Arbitration: What Is It? And How Do I Avoid It?

You probably already know the basic steps of a lawsuit. A case is filed, the attorneys seek evidence via discovery, and then the case is either settled or goes to trial, where a jury and judge make a decision and award a verdict.

A great many legal cases, though, don’t end this way, but are instead resolved through the process of arbitration.

What Is Arbitration?

Arbitration is a form of what is known as alternative dispute resolution, which refers to a set of methods by which a legal case can be resolved without having to go through the traditional route.

Although arbitration closely resembles a trial in many ways, there are some key differences:

• Instead of being presided over by a judge, the arbitration is overseen by a neutral third party known as an arbitrator (or, in some cases, a group of arbitrators).
• The arbitration procedure is not quite as formalized as that of a trial. For instance, the rules of evidence are much looser, and the lengthy process of discovery is done away with entirely.
• The process is usually faster than a trial, and also tends to be cheaper, although it can still be quite costly.
• Unlike court cases, which are almost always a matter of public record, arbitration is often done in private.
• The arbitrator has a lot more leeway to make a decision according to their wishes. They are not necessarily constrained by statutory law or legal precedent like a trial judge or jury would be.

Arbitration has become increasing common in recent years. While it was once used primarily for a fairly narrow range of issues, including labor disputes, it is now used in all sorts of cases.

Arbitration versus Mediation

Arbitration should not be confused with other forms of alternative dispute resolution, including mediation. When two parties enter into mediation, they agree to work together with a mediator to come up with a solution to their problem.

Mediation is generally geared towards finding a mutually amicable solution, while arbitration is a fundamentally adversarial process, similar to a trial. Furthermore, unlike an arbitrator, the mediator has no power to make a decision, but only to guide the dispute resolution.

Binding and Nonbinding Arbitration

There are two main types of arbitration.

• In nonbinding arbitration, the decision of the arbitrator is not final, and if one party does not agree with the final outcome, they have the right to pursue the case to trial. Because of this, a nonbinding arbitration is much a less powerful legal tool than a binding one, although it still can provide a useful opportunity for both parties to present their cases, assess their respective strengths and weaknesses, and come to some sort of resolution.
• In binding arbitration, the decision is final, and has the force of a court judgment. In fact, the arbitrator’s decision is more powerful than a court judgment, because you can appeal a judgment but you cannot appeal a decision made by an arbitrator. Once you have gone into binding arbitration, you have closed the door to a trial.

Forced Arbitration Agreements

Now, you may be asking yourself, when should I choose arbitration over a trial?

Well, in some cases, you won’t have as much of a choice as you might think.

While both parties can voluntarily decide to enter into arbitration, many contractual agreements these days come with clauses which are known as forced arbitration agreements, mandatory arbitration clauses, or some variation on this terminology.

A whole lot of contracts have these sorts of agreements these days, including:

• Agreements between consumers and the manufacturers or sellers of products.
• Agreements between employers and their employees or third-party contractors.
• Agreements involving banks, insurance companies, and credit card providers.

In many of these cases, one of the parties signing the contract will have little or no say in how the contract is drafted. This is known as a standard form or “take-it-or-leave-it” contract. For instance, when you sign a credit card agreement, you don’t get to negotiate the contents of the contract. You simply sign or choose not to sign.

Not only do you not have a say in the terms of these contracts, but typically, you don’t even read them. Of course, in theory you should read all the contracts you sign, but we know it doesn’t always work that way in the real world, and in any case legal laypersons cannot always understand the complex contractual language that may be involved. It’s quite likely that you’ve signed multiple binding arbitration agreements over the course of your life, perhaps without even being fully aware of it.

The problem is, by signing this agreement which you probably do not fully understand and in which you have little say, you are essentially waiving your Constitutional right to a civil trial.

Unless you and the other party agree to both take the case to trial (which in the case of a big corporation is unlikely), this means that your case will by default be funneled through the arbitration process. And since forced arbitration contracts almost always mandate binding arbitration, this means that the decision of the arbitrator(s) will be final.

The Advantages and Disadvantages of Arbitration

At this point, you might have the impression that arbitration is a pretty bad deal.

This isn’t strictly true. There are several potential advantages to the arbitration process, which is why it was developed.

  • The most obvious benefit is speed and efficiency. Legal cases can take years, while arbitration allows you to wrap things up relatively quickly and cheaply.
  • If you are concerned about your privacy, then arbitration can be a way to ensure that an embarrassing legal dispute is not made public.
  • In certain highly specialized fields that may be difficult for an ordinary judge to understand, arbitration can allow you to choose an arbitrator who is familiar with the intricacies of that field, making things more efficient for everyone.

However, in many cases, the cons of arbitration will significantly outweigh the pros for the ordinary litigant.

  • The first and foremost disadvantage of mandatory binding arbitration is your inability to appeal. Absent a few narrow circumstances, such as cases involving fraud or violation of the law, there will be no way for you to challenge a decision rendered in arbitration, no matter how unfair it may have been.
  • The lack of formal legal protections, which is one of the key features that makes arbitration preferable to a court trial in many cases, can actually work against you. Evidence can be accepted that might not have been accepted in a court. Similarly, the privacy and consequent lack of legal oversight can be more of a minus than a plus in many cases.
  • Powerful parties in an arbitration may be able to finagle the system in order to obtain an arbitrator who is biased in their favor. It’s harder to do this with an actual judge.

One of the most important disadvantages of arbitration, however, is that it effectively prevents class action lawsuits.

Class actions occur when many people who have been wronged by the same party in a similar manner get together and sue as a class. This enables parties who were injured in small ways which might not be enough to merit a lawsuit individually, but which together add up to a significant amount, to pool their resources together and sue.

However, class action arbitration is typically banned by mandatory arbitration agreements. If you were wronged, you will have to fight as an individual, no matter how few resources you may have.

In 2017, the federal government’s Consumer Protection Financial Bureau implemented a rule that would have prevented arbitration agreements from barring consumers from filing class actions lawsuits; however, this was overturned by an act of Congress.

Basically, arbitration isn’t always bad. But in many cases, it will be something which is best avoided, particularly in situations where you are David and your opponent is Goliath.

How to Avoid Arbitration

The best method of avoiding arbitration is, whenever possible, refusing to sign contracts with mandatory arbitration clauses in them. In our world today, that can be difficult, but if you want to steer clear of arbitration, this is your first line of defense.

Now, let’s say that it’s a little too late for that, and you’ve already signed a contract with a forced binding arbitration agreement. Unfortunately, that’s unavoidable sometimes. Does this mean it’s too late for you to have any say in the way your case is decided?

Not necessarily. Getting out of arbitration is not always easy, but there are a few steps you can sometimes take in order to improve your hand…

The Unconscionability Defense

Contrary to popular belief, not all contracts are enforceable. Just because you signed away your kidney without reading the convoluted fine print does not mean that you will legally be forced to comply with the terms of the contract.

That is because courts generally recognize the concept of unconscionability in contract law. If the terms of a contract are heavily one-sided against one of the parties, or if the contract was not agreed upon in a way that gave both parties a free, fair, and informed choice, then they will often declare the contract void and thus unenforceable.

There are several elements that can be used to prove unconscionability, but one of them is unequal bargaining power. This occurs when one party stood in a significantly advantageous position to the other. If a provision within a contract was cloaked in complicated legal language that a layperson could not reasonably understand, then that might be recognized as an example of unequal bargaining power.

An unconscionability defense won’t work against every arbitration agreement; if it did, then such agreements wouldn’t exist. But some arbitration agreements have been found to be unconscionable in California courts, and if the agreement which you are trying to avoid is particularly stacked against you, this you may be able to use this defense.

The Language of the Agreement

Arbitration clauses, while generally crafted by attorneys who are experts in such matters, are not always perfect. There are often gaps to what they cover, and if you run your arbitration agreement past a skilled legal eye, they may be able to find a loophole that will get you out of forced arbitration.

For instance, arbitration clauses have generally been recognized by courts to only apply to you and the other party or parties that signed the contract. This might not sound all that important, but it means that third parties, such as contractors working for the other party, will probably not be bound by the arbitration contract, and if your grievance was against them, you can still take them to court.

In addition, the arbitration clause may not be all-encompassing. There might be certain types of disputes that it does not cover, and you can potentially take advantage of this. And some contracts may even be rendered invalid by other, later contracts, or by being improperly drafted or finalized.

In short, there are a lot of ways in which your contract might not hold up! Don’t assume the worst until you’ve consulted with an attorney who is an expert at reading contracts and evaluating their strengths and weaknesses.

Be Aware of Your Rights

There are a number of situations in which forced arbitration is prohibited, and it’s very possible that one or more of these could apply to you. For instance, one major sector of the economy in which mandatory arbitration clauses are banned is the mortgage market.

Another limitation involves military servicemembers and their dependents: The Military Lending Act bans mandatory arbitration clauses for these groups in many cases, so if you are in the military, your hand will be vastly improved.

As a Californian, you have some special protections as well. Recently, the state of California passed a law banning forced arbitration contracts between employers and employees. As of the time of this writing, the law has not yet taken effect, but it will on January 1, 2020.

Making the Most of Arbitration

By following the above strategies, you may be able to avoid arbitration, but there is no guarantee. Sometimes, you will have no choice but to go through arbitration.

If this happens, though, your situation is far from hopeless. Arbitration has several disadvantages which can work to stack the deck against you, but the process also has aspects that can be used in your favor.

Remember, although arbitration differs from a civil trial in many ways, you have the right to seek the legal counsel of an attorney. A good attorney can do a lot for you; if possible, they can help you find a way out of arbitration and into a more favorable venue, but if this cannot be done, they will work to ensure that your voice is heard in the arbitration process and that your rights are respected.

Our attorneys at Bohm Wildish & Matsen LLP have been guiding clients through the arbitration process for years. If you are facing arbitration, or you want to find a way to get around it, then give us a call.

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