STOP! Don’t Sign that Arbitration Clause! (Until you’ve considered the consequences!)

UPDATE:  Earlier this week, the United States Supreme Court granted Certiorari to consider whether or not an arbitrator acts within his powers under the Federal Arbitration Act or in excess of those powers by determining that the parties had affirmatively agreed to authorize class arbitration simply on the basis of broad contractual language that required arbitration of any dispute arising under the contract as a precondition to litigation.  Oxford Health Plans LLC v. John Ivan Sutter M.D.  This development is further evidence of the need to carefully consider the consequences when signing arbitration clauses without considering the range of consequences!

Most contracts nowadays contain an “Arbitration Clause,” which the parties often unwittingly sign without considering the consequences. After all, if a dispute arises under the contract, would it not be better to resolve the dispute in an efficient manner that is faster and more cost-effective than going to court?  It could take years for a case to get to trial, and then there”s post-trial motions, appeals, and on and on. With arbitration, the matter could be submitted, argued, and decided by a experienced judge or lawyer with specialized knowledge of the subject area and selected by the parties themselves! What could go wrong?

Ever since Calvin Coolidge signed the Federal Arbitration Act (FAA) in 1925, parties to a dispute could utilize arbitration as a method of “alternative dispute resolution” or “ADR” as these types of proceedings are often called. Designed to allow the parties to resolve their disputes without the usual delays – and costs – of a lengthy trial, the arbitration process steadily grew more popular over the years. According to a recent article in the California Real Property Journal (Vol 30, No 3 2012), authors Paal, Block and Roland note that by the late 20th Century, all 50 states had adopted arbitration statutes.  They note that concerns over court congestion and runaway jury verdicts raised interest in arbitration.

However, Paal, Block and Roland note that arbitration procedures have become more formal and “judicialized,” but lacking the court”s procedural and evidentiary rules, the arbitration process has become as “uncertain, costly, and time consuming as ever.” (Citing Thomas J. Stipanowich, “Arbitration: The “New Litigation.”” 2010 U. Ill. L. Rev.1). The Journal article goes on to note that at the 2009 National Summit of Business-to-Business, “seven out of ten participants believed that arbitration [fell]short of expectations in terms of efficiency and economy at least 50% of the time.”

There are several practical reasons that individuals considering contracts in real estate transactions should not agree to mandatory arbitration. For example, the judicial relief afforded by a Lis Pendens – a Notice of Pending Action – is online casino not available under an arbitration clause. Neither is injunctive relief.  Or an action in Unlawful Detainer – which affords a landlord a relatively prompt, judicial process to evict a defaulting tenant.  In some instances, arbitration actually could take longer and end up costing much more than if the matter had simply proceeded through the litigation process.  It should be noted that almost all State and Federal Courts require that parties to litigation attempt one Det har gjort att manga svenska casinon anvander spel enbart fran Net Entertainment. or more of several alternative dispute methods as part of the litigation process, ranging from Early Neutral Evaluations to Mediation and both binding and non-binding Arbitration – all under the  jurisdiction and time limitations imposed by the Court.

For better and worse, the Courts have upheld the enforceability of the contractual provisions of an arbitration clause, even if the applicable statutory law would yield a different result if tried in Court. In a recent decision by the United States Supreme Court, the noncompetition provison in a contract with an arbitration clause had been ruled invalid by a State Court, but the high Court ruled that subject to the terms of the contract, only the arbitrator could make the determination,  not the State court. (Nitro-Lift Technologies LLC v. Howard).  The Court noted that the Federal Arbitration Act “declare[s] a national policy favoring arbitration,” and provides that a “written provision in … a contract [providing for arbitration] shall be valid, irrevocable, and enforceable.”  In other words, if the contract declares that an issue in that contract is subject to arbitration, the parties must resolve the issue through arbitration.

Is there an alternative to this “alternative dispute resolution” process?  Paal, Block and Roland suggest that Mediation is fast becoming more popular, and “has, for all intents and purposes, replaced arbitration as the preferred method of dispute resolution.” [Citation] Certainly, there are many advantages, not the least of which is that the proceedings are subject to confidentiality.  In Mediation, the parties are encouraged to work out their own, final resolution of the dispute, with the assistance of the Mediator. The process is conducted informally, and the process is subject to strict confidentiality. In Mediation, the parties can restructure the deal and fashion remedies that are not available through the judicial process.

Some newer contracts contain “Mediation Clauses” that provide that the parties first attempt to mediate a dispute prior to initiating litigation. Some contracts also require arbitration if the parties are unable to resolve the dispute through mediation. In some instances, especially in real estate matters, it would be prudent to carefully consider the consequences of agreeing to mandatory arbitration before signing the contract. As always, consult with an attorney before you make the commitment.