Determining if Mandatory Arbitration is “Fair”: Asymmetrically Held Information and the Role of Mandatory Arbitration in Modulating Uninsurable Contract Risks

Abstract: In this article Marrow posits that mandatory arbitration serves to neutralize a class of business risks rarely considered by those who want to eliminate it.

Business entities enter into business relationships based on the best available current information they have about those with whom they do business. Unfortunately, that information can degrade over time due to undisclosed evolving circumstances thereby leaving the business entity at a distinct disadvantage. In other words, asymmetrically-held information can create “new” risks, risks that weren’t anticipated when the original relationship came into being.

These “new” risks are particularly pronounced in situations involving consumer credit, employment and franchises. And for the most part they are uninsurable. For those providing credit the risk involves the deterioration of credit worthiness; for an employer it involves morale and business interruption; and for the franchiser it involves the reputation of the franchise.

Once discovered, survival requires a business entity to search for any and all measures to defuse the “new” risk and restore the equilibrium. Mandatory arbitration is one such measure because by design it is flexible, cost efficient and speedy. Mandatory arbitration makes it possible for the business entity to quickly secure an award with relief appropriate to the circumstances. It not only levels the playing field but it acts as a partial substitute for insurance because it transfers the impact of the “new” risk away from the business entity.