Because arbitration clauses have, in many circumstances, become immunity clauses for multinational corporations in their dealings with consumers, I find their proliferation, and courts’ enthusiasm for enforcing them even in consumer transactions where the relationship between the parties is so imbalanced that the consumer has no choice but to accept the agreement as written, to be extremely troubling. Arbitration clauses, however, are only becoming more common, and in agreements between equally sophisticated parties with similar bargaining leverage, the problems that I have described above aren’t necessarily present.
Even in contracts between similarly situated parties, however, arbitration clauses probably aren’t driving the deals that they are attached to. In many cases, they’re likely an afterthought, viewed more as boilerplate fine print than as a substantive provision that should be carefully thought through. Moreover, people might feel awkward about being seen as obsessing over dispute resolution at the beginning of a relationship. It’s like asking for a pre-nup. Here everyone is excited about this new relationship, and you’re throwing a wet blanket on the whole thing by focusing on how to end it if things go south.
But if you do end up in a dispute with the other party that requires the help of a neutral third party to resolve, you may find yourself wishing you had paid more attention to the arbitration clause when you could have done something about it. Arbitration clauses can take a lot of of forms, and if you have a chance to have some input into it, you should take that opportunity. It’s especially important to think through these issues before a dispute arises, when both parties are motivated to come up with a process that would be fair regardless of which side of the table they’re on.
Here are some things to think about when evaluating an arbitration clause:
How is the arbiter going to be selected?
A lot of arbitration clauses fail to say anything about how, specifically, the arbiter will be selected. Selection of the arbiter, however, might be the most crucial determinant of who ends up prevailing. Here are some questions to guide your thought process:
- Can the arbiter be anyone, or does it have to be someone with specialized knowledge about your industry? Or someone from a particular arbitration forum?
- Are the parties going to select the arbiter, or are they going to let an arbitration forum make the selection? If the forum is going to make the selection, will you be given any veto opportunities?
- If the parties are going to select the arbiter, what happens if they can’t agree? Arbiters usually require proof that both parties have agreed to use their services before beginning the arbitration, meaning that if one side wants to derail the whole thing, it can do so by refusing to cooperate on the selection of the arbiter.
Where is the arbitration going to take place?
If your contract is with someone who is in a different state, are you going to have to travel there for the arbitration hearing? If the arbitration is supposed to occur in your state, what happens if you want to arbitrate, but the other party refuses to participate?
What rules are going to govern the arbitration?
If you sue or get sued, the rules that govern your lawsuit are going to be chosen for you by the court in which the complaint is filed. In arbitration, however, the governing rules can be chosen by the parties. Again, this is easier to do before a dispute arises and the parties are motivated to select a process that’s fair rather than one that helps them strengthen their position in an already live dispute.
How will costs be allocated?
Although arbitration usually is cheaper than litigation, it still ain’t cheap. If you’re having to bring in experts, witnesses, or an arbiter from out of state, or if you’re having to pay for yourself and your lawyer to travel out of state, this process can get to tens or even hundreds of thousands of dollars quickly. Moreover, unlike in litigation, where the judge’s time is free, in arbitration, the parties pay for the arbiter’s time. And depending on which rules are governing your dispute and how much money is at stake, you might be required to hire three of them, as opposed to just one.
In short, don’t let the arbitration industry’s claims that arbitration is cheap and fast lull you into thinking that this won’t be a big deal if it comes up. Thinking through the arbitration clauses in your contracts is like picking the right insurance. You actually hope it will be a lot of time and energy wasted. But if you need it, you will be happy if you got it right.
Update: About two minutes after I posted this, I saw this article from Mother Jones, concerning a recent Supreme Court opinion, further enhancing large corporations’ ability to almost entirely exclude themselves from being held accountable by the US justice system.