Contractual Versus Compulsory Arbitration

Voluntary arbitration refers to an agreement entered into by two or more parties who choose to arbitrate a matter rather than litigate the matter in court. The agreement is a binding contract, and if a dispute later develops, one cannot choose to ignore the arbitration agreement and file suit instead.

But arbitration is not “compulsory.” It simply means that persons have voluntarily agreed in advance to arbitrate any future disputes and cannot back out of that agreement once a dispute arises. Failure to abide with “contractual arbitration” as agreed constitutes a breach of the agreement. If an individual has entered into such an agreement and later decides to file suit instead of arbitrating the dispute, the other person or party may take that individual to court to compel arbitration.

One of the most common circumstances where this situation arises is in the health care and insurance industries. When individuals enter a hospital for treatment or care, or fill out “new patient” forms for a physician, they may be asked to sign a document in which they agree to arbitrate any dispute which may arise. If they later attempt to sue the doctor or hospital for malpractice or a billing dispute, the agreement they signed will be presented to the court and their lawsuit will be dismissed and/or the court will order them to arbitrate the matter. The real danger in having their case dismissed is that the time limit for filing a dispute in arbitration may have expired while they were attempting to file a lawsuit in court (in some jurisdictions, a court may “stop the clock” to provide them with enough time to dismiss their court case and file it in arbitration). The lesson to learn is that they should carefully read all documents their health care provider may present to them prior to treatment or care, and they need to be always be certain to retain a copy for their records.

In many states, laws prohibit health care providers from refusing to treat individuals if they will not sign a voluntary arbitration agreement. On the other hand, only in rare circumstances will a court permit them to “set aside” a signed agreement to arbitrate and allow them to file suit instead. Usually, they will have to prove to the court that they did not sign the arbitration agreement “voluntarily.” For example, there is some legal precedent for allowing agreements with health care providers to be set aside (making them “voidable”) when evidence shows that they were signed while under extreme duress or in pain, semi-conscious, etc. In even more rare circumstances, a court may find an agreement to arbitrate “unconscionable” as against public policy and determine it to be null and void.

It is common practice for insurance policies (e.g., automobile, home, health, etc.) to contain language that commits an insured to the use of arbitration in the event of a dispute with the insurer. Many insureds do not realize that such language is contained in the lengthy policy language at the time they apply for insurance coverage. It often remains unknown and unrealized until a dispute arises and the insured attempts to sue his or her insurance provider. In most insurance policies, the agreement to arbitrate is not a separate document, but rather a statement contained in the policy, such as, “You agree to arbitrate any dispute relating to …” Individuals who sign the application for insurance coverage and have a policy issued to them have agreed to those terms.

On the other hand, “compulsory arbitration” is generally the result of express statute or regulation that mandates the arbitration of certain matters. The most common of these is the mandatory arbitration of labor disputes. If individuals are members of a union, the bargaining agreement for their bargaining unit will most likely contain provisions for the arbitration of all disputes.

One of the most compelling reasons for mandating the arbitration of certain matters is that such matters tend to be very complex, specialized, or too time-consuming for a general jury trial. For example, a dispute over a provision in the Internal Revenue Code may be technically complicated. Instead of a jury trial, arbitration will provide the opportunity for appointment of a neutral arbitrator or panel of arbiters who may be knowledgeable and experienced in tax matters and can more readily understand the arguments presented. The “State Provisions” Section below summarizes key areas where states have mandated compulsory arbitration of certain matters.

Inside Contractual Versus Compulsory Arbitration