Designing Effective Arbitration Clauses: Forum Options, Confidentiality, and Procedural Fairness

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Summary

• The forum framework specified in an arbitration clause can be custom-tailored or can be off-the-shelf, including those offered by organizations such as AAA, JAMS, and ICC.
• If the parties wish the result of an arbitration to remain confidential and have not chosen to apply a statute or model rulebook, confidentiality should be expressly provided in the agreement.
• The most common grounds for rescinding, modifying, or otherwise disallowing an arbitration clause are judicial findings of a lack of procedural fairness.
• A mandatory arbitration clause covering a statute and used in an employment or consumer agreement must provide all types of relief that a court would make available under that statute.

Antonio Marquez lanza/Moment via Getty Images

Jump to:

• Building the Private Forum
• Package Options: AAA, JAMS, and UNCITRAL
• Procedural Fairness
• Recent Statutory and Judicial Limitations
• Drafting Is Key

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Arbitration clauses transfer dispute settlement from its default location in a court of competent jurisdiction to a private forum. Contract clauses mandating arbitration must therefore both sufficiently specify the private forum framework and be procedurally fair in the eyes of the court. A clause can make reference to an organization offering a complete arbitration framework or design a tailor-made arbitration. Framework elements may vary when a contract moves from local to international, and those elements guaranteeing fairness should vary with increasing asymmetry in the sophistication of the parties, such as in consumer or labor contracts. The drafting of an effective arbitration clause should therefore take these variables into account.

The drafting of arbitration clauses navigates between three points of danger. First, if a court finds the private mechanism as drafted unfair, the court may rescind or modify it. Second, the private process as drafted could leave a gap, contain a contradiction, or otherwise prove unworkable. Third, a workable and fair process could be memorialized in a clause that is so long and complex that it creates difficulty in negotiating the contract.

Arbitration clauses should not be convoluted. Elements should be succinctly memorialized in a way that prioritizes viability and enforceability and ensures efficiency of process while focusing on necessary remedy type, permitted confidentiality, and judicially approved carve-outs. Below, I first examine practical framework components and then elements affecting fairness, and close with examples of provisions that have led courts to either question or rescind them.

Building the Private Forum

The forum framework specified for arbitration can be off-the-shelf or custom tailored. Off-the-shelf frameworks are offered by organizations such as the American Arbitration Association (AAA), Judicial Arbitration and Mediation Services (JAMS), and the International Chamber of Commerce (ICC). Choice of such a package will determine the seat, procedure, and arbitrator selection process. If parties prefer to customize the process, the arbitration clause can build its own framework. Important secondary components, such as the scope of discovery and rules on evidence, can be left to the arbitrator’s discretion or set out in the arbitration clause if not addressed in the preferred framework.

An arbitration clause can also fix its governing framework by reference to statutory or model rules designed specifically for the arbitration process, such as the Federal Arbitration Act (FAA), a state arbitration act, or the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL). Such generalized rule sets offer carefully crafted frameworks for the arbitration and can also determine preemption, appeal standards, and enforcement.

In the case of off-the-shelf rules, a brief arbitration clause suffices: “Any dispute or claim arising out of or relating to this contract shall be settled by arbitration in accordance with the [insert framework ] Arbitration Rules.”

If reference to a standardized framework is not made, the arbitration clause should specify the situs or place of arbitration and may also fix the state or country whose courts have supervisory jurisdiction for judicial review, issuing subpoenas, and eventual enforcement of the award. If not set forth in a separate clause, the substantive law governing any dispute should also be specified. If substantive law is not specified, it is likely that either the law of the place where the arbitration is seated or that of the place where the contract is performed will apply.

A tailored clause should also specify the number and qualifications of arbitrators and the method of selecting them. A contract of modest worth may well specify a single arbitrator, whereas one in which a possible claim is larger could specify a panel of arbitrators, often three. Arbitrators would likely bill their time at rates comparable to a senior lawyer, so reducing their number reduces the projected cost of dispute settlement. The clause must also specify how the arbitrator or arbitrators are chosen and any special qualifications any or all of the arbitrators should have. If three arbitrators are to be chosen, it is common for each of the parties to choose one arbitrator, and then those two shall choose the third. Today, it should also be possible to select an artificial intelligence (AI) large language model (LLM) to arbitrate on the basis of written submissions and with a detailed and mutually agreed upon set of prompts. However, the validity of such a process would be safest in a commercial setting among equally placed merchants.

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Carve-outs present both framework and fairness issues. Carve-outs in an arbitration clause frame the dispute settlement process “jurisdiction” by excluding or including types of claims or modes of action. A common scope for an arbitration would be “all claims arising out of or relating to the contract,” but this scope could be extended to tort claims and statutory claims, as well as include emergency or permanent equitable relief. If it is contemplated that the arbitrator should have the power to award attorney fees and costs, this can be included in the clause.

For an international transaction, the contractual arbitration clause should give special attention to the language and perhaps cultural neutrality of the arbitration, the convenience and neutrality of the forum location, and whether it is useful to restrict the nationality of the arbitrator(s), as well as the means and place of enforcement. The UNCITRAL Arbitration Rules set forth a detailed framework spanning from the form and timing of the first notice to commence arbitration until the form and contents of the arbitration award.

If the parties wish domestic or international proceedings and the result of an arbitration to remain confidential and have not chosen to apply a statute or model rulebook, confidentiality should be expressly provided in the agreement. If the parties wish an LLM to arbitrate the matter on the basis of written submissions, they should be careful to construct a comprehensive prompt for the AI that specifies all relevant elements, particularly governing law, that the AI would need to reach a conclusion from the arguments offered by the parties. Note that a publicly available AI would not guarantee confidentiality of the information submitted to it.

Package Options: AAA, JAMS, and UNCITRAL

For significant domestic and international commercial transactions, use of an institutional package is a safe and (as far as drafting goes) economical way to mandate arbitration in a contract. The AAA offers a robust administrative framework and team to handle filings, assign case managers, schedule hearings, and even appoint arbitrators if parties cannot agree. For consumer contracts, AAA’s Consumer Due Process Protocol imposes minimum fairness requirements on the arbitration, such as providing carved-out access to small claims court and conspicuous disclosure about the arbitration. The AAA presents the classic procedural trade-off: It is formally complete, predictable, and well-structured, earning broad judicial acceptance; however, the very formality that creates this respect can be overly rigid, procedurally cumbersome, and relatively expensive.

JAMS presents itself as a more streamlined and flexible framework with nearly the same cache among the judiciary. Any increased flexibility of procedure is likely counterbalanced by JAMS’s preference for drafting arbitrators from the ranks of the judiciary. A retired judge with significant experience on the bench will carry much of the procedurally disciplined thinking of the courts into an arbitration. JAMS also has its own Minimum Standards of Procedural Fairness for consumer arbitrations.

Procedural Fairness

As discussed above, the most common grounds for rescinding, modifying, or otherwise disallowing an arbitration clause are judicial findings of a lack of procedural fairness. The fairness elements of an arbitration clause relate to whether the weaker party understands that they are waiving a judicial proceeding, with all it entails, and whether the private forum imposed as an alternative provides procedural and substantive fairness comparable to a court. In a contract with consumers or employees, any clause providing for arbitration should be clear and conspicuous and should include a waiver of jury trial.

Important elements that an arbitration clause must contain to be deemed fair include plain language drafting, mutuality of the obligation to arbitrate, a location that is convenient for the weaker party, such as hearing by remote communication, and the presence of carve-outs that allow access to court for actions such as small claims, injunctions, or collective actions. A mandatory arbitration clause covering a statute and used in an employment or consumer agreement must provide all types of relief that a court would make available under a statute.

A lack of mutuality that restricts the weaker party while leaving the stronger free invites judicial invalidation, especially in consumer contexts. Provisions shifting costs away from the weaker party and allowing that party to pursue remedies beyond arbitration could gain the favor of the court. Asking the consumer or employee to waive a right to seek other forms of relief or file a class action could attract close examination by a judge, but such waivers are generally enforceable.

Recent Statutory and Judicial Limitations

Drafters should take note of the statutory carve-out found in the 2022 Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA), which amends the Federal Arbitration Act (FAA) to make pre-dispute arbitration agreements unenforceable with respect to disputes relating to sexual assault or sexual harassment when the claimant elects to proceed in court instead of arbitration.

The U.S. Court of Appeals for the Ninth Circuit clarified that the FAA cannot be modified or weakened by state law. In Chamber of Commerce of the United States v. Bonta, 62 F.4th 473 (9th Cir. 2023) (recon. en banc 2025), the Ninth Circuit struck down a California law (Assembly Bill 51) that outlawed mandatory arbitration agreements as a condition of employment. The court held AB 51 was preempted by the Federal Arbitration Act (FAA) because it directly frustrated the FAA’s purpose to enforce arbitration agreements according to their terms. While this decision primarily stands for the principle that state law is preempted by federal law addressing the same matter, it does indicate support for the use of arbitration. Any state law that broadly bans a federal provision for arbitration is invalid.

The limits of contractually mandated arbitration when it hinders statutory remedies was clarified by the Seventh Circuit in Smith v. Board of Directors of Triad Manufacturing, Inc., 13 F.4th 613 (7th Cir. 2021), which found that an arbitration clause in a pension plan was unenforceable because it prevented pursuit of statutory remedies under the Employee Retirement Income Security Act (ERISA). The Smith court applied the “effective vindication doctrine” against limitation on statutory remedies, as first announced in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 632–37 (1985), and developed with a cost-benefit test in American Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 235–36 (2013). The Smith court held that provisions invoked by the plaintiff had individual and plan-wide effect, but the arbitration provision in question precluded available statutory relief and was therefore invalid.

Another ERISA case was heard in the Third Circuit two years later. In Henry v. Wilmington Trust NA, 72 F.4th 499 (3d Cir. 2023), the Third Circuit refused to enforce an arbitration clause in an ERISA employee stock ownership plan (ESOP). The arbitration provision included a class action waiver that barred representative or plan-wide relief authorized by ERISA. Because that waiver effectively required participants to forgo statutory remedies (e.g., plan-wide equitable relief), the court held the class waiver—and, due to its non-severability, the entire arbitration clause—was unenforceable under the “effective vindication” doctrine. The U.S. Supreme Court later denied certiorari on this issue, leaving the Third Circuit’s ruling in place.

In the same year, Harrison v. Envision Management Holding, Inc., 59 F.4th 1090 (10th Cir. 2023), offered guidance on when carve-outs for class actions are necessary. In Harrison, the Tenth Circuit refused to enforce an ERISA plan’s arbitration provision that permitted only individual relief and thus waived plan-wide statutory remedies, applying the effective vindication doctrine. The U.S. Supreme Court denied certiorari.

The circuit court has also provided guidance on the limit of carve-outs affecting rights under antitrust laws. In Davitashvili v. Grubhub Inc., 131 F.4th 109 (2d Cir. 2025), the Court considered “(1) whether an agreement to arbitrate was made between Defendants and Plaintiffs; (2) whether, in the circumstances presented, arbitrability is an issue for the Court or the arbitrator to resolve; and (3) whether the relevant arbitration clauses are enforceable.” It determined that a consumer’s antitrust claims against Grubhub, Postmates, and Uber were broader than the contract expressed by those companies’ terms of service (TOS), so that they were not limited to arbitration and could proceed in court. The Second Circuit held that the TOS arbitration clause did not cover the plaintiffs’ antitrust claims because those claims did not arise out of or relate sufficiently to the plaintiffs’ use of the relevant app or platform. As a result, the court refused to compel arbitration for those claims under the clause.

Some recent circuit court decisions have also addressed fundamental points of law in the arbitration context. The Fourth Circuit reminded us that a valid contract requires mutual, binding promises. In Johnson v. Continental Finance Co., 31 F.4th 169 (4th Cir. 2025), the Fourth Circuit held that a credit-card arbitration clause (and its delegation provision) was unenforceable because the underlying cardholder agreement contained a unilateral “change-in-terms” clause allowing the issuer to modify any term at its sole discretion. Under the applicable Maryland state contract law, this rendered the arbitration obligation illusory—no mutual promise existed to support enforcement. The court also held that the threshold question of contract formation (whether any contract existed) was for a court, not an arbitrator, to decide.

The Second Circuit has recently sent out a reminder that unbiased neutrality is a prerequisite for an arbitrator. In Flores v. New York Football Giants Inc., 104 F.4th 205 (2d Cir. 2024), the Second Circuit held that an arbitration clause embedded in the NFL Constitution was unenforceable because it vested complete procedural and substantive authority in the NFL Commissioner (an opposing party), robbing the forum of neutrality when rendering decisions on the claimant’s statutory right to make racial discrimination claims. The clause in this way lacked the guarantees required to enforce arbitration under the FAA and thus could not be compulsory.

Drafting Is Key

Taking the above into consideration, the drafting of an arbitration clause should follow the same principles as drafting in general: Language should be comprehensive enough to establish a working framework and unambiguous on foreseeable contingencies. Ambiguity and gaps can make the agreement unworkable and lead to a judicial rescission. When dealing with consumers or employees, the clause should be balanced and should not be designed to pile on costs or to seek to remove statutory rights and avenues for relief from the consumer or employee. In particular, relief foreseeably available under a statute should not be restricted unless done with great care (specific disclosure and approval). In situations where the potential controversy merits blue-chip procedure, reference to a leading organization, such as the AAA or JAMS, offers what is likely the most concise yet secure option for an arbitration clause. If you choose to name an AI as arbitrator, it would currently be prudent to do so only among equally sophisticated contracting parties and with all necessary information prompted to guide the AI in assessing the parties’ submissions against the specified body of law. Useful language in any arbitration clause could be that the clause is intended to apply to the full extent permitted by law.

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Author

David C. Donald

David C. Donald is Emeritus Professor in the Law Faculty of The Chinese University of Hong Kong and an attorney at law in Honolulu, Hawai’i focusing on advice to small businesses and planning for moderate to small estates. ...

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Author

David C. Donald

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