Understanding Mandatory Binding Arbitration in Consumer Contracts

​​​If you have a national bank-issued credit card, a cell phone services contract, or you have borrowed from a payday or auto title lender, purchased a new or used car, or signed a home improvement contract, your contracts may contain binding arbitration clauses. 
Q: What is a binding arbitration clause?
A: Arbitration refers to an agreement between disputing parties to let an outside party resolve the dispute instead of using the court system. When the parties agree to follow the arbitrator’s decision, the arbitration becomes “binding.” When you sign a contract with a binding arbitration clause, you are agreeing to use arbitration to settle any disputes that may arise. You give up certain rights when you sign contracts with binding arbitration clauses.
Q: What rights do I give up by signing a contract with a binding arbitration clause?
A: You give up your right to have a judge or jury decide your case in court, and you give up the right to file a lawsuit on behalf of yourself and other consumers who may have the same problem with the business. This is called a class action. While most binding arbitration agreements prohibit class actions, this may change in the future. The Consumer Financial Protection, Bureau, the federal agency that protects consumer rights, recently proposed regulations that will eliminate bans on class actions in arbitration agreements in consumer contracts.
Q: What is the difference between arbitration and mediation?
A: Like arbitration, mediation is used to resolve disputes without using the court system. In mediation, a neutral third party helps disputing parties reach a mutually agreeable resolution, but the mediator has no power to order the parties to do anything. Mediation can be very informal, and parties usually agree to mediation after a dispute arises. Arbitration is more formal, with its own set of rules. The arbitrator listens to each side and then makes a decision.
Q: Will a company remove the arbitration clause from my contract if I ask?
A: Most contracts containing binding arbitration clauses are standardized form contracts that offer goods or services on a “take it or leave it” basis. However, some credit services organizations and title loan contracts give you the right to "opt out" of arbitration. These opt-outs usually require you to send a separate notice to an address listed in the contract within a specified period of time. If your contract does not give you the right to opt out of arbitration, you should try negotiating to have the claues removed. If you are not successful, you must decide whether or not you want to sign the contract. Most contracts require you to initial the clause or page containing the arbitration requirement, indicating that you understand and consent. Do not sign any contract unless you understand it and agree to all of the terms.
Q: What is the difference between going to court and going to arbitration?
A: When you go to court, the judge and jury must follow certain rules about how parties exchange evidence and what kinds of evidence the judge and jury can rely on to make a decision. Arbitration rules are different and may limit the amount or kind of evidence or information you can ask the other party to provide. Arbitration hearings are sometimes done in writing or over the phone. Arbitrators may not award as much as a court or jury would award if you win your case. Arbitration fees and costs vary. Your contract should explain how costs will be paid.
Q: Is losing in arbitration like losing in court?
A: No. If you lose in arbitration and the arbitrator orders you to pay money or return goods, the winning party must file a request asking the common pleas court to affirm the award. The winning party has up to one year after the arbitration award to file this request. After the court affirms that arbitration decision, it can be enforced like any other court judgment.
Q: What if I disagree with the arbitrator’s decision?
A: If you lose, you have only three months after receiving the decision to challenge it. To challenge an award, you must file a request in common pleas court, asking the court either to vacate the award or to modify it. The reasons you may challenge an award are very limited. You do not have the right to challenge the award just because you disagree with it, or because you think the arbitrator did not apply the law correctly or consider all the facts. Talk to a lawyer if you believe you have good reason to challenge an arbitration award.
This “Law You Can Use” column was provided by the Ohio State Bar Association (OSBA). It was prepared by Linda Cook, senior staff attorney for the Ohio Poverty Law Center in Columbus.​

Articles appearing in this column are intended to provide broad, general information about the law. This article is not intended to be legal advice. Before applying this information to a specific legal problem, readers are urged to seek advice from a licensed attorney.



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