Understanding Remedy-Stripping Arbitration Clauses: Validity, Arbitrability, and Preclusion Principles

Abstract

Overzealous adhesion contract drafters frequently try to deprive adhering parties of their remedies by grafting remedy-stripping provisions onto their arbitration clauses. Courts have not sufficiently analyzed such remedy-stripping clauses or attempted to craft a coherent and uniform approach to them. To date, courts have either held the entire arbitration clause unconscionable and therefore unenforceable; severed the offending remedy-stripping terms, to enforce a "cleaned up" arbitration clause without remedy limitations; or enforced the remedy limitations while holding that arbitration will proceed only on those claims for which the arbitrator is authorized to award remedies. More recently, drafters of remedy-striping arbitration clauses have argued that the FAA's purported mandate that arbitration clauses must be enforceable "as written" preempts state contract doctrines that would deny enforcement to remedy-stripping clauses. If there is any serious possibility of judicial acceptance of this argument, it is crucial to have worked through the issue of the preclusive effect of an arbitration conducted under such an agreement. I argue that, although proper understanding of preclusion principles places the validity of remedy-stripping clauses in a different light, courts are still justified in striking remedy-stripping clauses in their entirety as unconscionable or against public policy. I argue that courts should give the prior arbitration in such circumstances the narrowest preclusive scope that is consistent with established preclusion principles. Finally, I show how taking preclusion principles into account can also resolve the special remedy-stripping problem of class actions.

Keywords: employee, consumer, arbitration, compelled arbitration, mandatory arbitration, pre-dispute arbitration, Federal Arbitration Act, FAA, alternative dispute resolution, ADR, claim preclusion, issue preclusion, res judicata, collateral estoppel, remedies, waiver, exculpatory clause, class action

JEL Classification: K41