Binding Arbitration: What It Means and What to Know Before You Sign

Arbitration clauses sit quietly in client contracts, supplier terms, software agreements and employment contracts, and most people only read them when a dispute starts. By then, the choice has been made. This guide explains what binding arbitration means, how US and UK law treat it, and what to think about before a clause goes into your own contracts. It isn't legal advice: talk to a lawyer about your own contract.

What binding arbitration means

Cornell's Legal Information Institute describes arbitration as an alternative dispute resolution method where the parties agree to have their case heard by a qualified arbitrator out of court. Under the Federal Arbitration Act, decisions are binding just like a court case, and pursuing a claim through arbitration stops you raising it in the courts as well. It's the method closest to going to court: arbitrators aren't bound by the Federal Rules of Evidence, but they hear evidence, and the parties usually agree to some limited discovery.

Binding, non-binding, mediation and court compared

	Binding arbitration	Non-binding arbitration	Mediation	Court
Who decides	Arbitrator(s) you choose or appoint	Arbitrator gives an opinion	The parties, helped by a mediator	Judge or jury
Is the outcome final?	Yes, with very narrow grounds to challenge	No, either side can reject it	Only if both sides sign a settlement	Yes, subject to appeal
Public or private	Private	Private	Private	Usually public
Right of appeal	Very limited	Not needed	Not applicable	Full appeal rights
Best for	Ending a dispute with certainty	Testing the strength of a case	Keeping a relationship intact	Setting precedent or urgent orders

What the Federal Arbitration Act says

Section 2 of the Federal Arbitration Act, at title 9 of the US Code, says a written arbitration provision in a contract involving commerce is valid, irrevocable and enforceable, except on grounds that would let any contract be revoked. That last part is why fraud or unconscionability arguments still come up.

Once there's an award, section 9 lets a party apply to the court named in the agreement to confirm it within one year, and the court must confirm it unless it's vacated, modified or corrected. Section 10 limits vacating an award to four situations:

• The award was procured by corruption, fraud or undue means.
• There was evident partiality or corruption in the arbitrators.
• The arbitrators were guilty of misconduct, such as refusing to hear pertinent evidence or to postpone when there was good cause.
• The arbitrators exceeded their powers, or didn't make a final and definite award.

Here's the deadline people miss: under section 12, notice of a motion to vacate, modify or correct an award must be served within three months after the award is filed or delivered. Miss it and the door usually closes.

The exception added in 2022

In 2022 Congress added chapter 4 to the Act. Section 402 says that, at the election of the person alleging a sexual harassment or sexual assault dispute, no predispute arbitration agreement or joint-action waiver is valid or enforceable for that case. A court, not an arbitrator, decides whether the exception applies. Cornell's summary also notes the Act doesn't apply to seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce.

Class action waivers

Many consumer and employment contracts pair arbitration with a waiver of class actions, so each claim has to be brought on its own. In AT&T Mobility v. Concepcion in 2011, the US Supreme Court held that the Federal Arbitration Act preempted a California rule that had treated many of those waivers as unconscionable. The practical result: a well-drafted clause can stop customers joining together in one case. That's why these clauses are common, and why Cornell notes they've become controversial.

What small businesses put in contracts

The American Arbitration Association publishes standard clauses you'll see copied into thousands of agreements. Its basic commercial clause covers any controversy or claim arising out of or relating to the contract, says it'll be settled by AAA arbitration under its Commercial Arbitration Rules, and lets judgment on the award be entered in any court with jurisdiction. It also offers a version that requires mediation first and only moves to arbitration if mediation fails.

Points to decide with your lawyer before you add a clause:

1. Which disputes are covered: everything, or only some types of claim.
2. Whether you'll try mediation first, which is often cheaper.
3. Which rules and which organisation will run it.
4. How many arbitrators: one keeps costs down, three spreads the judgment.
5. Where hearings happen and which state's or country's law applies.
6. Who pays the arbitration fees, and whether small claims can still go to small claims court.
7. Whether a class action waiver is included, and whether it's enforceable for your customers.

If you're reviewing a full agreement, our guide to what a business contract should include covers the other clauses that sit alongside dispute resolution, and freelancers can check what an independent contractor agreement should include.

The UK position

In England, Wales and Northern Ireland, arbitration is governed by the Arbitration Act 1996. Section 1 sets out its principles: the object is the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense, and the parties should be free to agree how disputes are resolved.

The big difference from the US is section 69: unless the parties agree otherwise, a party can appeal to the court on a question of law arising from an award, but only with the agreement of the other parties or the court's leave. Many commercial clauses exclude that right, and an agreement to dispense with reasons for the award counts as excluding it. Under section 70, any challenge or appeal must be brought within 28 days.

My advice

Read the dispute clause before you sign, not after a disagreement. If you're the smaller party, arbitration can be quicker and more private than court, but you're giving up most of your appeal rights and possibly the option of joining with others. If you're adding a clause to your own terms, think about mediation first, a single arbitrator and a sensible location, and have a lawyer check it fits your state or country. A clause that looks tough on paper but can't be enforced protects nobody.

Frequently asked questions

What does binding arbitration mean?

It means both sides agree to accept the arbitrator's decision as final. In the US, a court will only vacate the award on narrow grounds such as fraud, corruption, arbitrator misconduct or the arbitrators exceeding their powers.

What is the difference between binding and non-binding arbitration?

In binding arbitration, the award is final and can be confirmed by a court. In non-binding arbitration, the arbitrator gives an opinion that either side can reject.

Can you appeal a binding arbitration decision?

Only in limited ways. In the US, section 10 of the Federal Arbitration Act lists narrow grounds to vacate, and notice must be served within three months. In England and Wales, section 69 allows an appeal on a point of law unless the parties agreed otherwise, with permission and within 28 days.

Are class action waivers in arbitration clauses enforceable?

Often, in the US. In AT&T Mobility v. Concepcion (2011), the Supreme Court held the Federal Arbitration Act preempted a California rule against many class waivers. Sexual harassment and assault claims are an exception under chapter 4 of the Act.

Should my small business use binding arbitration?

It depends on your customers, contracts and location. Talk to a lawyer for your contract, and consider a clause that requires mediation first.