Why Arbitration Clauses Are Crucial for High-Volume Businesses
Arbitration clauses are becoming increasingly common in modern business agreements. An arbitration clause is a section in a contract that designates whether contract disputes must be settled through arbitration or in court. They are valuable tools for simplifying customer disputes and saving time and effort on legal matters. No company can benefit from arbitration clauses more than high-volume businesses that sign hundreds or thousands of contracts a year.
Implementing arbitration clauses in your business contracts can help save thousands, if not millions, in legal fees. Your organization could see significant improvements in your conflict resolution processes by adding a single clause.
Read on to learn what arbitration clauses do, why they matter to high-volume businesses, and examples of how these clauses work in the real world.
Please note that that this article is not and should not be taken as legal advice.
What is an arbitration clause?
An arbitration clause is a contract clause that binds signers to handle all disputes with a company through arbitration instead of going through the litigation process. Most importantly, it helps prevent class-action lawsuits.
Arbitration is a process that allows two or more parties to resolve legal conflicts outside of court. In arbitration, a neutral third party known as an arbiter listens to all parties’ claims and makes a legally binding decision about the case.
The difference between arbitration and a lawsuit is more than just whether the decision-maker is called an arbiter or a judge. In a lawsuit, both parties typically have legal representation. Neither party can choose the judge, and the judge must closely follow legislation to decide the case. This makes lawsuits resource-intensive, inflexible, and time-consuming.
Meanwhile, arbitration is much more adaptable. The parties can choose the arbiter, and the format of the dispute resolution is less strict. Furthermore, the arbiter may not be handling any other case at the same time, allowing arbitration to be resolved more quickly. Finally, arbitration can include a measure of negotiation, giving the arbiter more leeway in their final arbitration award decision.
Why do arbitration clauses matter?
An arbitration clause is useful for reducing the resource drain of individual lawsuits and class action lawsuits.
In a class-action lawsuit, a class or group of users comes together under the banner of similar complaints. They file their case as a group, giving them leverage in court. If a class action claim is permitted to proceed, it’s a sign that the claims have substance.
If a class-action lawsuit succeeds, your organization may face substantial penalties, as many courts assign both compensatory and punitive damages in class actions. For instance, Johnson & Johnson faced more than $4 billion in punitive damages after a class-action case filed by people who claimed that its baby powder caused cancer.
However, arbitration clauses can prevent that. Instead, each individual plaintiff will need to go through arbitration on their own. This prevents you from facing punitive damages and gives you significantly more room to negotiate individual complaints. By avoiding a class action, you can avoid major losses and save time and effort overall.
The importance of arbitration clauses for high-volume businesses
The protection of an arbitration clause is crucial to high-volume businesses. Any organization can fall victim to a class-action lawsuit, but high-volume companies are especially vulnerable because it’s easy for contracts – especially manually prepared ones – to slip through the cracks. With a more extensive user base comes increased risk for legal action and class actions.
Enforcing arbitration clauses, especially those presented via clickwrap is really crucial to effective risk mitigation at your company. Ensuring that the clickwrap agreements are designed optimally, provide conspicuous notice, and capture back-end records of acceptance will significantly increase the enforceability of a clickwrap and arbitration agreement.
Arbitration clauses and clickwrap agreements
Businesses that use clickwrap agreements can get incredible value from a well-written arbitration clause. These types of contracts are particularly useful to companies that consistently bring in high volumes of customers. That’s the same situation in which arbitration clauses are most helpful.
Despite the benefits of arbitration clauses, some companies may find that their clauses aren’t enforceable. This is often because the clickwrap agreement as a whole is designed improperly and the company failed to maintain appropriate back-end records documenting who signed contracts and when. You can take a few steps that make it more likely that your clickwrap arbitration clauses will be upheld in court.
Designing an enforceable clickwrap arbitration clause
A clickwrap agreement is a digital contract that the user signs by clicking a box or button. These types of agreements have only existed for a handful of years, but in that time multiple court cases have refined legal opinion about how clickwrap agreements should be structured to remain legally enforceable.
First, the screen element users engage with to signal their acceptance must be clearly labeled. Companies must use clear language, such as “By clicking ‘accept,’ you agree to our Terms of Service,” so customers are aware that they are signing a contract.
Just as importantly, the screen on which the user accepts the terms of the contract must be well-designed. The agreement must be conspicuously presented, making it impossible to miss. For instance, the font should be easy to read and contrast against the background. The screen element that signals acceptance should also be positioned close to the contract itself, so it’s clear that the two are related.
Behind the scenes, you also need to do some work. And as your clickwrap agreement evolves over time, keeping exceptional records of these changes — to the agreement itself, or to the transaction flow in which it’s presented — will be crucial. These records will prove how your clickwrap was presented to individual clients if they try to dispute the arbitration clause. Designing a solid clickwrap contract requires both front-end and back-end work, but it will pay dividends by keeping your arbitration clause enforceable.
Real-world examples of clickwrap arbitration clauses in action
Major high-volume companies are already implementing clickwrap arbitration clauses in their customer agreements. These clauses have made their way through the courts and have set a precedent for how other companies should structure their contracts.
Two informative examples of clickwrap arbitration clauses are Barnes and Noble and Uber. Here’s how these companies’ clauses have been treated in court and what you can learn from their examples.
Barnes and Noble
One of the earliest arbitration clause precedents was set in a court decision against bookstore giant Barnes and Noble. The company had included a “terms and conditions” page on its website which informed visitors that by using the website, they agreed to handle all disputes through arbitration. However, visitors did not have to click the hyperlink, and may not have noticed it at all.
However, when a class-action lawsuit was brought against the company, the judge in both the original case and the panel at the appeals court declared this clause unenforceable. The judgment was that users can’t be held to an agreement many of them never saw.
The Barnes and Noble case demonstrates that “browsewrap” agreements simply don’t hold up. If you want to offer an online contract, you must present it and have users actively click or perform another action to agree to it or it may not be enforced by the courts.
The rideshare company Uber has faced multiple challenges with its arbitration clauses over the past several years. A recent state appellate court case has found that the firm’s digital contract, including its arbitration clause, was not legally binding for two reasons.
First, the court found that Uber’s rider clickwrap was formatted such that it encouraged customers to skip reading the terms and conditions entirely. The page’s format highlighted a hyperlink that sent the reader to the next page and indicated their consent to the contract and downplayed the link to the actual terms and conditions to which they were agreeing.
Riders were never shown the actual terms unless they specifically chose to click a link. Furthermore, the link that indicated the reader was agreeing to a contract was deemed not clear enough in its language and presentation. In combination, these factors were found to make Uber’s contract, including its arbitration clause, unenforceable.
This demonstrates the importance of designing your clickwrap agreement pages with care. Something as simple as emphasizing the wrong part of the page can render your contract unenforceable if a judge deems it unclear.
Uber did have the benefit of saving excellent records of its clickwrap agreements. You can do the same by Using a centralized clickwrap contract provider that automatically tracks changes. This ensures that you always have evidence of how your agreements were structured. These records can help you avoid wasting time and resolve disputes about your arbitration clause more quickly.
A well-designed clickwrap arbitration clause can save high-volume organizations significant time and effort. However, you need to ensure that you’ve structured the clickwrap agreement correctly for the court system to consider it enforceable.
Ironclad can help you build an enforceable clickwrap arbitration agreement that is more likely to stand up in court. You can schedule your demo today to explore how Ironclad can make developing and implementing clickwrap arbitration clauses easier.