Thursday, June 26, 2014

What You May Be Giving Up When You Agree to "Arbitration"

Grain contracts often
contain arbitration clauses
Although most people are unfamiliar with the arbitration process, it is common for many form contracts to contain "arbitration" clauses. The Texas Supreme Court recently addressed cotton farmers’ challenge to an arbitration clause in a cotton marketing contract.  The Texas court upheld the arbitration clause but questioned whether a one-sided attorneys’ fees provision favoring the marketer was unconscionable. (Read Texas ag blogger Tiffany Dowell's good summary here).  Having not read the boilerplate common in many contacts, people are often surprised to learn they have consented to arbitration.  The recent Texas case reminded me of my own experiences with arbitration clauses and what four rights clients give up when they agree to arbitrate:


1. Your right to have your dispute resolved by the judicial system.  Arbitration is meant to be a speedy alternative to the courthouse.  When you agree to arbitrate a dispute, you give up your right to seek redress in a court.  Instead, your dispute is resolved according to the particular arbitration rules selected by your contract. Rather than your dispute being heard in the nearest county courthouse, arbitration will take place in the forum selected by the contract or the arbitrators.  This may mean your dispute is resolved in a state far away.

2. Your right to have your dispute resolved by a judge or jury.  File a breach of contract action in a court and either a judge or jury will determine (a) whether there has been a breach and (b) to what extent damages are owed.  In arbitration, a contractual dispute is resolved by one or more arbitrators who render a decision and, if deemed necessary, award damages to the prevailing party.  Who are these arbitrators?  That depends on what the contract or arbitration rules require.  They may be industry professionals, retired judges, private practice attorneys, or anyone identified by the contract.

3. Your right to obtain "discovery" in the judicial process.  One of the central components of court litigation is "discovery," the process by which both plaintiff and defendant are allowed to learn all aspects of their opponent's case.  This means the opportunity to ask the other side to answer questions (interrogatories) under oath, require witnesses to answer questions live in depositions under oath, and require parties to provide documents to support their positions.  Discovery can be long, expensive and grueling process, but it can also be very thorough.  Arbitration typically shortens the "discovery" process, limiting a party's ability to obtain information about their opponent's position.

4. Your right to a meaningful appeal.  If you do not agree with an arbitration award, you have few options to appeal.  You can appeal the award to court, claiming the process was unfair, an arbitrator was biased, or the award was unconscionable.  But courts give great deference to arbitration awards and will overturn them only in rare circumstances.  There must be something outrageous that occurred.  Most likely, the arbitration award will stand and will be binding.

Giving up these rights does not mean you should avoid contracts with arbitration clauses.  Arbitration is intended to provide a streamlined, less expensive means for resolving contractual disputes.  Parties signing contracts with arbitration clauses should consult an attorney and understand what they are giving up and how arbitration will occur, if needed.  The agreement to arbitrate is made at the time the contract is signed, not when a dispute arises.

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