This article has been written by Keyva Taylor pursuing Diploma in US Contract Drafting and Paralegal Studies and edited by Shashwat Kaushik.
This article has been published by Sneha Mahawar.
Table of Contents
An arbitration agreement helps parties solve contractual issues. Just like litigation, when parties go to the courts to have an impartial third party, that is, a judge, decide and resolve legal issues, arbitration helps parties solve their issues by bringing an impartial third party, also known as an arbitrator, to resolve contractual issues. The agreement focuses on arbitration, which is a dispute resolution where parties meet with the arbitrator in person and then both parties will make their case with evidence to support their argument. Having heard both parties, the arbitrator will then present a written decision called an award. Such arbitrational proceedings are included in the arbitration agreement. Such agreements have been mostly included in contracts and agreements for as long as business has been conducted.
What are arbitration agreements
Arbitration has always been around for many years, perhaps even centuries. But there were two legal cases that gave rise to the use of arbitration in U.S. civil matters. In United States Asphalt Refining Co. vs. Trinidad Lake Petroleum Co. (1915), the validity of such arbitrational clauses in business dealings was questioned. The claimant, which is a corporation in South Dakota, took steamships from the respondent, a British corporation that owned vessels that were under British registry to be used lawfully around the world but were mostly employed in Trinidad and the United States. These steamships were then withdrawn from the claimant’s service during World War I. The charter for each steamer that was made in London contained the clause that disputes were to be settled in London through arbitration and the enforcement of such an agreement shall be made a rule of law. The claimant questioned the validity of such a clause but as held by District Judge Hough, “under the law of the place of contract,” which is England, “this arbitration agreement was at the time of making the charter parties entirely valid.” The judge also based this judgement on the English Arbitration Act of 1889, as the English courts would have actually ruled in favour of the respondent given that both parties had agreed to the terms of the clause and were able to consent, having been of sound mind and of legal age to do so. The impact of this case led to the formation of the Federal Arbitration Act in 1925. It then became statutory law, which helped civil matters be decided fairly. Also, with the formation of the Act came the American Arbitration Association, which helped strengthen confidence in using arbitration when resolving civil matters and overcome existing hostility that evolved from English courts. The use of arbitration has grown throughout the years to deal with civil matters and businesses have grown to see the benefits of this dispute resolution.
Benefits of arbitral agreements
Arbitration agreements are used in contracts because they are beneficial in contractual matters. In the recent case of Coinbase, Inc. vs. Bielski (2023), Justice Kavanaugh highlighted these benefits, stating that arbitration offers “efficiency, less expense, less intrusive discovery and the like.” Arbitration is a quicker and more efficient way to solve legal matters, saving businesses time and money. If parties decide to go through the courts to solve legal matters, they may find themselves waiting for quite a while. Also, litigation can be costly, as money must be spent on legal representation and other expenses that may arise. Arbitration offers a more efficient solution as matters can be heard faster and a decision can be rendered, sometimes within the same day. Unlike litigation, arbitration follows a simple set of rules of evidence and procedure; there is less intrusive discovery under arbitration. Only evidence needed to resolve the dispute under arbitration is considered and the process time for discovery is therefore shortened. Additional evidence isn’t necessarily considered unless it pertains to the subject matter.
Also, unlike the courts, which are bound by precedent, arbitration proceedings are more flexible in nature and are based on evidence. Parties can create their own rules that are to be followed during proceedings, which will then be considered and possibly enforced by the arbitrator. Arbitrators are also experts in their field, bringing their own knowledge of the specific industry to legal proceedings.
There is also greater confidentiality offered when using arbitration. Businesses may prefer to keep certain matters private and this is easier if parties go to arbitration. Trials often do not offer the same kind of confidentiality and the decisions of cases under litigation become public knowledge after rulings.
Disadvantages to using arbitration clauses
Although arbitrational clauses provide numerous advantages, there are still several disadvantages that arise when using arbitrational agreements. Most general arbitration clauses tend to declare that they are binding. This therefore means that if both parties agree that legal matters are to be decided through arbitration, they are bound by that decision and the decision of the arbitrator. Some arbitration agreements may state that the decision is non-binding and that the disgruntled party can take the matter to court. However, this is even an additional expense, as not only would they have to be for the arbitration but also court and other legal fees.
In Doctor’s Associates, Inc. vs. Casarotto (1996), there was a dispute regarding a standard form franchise agreement for a Subway sandwich shop. Casarotto sued the petitioners, franchisor Doctor’s Associates and its agent, Lombardi. The Montana Supreme Court ruled that the arbitration clause was unenforceable. This was overruled by the Supreme Court with the decision rendered by Justice Ruth Bader Ginsburg that the Federal Arbitration Act precedes the Montana first page notice of arbitration requirement as matters that are “subject to arbitration” must comply with Federal law.
This is in comparison to the outcome of Green Tree Financial Corporation vs. Randolph (2000).
The respondent had purchased a mobile home, which was financed by Green Tree Financial Corporation. The agreement included that she would have to buy insurance and she couldn’t agree to this as it wasn’t initially disclosed to her. The matter had gone to the Court of Appeal, which decided that the agreement couldn’t be enforced as there was no decision rendered on the rest of the payment of arbitration expenses. Chief Justice William H. Rehnquist held that “large arbitration costs can prevent someone effectively vindicating her rights”, she wouldn’t have to pay should the matter go to arbitration.
This brings up another disadvantage. It is usually assumed that arbitration is an affordable legal recourse, but that may not necessarily be the case, especially when dealing with larger corporations. Although Randolph was able to avoid legal costs, Casarotto wasn’t that fortunate.
Another issue that may deem arbitration unfair is that of mandatory arbitration. The idea of mutual consent is not considered here, as arbitration is mandatory by contract. These types of agreements can restrict the rights that would otherwise be available to other parties to the agreement. In AT&T Mobility LLC vs. Concepcion (2010), a class action lawsuit was brought on the basis that the offer of a free phone to new customers was an act of fraud as they were charged sales tax on said phone. AT&T had an arbitration clause within its’ contract to which the parties had indirectly consented. Justice Scalia, in presenting the majority opinion, noted that state law cannot preempt that of the Federal Arbitration Act. Therefore, parties can only use individual arbitration for legal redress rather than a class action lawsuit.
Similarly, in American Express Co. vs. Italian Colors Restaurant (2013), the card acceptance agreement only allowed matters to be decided by arbitration. Although claims were brought by merchants such as Italian Colours Restaurant that it violated U.S. antitrust laws, the Supreme Court of the United States ruled in favour of American Express, and it was held that the card company can prohibit class action suits due to its’ arbitration clause.
This is in comparison to Ryan Romano vs. Blue Cross Blue Shield of Michigan (2022), where Honourable George Caram Steeh held that Blue Cross Blue Shield of Michigan (BCBSM) could not compel the plaintiff to obtain the COVID-19 vaccine due to religious reasons and therefore this part of the arbitration clause within the employment was not enforceable. Additionally, in Lamps Plus, Inc. vs. Varela (2018), due to the general language used, the arbitration clause would not be enforceable as it was ambiguous.
Unlike ligation, which allows for appeals should one party not agree with the judicial rulings, as seen in the following cases, arbitrational agreements are not easily repealed. Parties may have agreed to the rules but not necessarily agreed to the outcome of the ruling and as the courts can recognise this ruling is final, there may be no other legal recourse for the unsatisfied party. Also, as parties usually decide their own rules and there is no set precedent, there could be different outcomes for arbitration disputes even if the facts are similar.
Improving arbitration agreements
Arbitrational clauses can be improved to ensure that proceedings are more efficient.
Determining the validity of arbitrational agreements has introduced agreements that should be resolved through arbitration to the court system, which invalidates the entire concept of arbitration. Improving the validity of arbitrational agreements therefore needs to be considered to remove ambiguity and allow agreements to be solved outside of the courts by arbitrators.
Sometimes, implementing these improvements may be considered, depending on the nature of the agreement. Drafting the actual arbitration clauses rather than using the boilerplate clause can ensure that both parties needs and expectations are met. Also, parties can consider whether the language used in the clause only addresses contractual issues or whether it should be drafted to include other forms of dispute, such as torts or statutory claims. The language used in such a clause can affect how it is interpreted by the arbitrators, should it become an issue in the future.
Also, selecting arbitrators with actual legal experience and experience in that industry can ensure that the matter is efficiently dealt with, as can the number of arbitrators that are to be on the panel. In some cases, introducing third party discovery may be advantageous to one party who believes that the other party is hiding relevant evidence or other subject matter, which can negatively impact arbitrational proceedings. A three-party panel may result in a more fair and balanced decision than just having one person presiding over the matter. This can be stated if the clause is being drafted to the specific agreement rather than being a boilerplate clause. When drafting the clause, it may also be beneficial to add a severability clause, which can render parts of the clause unenforceable without affecting the entire clause. Another aspect that can be considered while drafting is adding a severability clause that allows the arbitration clause to continue even after the contract has been terminated or expired. Creating a budget also ensures that the parties do not overspend and that costs are reasonable for both parties.
Trends in arbitration agreements
Another trend that may be introduced in future arbitration agreements is following precedent in other matters. This has already been done in class action law suits. This may create some predictability as to how cases will be decided in the future.
Arbitration contracts are useful in providing parties with legal redress when conflicts arise with contracts. Although they can be quite beneficial in solving disputes with respect to contracts, there are also several limitations that may arise, depending on the nature of the contract. As the business world continues to progress, so will the nature of arbitration agreements.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: