California arbitration laws provide parties the ability to arbitrate disputes. Arbitration is a process for resolving disputes that does not involve the courts. It is a private process used by parties to resolve legal conflicts or disputes. In some cases, arbitration is mandatory and in some cases the parties can agree to use it as a dispute resolution tool. Certain contracts, including employment agreements, may contain language that requires arbitration in the event of a dispute.

An arbitration is usually conducted by a neutral third party called an arbitrator. This individual listens to both sides of a dispute. In most cases, arbitration is more relaxed than court and more evidence is allowed to be presented.

An arbitrator reaches a decision based on what the parties presented. The arbitrator then issues an arbitration award. This award can include a financial award from one party to another or a non-financial award such as ceasing a certain business practice or adding employee incentives.

What Is Non-Binding Arbitration?

There are two types of arbitration, binding arbitration and non-binding arbitration. Non-binding arbitration results do not carry any legal precedence and the parties are not bound by law to follow them. They are guidelines that assist the parties in avoiding conflicts in future conduct. This type of arbitration is more common in less complex disputes or when the parties are seeking guidance and counseling.

Non-binding arbitrations are usually faster and more efficient than courtroom litigation. This arbitration also can help encourage and/or preserve a working relationship between the parties since lawsuits often cause breakdowns in relationships. 

What is a Binding Arbitration?

In contrast to non-binding arbitration, decisions made in a binding arbitration are final. The parties involved are bound by the decision and the results are enforceable by law. Binding arbitrations are often difficult to challenge.

Binding arbitrations are often used to resolve contract disputes. These may include business transaction contracts or employment contracts. Many contracts for services now include arbitration clauses.

Binding arbitration clauses can be found in a contract made between two or more parties. The clause is intended to keep the parties from filing a lawsuit in court should a dispute arise. This clause requires the parties to resolve any dispute by binding arbitration.

Why Include a Binding Arbitration Clause in a Contract?

There can be benefits to including a binding arbitration clause in a contract. The clause may safeguard against future lawsuits. It may also provide other advantages, such as:

  • Lower cost than court litigation;
  • A speedier resolution than court litigation;
  • A flexible date for arbitration that accommodates both parties’ schedules;
  • A more private process without courtroom spectators that can be kept confidential if the parties agree to do so;
  • A simpler and less formal proceeding than a courtroom proceeding; and/or
  • A process more geared towards party negotiation and resolution of the dispute rather than arguing to win.

A drawback of the arbitration process is the decisions are difficult to appeal. Simply because another arbitrator viewing the same evidence would have reached a different decision does not provide sufficient grounds for setting the arbitration award aside.

There are however, a few circumstances where an arbitration award can be appealed to a court and possibly set aside. These include:

  • An arbitrator lacked jurisdiction to award, such as when the subject matter of the dispute cannot be arbitrated;
  • The issue or dispute is not covered by a valid arbitration agreement, such as when there is an issue the parties did not agree to arbitrate;
  • The arbitration was tainted by fraud; and/or
  • Misconduct on the part of the arbitrator that affected their decision.

What Makes a Binding Arbitration Clause More Likely to Fail?

Similar to other contracts, there are certain circumstances that may cause a binding arbitration clause to fail or become void. For example, if the contract itself goes against public policy, the entire contract, including the arbitration clause, is void. There are other instances where a binding arbitration clause will fail, including:

  • Fraud in the factum occurs when an individual enters into a contract when they do not understand the consequences of its contents and/or its true risks and obligations;
  • Fraud in the inducement occurs when one party misleads the other regarding the facts contained in the contract and the relying party signs based on those facts;
  •  Duress occurs when a party signs a contract under threat, coercion or force;
  • An illegal contract is a contract created using illegal terms, such as contracting to commit a crime; and/or
  • An unconscionable contract means the contract is shockingly unreasonable, such as when it gives one party an extreme advantage over the other making it extremely unfair to one party.

How Do You Challenge a Binding Arbitration Clause in California?

A binding arbitration clause can be challenged in California in very limited circumstances. It is helpful to contact a local attorney in these circumstances. If you are located in a different jurisdiction, an attorney will be able to appear on your behalf in California.

Should the court hear an appeal of a binding arbitration award, a judge will determine whether the arbitration award should be enforced or vacated. A review of the arbitration award is based on the Federal Arbitration Act (FAA) guidelines as well as public policy. Some circumstances that may allow an appeal include:

  • The arbitrator exceeded their powers as outlined in the arbitration clause;
  • The arbitrator engaged in prejudicial misconduct;
  • The contract that contained the arbitration clause is void, rendering the arbitration clause unenforceable;
  • The prevailing party utilized fraud or corruption to obtain a decision in their favor; and/or
  • The arbitrator made an incorrect calculation when determining the prevailing party’s financial award.

It is rare for an award to be vacated. However, if the contract is found to be unconscionable, fraudulent, made under duress or against public policy, the award may be vacated.

What are the Remedies for Violations or Breaches of Binding Arbitration Clauses?

As discussed above, non-binding arbitration agreements only provide guidelines. They are not legally enforceable. Therefore, violations of these may not result in legal penalties.

However, binding arbitration is legally enforceable. Violation of these agreements can lead to legal penalties. These may include an order of contempt, an injunction or monetary damages. If the violation is severe, it may lead to a lawsuit in court.

Do I Need an Attorney to Help with a Binding Arbitration Clause in California?

Yes, a California contract lawyer is extremely important in a binding arbitration clause case. A lawyer can advise you regarding your case and what action you should take. A lawyer can also instruct you on what evidence is needed to support your claim. Contract disputes are usually complex matters and may involve multiple parties. It is important to have an experienced business lawyer to ensure your rights are protected. 

 A business lawyer can also be of assistance if you wish to arbitrate a dispute or if you entered into a contract that requires you to do so. A lawyer can review your dispute, provide advice on how to prepare for arbitration, answer any questions about the process and represent you during the arbitration hearing.

In addition, if you reside outside of the state but your claim requires you to appear in California, a lawyer can petition the court on your behalf. After this is done, the court may find the contract is fraudulent or unconscionable and may be voided without requiring your presence.