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What’s the Deal with Arbitration Clauses?

Have you seen the latest headlines?  Arbitration clauses are in the spotlight again:  the good, the bad, and the arguably unconscionable.  The New York Times ran a thought-provoking three-part series earlier this month highlighting the various ways in which arbitration has come to infiltrate contractual relationships across the board, impacting employees, patients, students and consumers alike.

Undoubtedly, the consequences of agreeing to alternate dispute resolution (or ADR) in employment contracts ― including arbitration, mediation or some combination of the two ― can be far reaching for everyone, from highly compensated executives to unsuspecting wage-earners.

Why so Reviled?

These provisions, by circumventing the courts, have the effect of “privatizing” the law.  And they have gotten bad press.  They deprive prospective litigants of the right to be heard in civil court before an unbiased judge and a jury of their peers. They shield large employers, particularly in the financial sector, from costly employee claims.  And, they bar employees from banding together to bring class actions, making it financially unfeasible for them to vindicate their individual grievances.

Also, arbitration takes place behind closed doors and remains confidential.  With so much of the arbitration process left to the discretion of individual arbitrators ― whose unstated allegiance may lie with large corporate employers who are their own repeat customers ― the potential for abuse cannot be denied.  This is of particular concern because arbitration awards are generally final and binding. Except under the most egregious of circumstances, they are not subject to judicial review or other meaningful avenues of appeal.

Making Arbitration Work for You

But wait! Not so fast! Don’t rush to judgment yet.  There is nothing inherently evil about arbitration.  To the contrary, after years of experience as executive employment attorneys, we know that, when skillfully negotiated, customized, and carefully drafted, ADR clauses can be enormously beneficial.  For example, arbitration can lead to a much faster, easier and more economical resolution of contested matters than traditional litigation.  So can mediation, or some combination of the two.  But often times, even the most sophisticated executives do not fully grasp the many-faceted differences among these alternative methods of dispute resolution or how they can be carefully tailored to meet their needs.

Stay tuned. In the new year, we will clarify the differences between arbitration and other forms of dispute resolution, and explain the pros and cons of ADR in the executive employment arena.  ADR may offer greater expedience and lesser costs, but at what real price?  Arbitration clauses can open the door to resolving differences or act as an insuperable deterrent. They can level the employer-employee playing field or exacerbate the inequities already inherent in these relationships.

Here are a few subtle and not-so-subtle variations to watch out for:

  • mutuality
  • over-broadness
  • forum and venue restrictions
  • religious strictures
  • single arbitrator vs. tripartite panel designations
  • time-sensitive chances to opt-out
  • bars to class actions
  • limitations on depositions, document production and other evidence
  • apportionment of arbitrators’ fees
  • fee-shifting and reimbursement for reasonable attorneys’ fees

The more you know, the easier it will be to avoid these and other pitfalls.   Whether to propose, accept or reject arbitration, mediation or both depends on your own individual circumstances and needs.  Certainly, the parameters of any such provision should be the subject of thoughtful analysis and skillful drafting and negotiation on a case-by-case basis.

About the Author

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Liza Horowitz

Lisa figured out years ago how to apply her lifelong love of poetry, translation and psychology to her professional passion: executive employment law. With meticulous attention to language, she interprets and powerfully voices her clients’ needs, whether drafting, negotiating or litigating on behalf of the senior executives and academicians she represents in the worlds of finance, media and higher education. Lisa holds a B.A. and M.A. from Brown University and is a graduate of Columbia Law School, where she was a Stone Scholar.