"I SIGNED WHAT?" UNDERSTANDING AN AGREEMENT TO ARBITRATE

By Jay F. Brubaker

Mr. and Mrs. Concepcion thought something was amiss when they looked at their cell phone bill and saw that they were being charged sales tax for a phone that they had received for "free" from their cell phone company. The Concepcions (along with similarly situated others) filed a class action lawsuit against their cell phone provider. (A "class action" lawsuit provides a means for many persons who have identical claims to file a single lawsuit together, which is an advantage for consumers who might not otherwise be able to afford to file their cases separately).

Unfortunately for the Concepcions, their contract with their cell phone company included an arbitration clause. This clause required the Concepcions to submit their claims against the phone company to arbitration instead of filing a lawsuit. The terms also prohibited the Concepcions from banding together with other customers to bring their claims as a class action within the arbitration proceeding. The U.S. Supreme Court determined that the arbitration agreement was valid, and the Concepcions' class action efforts were over.

The Concepcions' case illustrate a common problem that arises when a person enters into a contract that contains an arbitration clause. Because consumer contracts quite often contain arbitration clauses, this article will explain the concept of arbitration and discuss the pros and cons of using arbitration to resolve legal disputes.

1. What is arbitration?

Arbitration is a means of resolving a legal dispute out of court by submission of claims to one or more "arbitrators". Arbitrators are not judges, but they do review evidence submitted by the parties, and that usually includes a hearing before the arbitrator that is similar to an abbreviated trial. Arbitrators then issue decisions resolving the claims. The results of arbitration can be binding or non-binding, depending on the terms of the agreement. If the arbitration decision is binding, it serves as a final resolution to the dispute.

The parties to a contract can agree to use one arbitrator or a panel of arbitrators, can agree on where the arbitration will take place, and can agree on whom will pay for the arbitration proceedings. Parties can also agree to arbitration procedures that are more limited than traditional court proceedings. For example, parties can agree that the arbitrators will not decide class action types of disputes. Often parties will agree to use a specific arbitration agency, such as the American Arbitration Association. In this case, the rules of that agency will apply and the agency will assist in choosing the arbitrator.

2. What are the benefits of arbitration?

Arbitration provisions are frequently included in contracts as a way to resolve disputes without going to court. Businesses often favor arbitration clauses, as arbitration is usually cheaper and much quicker than a lawsuit.

The ability to agree on the identity of the arbitrators allows parties to choose someone who is an expert in the disputed matter to make the decision. This can be beneficial in disputes that are highly technical in nature, since a judge may not have as much technical expertise in the matter. Arbitration can also be conducted confidentially. This allows parties to resolve disputes about sensitive matters without unwelcome publicity.

3. What are the potential negatives of arbitration?

One of the most frequent complaints about arbitration is that there is very little judicial oversight over arbitration proceedings. The Federal Arbitration Act of 1925 severely limits judicial review of arbitration decisions. Under the FAA, courts can only review arbitration awards where the arbitrators do not follow the terms of the arbitration agreement, where one or more of the arbitrators is biased (i.e. where an arbitrator has a direct financial interest in one of the parties to the dispute), or where an arbitrator specifically directs one of the parties to do something that is illegal. It is important to understand that an arbitration award generally cannot be reviewed based only upon the contention that the arbitrator did not follow the law in rendering his or her decision.

The limitations on judicial oversight can be particularly problematic for consumers. Often, large companies that use standardized (form) contracts for their hundreds or thousands of customers will include arbitration clauses in their contract terms. Many consumers do not discover this until they attempt to file a lawsuit, and find themselves sent to arbitration instead.

Others have questioned the fairness of arbitration proceedings, especially in situations involving consumer contracts. Since the arbitration agreements are generally drafted by the company selling the item or service, the agreements often include terms such as limitations on damages, limitations on attorney fee awards, or other terms which are more beneficial for the company than the consumer.

Additionally, the impartiality of the arbitrators has been questioned. Since the party drafting the contract often chooses the arbitrators, there may be a tendency to choose arbitrators who may be predisposed to favor the company.

4. Conclusion.

Arbitration can frequently be an efficient and effective way for parties to resolve a dispute. However, it is important to understand the terms of any arbitration agreement, or contract that includes an arbitration agreement, before entering into it. If the contract is a standardized consumer contract, you may have little negotiating power to obtain desired changes to arbitration clauses. But if it is a non-standardized contract (such as contract to build a home or provide a customized service), proposed language addressing the resolution of disputes should be carefully reviewed before the contract is signed.

Our attorneys often assist clients in drafting contracts and address the topic of dispute resolution in that context. Our attorneys also have experience representing clients in presenting their claims in an arbitration proceeding. Please contact us for assistance if you desire to protect your rights in either of these contexts.