Arbitration Clauses in Terms and Conditions

A legal dispute with customers or users could be expensive, time-consuming and even publicly embarrassing. You may prefer to use arbitration to resolve any dispute. An arbitration clause in your Terms and Conditions agreement is a way to get customers to agree to this option before any dispute arises.

Here's what you need to know about what these clauses are, what information they should include, and how to best display your arbitration clause for maximum effectiveness.

What is an Arbitration Clause?

An arbitration clause is a clause found within a Terms agreement (such as a Terms and Conditions agreement) that says both parties to the agreement agree that arbitration will be the initial (or sole) way to resolve any legal dispute, along with details of how it will work.

Here's an example of a standard arbitration clause:

Why Use an Arbitration Clause?

Using an arbitration clause has several benefits for your business:

• It can keep costs down compared to going to court.
• It can avoid bad publicity as much or all of the arbitration process is confidential, unlike court hearings which are often public.
• An arbitrator with specialist knowledge of your industry may understand your case better than a non-expert judge or jury.
• Customers or users may be less likely to hire a lawyer when going through arbitration, which could improve your chances of a favorable outcome.
• It could reduce or remove the risk of facing a class action case.

Arbitration is particularly important with Terms and Conditions agreements as you effectively have a high volume of contracts and thus the potential for a high number of disputes.

Do Arbitration Clauses Have Any Drawbacks?

Take into account the following when deciding whether to have an arbitration clause:

• The clause could deter some potential customers or users, particularly if the arbitration is binding and has no opt-out method.
• Unlike some court procedures, arbitration usually has no appeals process.
• Arbitration doesn't usually have a discovery process by which both parties must share key evidence before a hearing.
• Arbitration may be expensive so the financial advantages compared with going to court could be limited.

Are Arbitration Clauses Legal?

In the United States, arbitration clauses are explicitly legal under federal law. The Federal Arbitration Act says the two parties can agree to an arbitration clause, even if the arbitration is mandatory and the outcome binding. The few exceptions to this do not affect Terms and Conditions agreements.

In Europe, the position varies significantly between countries, even if they are members of the European Union.

If you operate in another country, check the rules on arbitration clauses.

What Information Should You Put in an Arbitration Clause?

The following are points you should consider including in your arbitration clause to make it as informative and effective as possible.

Arbitration's Role in Disputes

An arbitration clause can work in two main ways. It can be a mandatory step to go through before any court action. Alternatively, it can be in place of (and explicitly exclude) any court action. Make clear which applies in your agreement.

Here's how Square explains that arbitration is in place of court action except for cases in a small claims court:

What the Process Involves

Make clear whether the arbitration must automatically happen, or if it requires one of the two sides to enforce the clause. One practical effect of this is whether a customer can bring a case in the court system (at which point you can insist on arbitration and void the case) or if the customer cannot (and must not) go to court at all.

Related explains how either side can start the arbitration process:

Set out any of the following that you want to control:

• Which person or organization will conduct the arbitration
• How the arbitration works, for example whether the two sides try to negotiate an outcome or leave it to the arbitrator to issue a ruling
• What language is used to conduct the arbitration process
• How many arbitrators will hear the case

Conde Nast sets out how the arbitration will operate:

If the Outcome is Binding

Say clearly whether the outcome of the arbitration is binding on both parties or whether either side can reject the decision and proceed to court action.

Rightworks makes clear the outcome is binding and will have legal force:

How to Initiate Arbitration

Set out how users can initiate the arbitration process. For example, you could require a period to attempt direct negotiation before proceeding to arbitration.

Adobe sets out the timescale for negotiations before arbitration begins and lets users know the steps they must take:

Who is Responsible for Arbitration Fees

Say who is responsible for each side's fees. Options include:

• Both sides pay their own fees
• The side bringing the case pays both side's fees
• The payment depends on the outcome of the arbitration

Check laws in your jurisdiction as they may limit what fee payment options you can include and insist upon in the arbitration clause.

PayPal gives extensive details of the payment of arbitration fees:

Any Exemptions to Mandatory Arbitration

Set out any situations which will be exempt from mandatory arbitration. This could be any situation which you want to exclude. For the sake of clarity, it could also include any situations where the law does not allow mandatory arbitration.

Stripe explains how insolvency matters are excluded from its mandatory arbitration:

Can a User Opt Out of Arbitration

Say whether the customer has the right to opt out of the arbitration clause after agreeing to the Terms and Conditions agreement. If so, set out how they can opt out.

Here's how T-Mobile details its opt-out process:

Where to Display an Arbitration Clause

Display your arbitration clause within your Terms agreement, such as a Terms and Conditions agreement or Terms of Use.

The clause can be its own standalone clause, or it can be integrated into a clause that addresses other aspects of lawsuits, such as dispute resolution or governing law and jurisdiction.

Just make sure that the clause is conspicuous and easy to find. This helps ensure it will be legally binding as per California's Long v Provide Commerce, Inc case where it was held that an arbitration clause could be invalid if it isn't conspicuously displayed.

Microsoft uses bold and capital letters to draw attention to its arbitration clause, making it stand out:

How to Get Users to Agree to Your Arbitration Clause

Finally, make sure that you can prove either that the customer had a reasonable opportunity to see the clause before agreeing to it, or that they actively confirmed they had read it. This will reduce the risk of the customer challenging the clause as unfair later on.

Require users to give clear consent that they have read and agree to the Terms and Conditions agreement. Use a clearly labelled checkbox or similar method and either display or link to the agreement. Do not use a pre-ticked box.

Here's an example of how you can require users to explicitly confirm both that they've read the Terms and Conditions agreement and that they agree to it:

Summary

An arbitration clause is part of your Terms and Conditions agreement. It means you and a customer or user agree to use arbitration before (or instead of) going to court to settle any dispute.

Using an arbitration clause reduces the risk of a potentially costly, public legal battle. It has some drawbacks including the risk of losing a binding ruling with no appeal.

Include important information in your arbitration clause such as how the process works, how users can initiate arbitration, whether or not it's binding, any fees and who must pay them, and any exemptions to the arbitration requirement.

For maximum effectiveness, put the arbitration clause conspicuously within your Terms and Conditions agreement. Make sure you can prove the customer had a fair opportunity to read the agreement before signing up to a purchase or service by obtaining consent.