Some websites specify in their terms of service that disputes shall be resolved by binding arbitration rather than by going to court. What is the pros and cons of specifying binding arbitration vis-a-vis a court proceeding?

  • It is worth noting that binding arbitration clauses in standard form contracts (like between websites and their many users) are not legal in many jurisdictions (e.g. Australia) but are legal in others (e.g. USA). ToS should include a severance clause to deal with this AND ensure they don't fall foul of any misleading and deceptive conduct laws (i.e. By saying there is binding arbitration when there isn't). Better still, the ToS should be jurisdiction specific.
    – Dale M
    Jan 19 '17 at 21:34
  • @DaleM Good point. Also, any TOS whether it has an arbitration clause or provides for resolution in court, should have a choice of law and choice of forum provision which will often be honored even if a full fledged arbitration clause is not.
    – ohwilleke
    Jan 20 '17 at 0:19
  • It is worth noting that whether a TOS is enforceable at all depends on quite a few things and in the US the courts have (from what I've seen/read) mostly been siding with customers against companies when TOS disputes had been litigated in cases where the provisions of the TOS were onerous for the customers.
    – DRF
    Jan 20 '17 at 10:03

Usually web site owners will prefer arbitration and people who would potentially sue web site owners will prefer a court forum, but this is only a typical situation and not a die hard rule for all circumstances.

Features of arbitration:

  • Binding arbitration is not subject to appeal so it tends to favor repeat, low stakes litigators over one-time high stakes litigators.
  • Binding arbitration precludes class action lawsuits and punitive damages in most cases.
  • Binding arbitration creates an institutional bias in favor of the contract drafter because the arbitrator needs to rule in their favor to get future business from the party selecting arbitration v. non-arbitration.
  • Binding arbitration has much higher filing fees than ordinary court and is usually faster than ordinary court, but litigation costs for the parties tend to be similar to ordinary court.
  • Binding arbitration has a reputation for "baby-splitting results" rather than all-or-nothing decisions in favor of one side or another.
  • Binding arbitration can escape biases (e.g. anti-gay, anti-religious minority, anti-marijuana, pro-local citizen) that might exist in a local court system.
  • Binding arbitration generally allows for much more irrelevant evidence to be admitted, and binding arbitration decisions cannot generally be overruled on the grounds that the arbitrator failed to follow the law or completely screwed up in understanding the facts. There is a much weaker likelihood of getting a fair result.
  • Binding arbitration is generally not public, so the proceedings are generally secret, avoiding publicity and disclosure of secrets discussed in the proceedings.
  • Arbitration often considers written documents like letters and witness statements in circumstances where courts in the U.S. would require in-person testimony (this is less of a consideration outside the U.S. where the hearsay rule is much less strict or is non-existent).
  • Arbitrators are more often subject area specialists in the matter that is disputed.
  • Arbitrators are less likely to reinterpret language in a TOS in terms of policy considerations or judicial precedent glosses (i.e., they are more likely to read contracts literally).
  • Arbitration awards are not immediately enforceable and must be filed with a court in a summary proceeding to be enforced which makes them inconvenient for cases that are mostly uncontested.
  • Arbitration awards don't create precedents that can be used in future cases.
  • Arbitration can more often be decided without an in person hearing than court cases, even in situations where there are factual disputed between the parties.

Features of court:

  • Filing fees in court cases are cheap.
  • Judges in courts tend to be far more impartial than arbitrators.
  • Court decisions are immediately enforceable without a collateral enforcement action. This is particularly important when preliminary relief like a temporary restraining order or preliminary injunction is desired.
  • Court decisions that are incorrect under the law or not supported by the facts can be appealed. They are much more likely to follow the law.
  • Less irrelevant information is considered in a court decision.
  • Court decisions can serve as precedents in future cases.
  • Jury trials and class actions are often available in court cases.
  • Court decisions are more likely to clearly rule in favor of the party in the right and against the party in the wrong without "baby splitting."
  • Judges and juries in courts are "generalists" who are less subject to institutional capture than arbitrators (especially specialist arbitrators).
  • Court is a more favorable forum for one-time, high-stakes litigation.
  • Courts can have jurisdiction over people who aren't parties to an arbitration agreement but who may be necessary to grant full relief or who have a stake in the outcome.
  • Punitive damages are often available in court cases when they wouldn't be available in arbitration forums.
  • A note on precedents - a number of leading jurists in many countries have raised red flags that due to the increase in arbitration over litigation that this is actually stifling the development of the law in common law jurisdictions thereby increasing uncertainty about the law and therefore compliance costs.
    – Dale M
    Jan 20 '17 at 0:51
  • @DaleM They are right, particularly in areas of the law that are almost entirely governed by arbitration such as disputes between securities brokers and their customers, disputes between realtors over commissions, and many kinds of small dollar consumer litigation (although consumer arbitration often has a small claims court exception to the scope of the clause).
    – ohwilleke
    Jan 20 '17 at 0:52
  • Wait, so if I take a company to binding arbitration, they selects the venue? That seems unethical. May 17 '17 at 18:34
  • @CharlesShiller Ethical or not, it is the law and is widely used.
    – ohwilleke
    May 17 '17 at 18:47

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