.

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Related terms

Other entries in the same area of law, each written from the same primary sources.

• Automatic Renewal and Negative Option SubscriptionsThe federal and state rules on subscriptions that keep charging until you cancel - what a seller must disclose and obtain before enrolling you, the cancellation mechanism it must offer, and where the law currently stands.
• Billing Error Dispute (Credit Card Chargeback)The federal procedure for disputing a charge on a credit card statement - a written process with deadlines on both sides that the card issuer must follow, not a courtesy it may offer.
• Class ActionOne lawsuit brought by named plaintiffs on behalf of a larger group with the same injury.
• Cooling-Off Rule (Canceling a Door-to-Door Sale)The federal right to cancel certain sales made at your home or away from the seller's regular place of business, the notice the seller must give you, and the many sales it does not reach.
• Credit Freeze and Fraud AlertTwo free federal tools for stopping identity thieves from opening accounts in your name - one that locks your credit file, one that warns lenders to check who they are dealing with.
• Credit Report DisputeThe federal process for forcing a credit bureau and the company that reported an item to investigate information you say is wrong.
• Data Breach Notification RightsWhat a business must tell you when your personal information is exposed, which laws require it, what the notice must say, and what a person whose data was breached can actually claim.
• Debt Validation Notice and Disputing a DebtThe written notice a debt collector must send when it first contacts you, what it must contain, and the dispute right it opens - during which the collector must stop until it verifies the debt.
• Fair Debt Collection (Collector Conduct Rules)Federal limits on what a third-party debt collector may say and do - including a written demand that stops contact, and a 30-day right to make them verify the debt.
• Gift Card and Prepaid Card RulesThe federal limits on gift card expiration and fees, the state laws that go further, and the separate protections for reloadable prepaid cards used like bank accounts.
• Identity Theft Recovery RightsThe federal rights a victim of identity theft can use to remove fraudulent accounts from a credit report, obtain the records of what the thief did, stop the debts being collected, and limit liability for the charges.
• Implied Warranty and the Magnuson-Moss ActThe promises the law reads into a sale whether or not anyone wrote them down, and the federal act that limits how a seller can take them away.
• Right of Rescission (Home Loans)A federal right to cancel certain loans secured by your home during a short window after signing - and for much longer if the lender failed to give the required disclosures.
• Robocalls and the TCPAThe federal law that restricts automated and prerecorded calls and texts to your phone, gives you a Do Not Call right, and lets you sue for a fixed amount per illegal call.
• Time-Barred DebtA debt so old that the statute of limitations bars a lawsuit to collect it - what a collector may and may not do about it, how a payment can revive it, and why the credit-reporting clock is a different clock.
• Unauthorized Debit Card and Electronic Transfers (Regulation E)The federal rules that limit a consumer's loss from an unauthorized debit card, ATM, ACH or payment-app transfer, require the bank to investigate an error, and decide who bears a loss the consumer was tricked into sending themselves.
• Unfair and Deceptive Practices (UDAP)The consumer-protection laws, one federal and one in every state, that make it illegal for a business to mislead you or treat you unfairly - and the state versions are the ones a consumer can actually sue under.
• Vehicle RepossessionA lender's right to take back a financed car after default without going to court - subject to rules about how it is taken, how it is sold, and what you can still be made to pay afterwards.
• Wage GarnishmentA legal order requiring an employer to withhold part of someone's pay and send it to a creditor.

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