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Read the Arbitration Clause

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The U.S. Supreme Court in a June 20, 2013, opinion, American Express Co. v. Italian Colors Restaurant, upheld a commercial contract provision requiring arbitration and containing specific language that there "shall be no right or authority for any Claims to be arbitrated on a class action basis." In other words, multiple claimants could not combine into a large arbitration. The plaintiff asserted that the cost of a successful individual arbitration would exceed the amount recovered.

The majority opinion repeated the often quoted language of the Federal Arbitration Act that contractual arbitration provisions "...shall be valid, irrevocable, and enforceable... ." Consequently the language of the contractual arbitration provision controls absent a "contrary congressional command." So long as the arbitration will not exclude the consideration of statutory rights that might be litigated, the provision is valid.

Justices Kagan, Ginsburg, and Bryer dissented asserting that in essence the provision insulated American Express from antitrust liability. While an arbitration provision may not directly prevent the assertion of statutory rights, it may do so indirectly under the majority opinion since the cost of conducting a necessary antitrust market analysis is prohibitive for this individual claimant. The dissent concluded that the Federal Arbitration Act was designed to resolve disputes in a streamlined manner. "In the hands of today's majority, arbitration threatens to become more nearly the opposite - a mechanism easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability."

Contractually provided arbitration of virtually any claim is upheld by the courts. Absent clear arbitrator bias or the arbitrator exceeding her authority, both businesses and consumers should anticipate being bound to the arbitration language in a contract. The discussion concerning whether or not arbitration provisions are in fact freely negotiated by the parties is beyond the scope of this brief comment as are the many criticisms asserting that arbitration creates a private legal system beyond public scrutiny and control. Nevertheless, it is critical to understand a proposed contractual arbitration provision. Know what arbitration will mean in your transaction. Read the arbitration clause.