The current turbulent state of affairs revolving around the novel coronavirus (COVID-19) has severely disrupted an already overburdened judicial system. Many courts have closed or limited operations; some have delayed trials and in-person hearings weeks or months. Court closures and restrictions are likely to be in place for some time, and, even if lifted, may recur until a vaccine is developed and deployed. Moreover, once the courts resume regular business, the backlog will be significant. Now more than ever, formal court procedures will likely significantly delay dispute resolution. Accordingly, it is prudent to consider the many advantages arbitration may provide under these circumstances.
The disruption of public judicial systems highlights a number of significant advantages of private or quasi-private dispute resolution alternatives, such as arbitration. Arbitration offers the parties more control over the dispute resolution process. In particular, the procedural control parties have in arbitration will certainly benefit any party seeking resolution of a dispute during these uncertain and trying times. The advantages of arbitration should be given serious consideration during times of unprecedented disruption. A consideration of those advantages should inform contract and litigation strategies.
This summary starts with an overview of arbitration, moves to core considerations when drafting arbitration agreements, and concludes with advantages and disadvantages of arbitration:1
What is Arbitration?
Arbitration is a form of alternative dispute resolution (“ADR”) used in place of litigation. It is the private, judicial determination of a dispute by an independent and neutral third party (often, a retired judge). Because it is private, arbitration can often proceed regardless of court closures. Unlike other forms of ADR, such as mediation, however, it is just as final and binding as a court determination.
An arbitration hearing may involve the use of an arbitrator or a panel of arbitrators. Arbitrators are typically lawyers or retired judges; they may also be experts in a particular field. The parties must typically agree to an arbitrator or arbitrators prior to any appointment.
When Can You Arbitrate?
Anyone can agree to arbitrate a legal dispute, but the key word is “agree.” Arbitration is a creature of contract, and parties may agree to it before or after a legal dispute arises. Agreements to arbitrate are typically found in written contracts, the subject of which is generally a larger transaction. In light of current court disruptions, stand-alone agreements to arbitrate have found favor. Parties may enter into an agreement to arbitrate at any time, provided there is mutual assent, whether or not such an agreement was part of the initial contractual relationship.
Authority for Arbitration
Federal and state laws governing arbitration are virtually indistinguishable in purpose. However, federal law trumps state law directed at arbitration where the two conflict.
- : Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq. The FAA is an act of Congress that provides for judicial facilitation of private dispute resolution through arbitration. It applies in both state and federal courts where the transaction “involves” interstate commerce and is predicated on an exercise of the Commerce Clause powers granted to Congress by the Constitution. The FAA provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.
Arbitration stays litigation in any court under the FAA.
- : California Arbitration Act (“CAA”), Code of Civ. Proc. § 1280, et seq. The CAA regulates private arbitration in California. It requires an order of arbitration where the parties have agreed in writing to arbitrate disputes between them. Cal. Civ. Proc. Code § 1281.2.
In California, there exists “a strong public policy in favor of arbitration and any doubts regarding the arbitrability of a dispute are resolved in favor of arbitration.” Coast Plaza Doctors Hosp. v. Blue Cross of California, 83 Cal. App. 4th 677, 686 (2000).
How Does Arbitration Work?
The arbitration agreement between the parties may specify rules that govern the dispute. In general, however, arbitration hearings resemble a trial. The arbitrator hears evidence brought by both sides. There is a period for opening arguments, and for examination and cross-examination of witnesses. However, many of these aspects are simplified or limited so as to make the process quicker than a courtroom trial. Discovery, for example, is typically streamlined. In addition, unlike a court determination, arbitration proceedings and opinions are not public record.
The process of arbitration differs among cases, but the following are the steps in a typical arbitration:
- : An arbitration case begins when one party submits a Demand for Arbitration (“Demand”) to the arbitral dispute body specified in the arbitration agreement, or that the parties have otherwise agreed to. This typically includes a statement of claim, which summarizes the matters in dispute and the remedy sought. The respondent is notified of the Demand by the arbitral dispute body and a deadline is set for a response. In the Response, the respondent admits or denies the claims. There may also be a counterclaim by the respondent, which requires a reply from the claimant.
- : The parties select an arbitrator or a panel from a list provided by the arbitral dispute body. More rarely, arbitrators will be appointed by existing tribunal members (for example, each side appoints one arbitrator and the arbitrators appoint a third), or by an external party (for example, the court or an individual or institution nominated by the parties).
- : The arbitrator conducts a preliminary hearing with the parties to discuss the issues in the case and certain procedural matters, such as witnesses, depositions, sharing information, and the calendaring of deadlines.
- : Written evidence is exchanged between the parties. Depositions may or may not be allowed. Where they are allowed, they are typically much more limited in number; frequently only a single deposition is allowed.
- : At the hearing, both parties may present testimony and evidence to the arbitrator. The parties may question witnesses. Unless the case is particularly complex, this is usually the only hearing before the arbitrator.
- : After the hearing, both parties may present the arbitrator with additional documentation or briefing, as allowed by the arbitrator.
- : Based on information presented, the arbitrator or arbitrators render a decision. The award usually includes the reasoning, although the parties can elect the form of decision.
What Does Arbitration Cost?
Arbitration costs vary, depending on the complexity and detail of the case, fees of the arbitrator and administrative fees for filing. The administrative fee is typically determined by the size of the claim, with larger claims requiring a higher fee. An arbitrator typically costs between $500 and $1,000 per hour, and a week-long arbitration hearing can cost anywhere between $20,000 and $40,000, excluding attorneys’ fees and other costs. Generally, the parties split the cost of arbitration equally, but the allocation of costs is also frequently a matter of contract.
Organizations That Arbitrate
There are a number of organizations that provide arbitrators. Some of the larger and more prominent organizations include JAMS, American Arbitration Association (“AAA”), ADR Services, and Judicate West. Each organization has its own cost structure and roster of unique arbitrators. There are also a number of boutique arbitration providers. Depending on the type of contract and disputes anticipated there may be a reason to select one over the other. Although a three-person panel of arbitrators through AAA is a popular choice, it is not always the right one because, for example, three-person panels are more expensive and can be more cumbersome.
Both the FAA and CAA require that arbitration agreements satisfy the requirements for a valid contract under state law. Under California law, contracts must be “conscionable,” supported by consideration, and executed absent fraud, duress, mistake and lack of capacity.
In addition, some key considerations to consider when drafting arbitration agreements include:
- : An arbitration agreement must not be buried in an agreement but must be clearly visible to the signatory. Boldface type or larger font size for an arbitration clause will increase visibility and weigh against a finding of procedural unconscionability.
- : Requiring the signatory to acknowledge the arbitration clause by separately initialing or signing it will prevent the argument that the other party was unaware of the clause or that the drafter tried to hide it.
- : A party drafting an agreement must make sure the agreement is bilateral. This includes insuring that both parties must use arbitration and waive their rights to court. In some cases, a “carve out” allowing one party to seek relief in court may be possible. California has allowed such carve-outs in limited cases, for example, where one party needs injunctive relief.
- : A refusal to discuss or negotiate weighs an agreement in favor of procedural unconscionability. Make sure signatories have adequate time to review and discuss any agreement before signing it.
- : The parties’ agreement should state that the arbitration agreement is governed by the FAA.
- : Arbitration agreements are generally construed against the drafter. An arbitration agreement that requires the signatory to bear all or most of the costs will likely be construed more harshly against the party with superior bargaining power.
- : Make sure the contract is negotiated in the same language it is written in.
- : If the parties prefer a particular arbitral dispute body, such as JAMS or AAA, or how an arbitrator must be selected, they should specify that. The parties can also specify whether streamlined discovery will be used, or the law under which the agreement should be governed.
- : If the parties want the arbitrator to provide a written decision, they should say so in the arbitration agreement.
- : Any party wanting to provide for a right of appeal must ensure that this right is specifically articulated in the arbitration agreement.
Separability and Severability
Both federal and California arbitration law generally recognize the separability doctrine, whereby arbitration clauses are viewed as separable from the rest of a contract and not necessarily impacted by defects in the larger contract containing the arbitration clause. Thus, a court may hold an agreement invalid and still enforce the arbitration clause therein. See St. Agnes Medical Center v. PacifiCare of California, 31 Cal. 4th 1187, 1198 (2003).
Moreover, where a clause in an arbitration agreement is collateral to an agreement and can be severed without affecting the remainder of an agreement, a court may sever that clause. See Dotson v. Amgen, 181 Cal. App. 4th 975, 985 (2010) (trial court abused discretion in failing to sever clause where “provision can easily be severed without affecting the remainder of the agreement”).
Arbitrating Employment Disputes in California
Arbitration agreements covering employment have a number of special considerations that bear keeping in mind in California.
- : In addition to the basic principles of contract law, employers in California must also ensure their arbitration agreements satisfy the requirements set forth by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000). In that case, the Court held that agreements to arbitrate employment discrimination and other statutory claims must meet the following requirements to be enforceable under California law: (1) require neutral arbitrators, (2) allow for more than minimal discovery, (3) require a written decision by the arbitrator, (4) allow for all types of relief otherwise available in court, and (5) not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration process. Id.
- : California recently enacted Assembly Bill (AB) 51, a law that attempts to ban employers from requiring applicants or employees, “as a condition of employment,” to waive their rights to litigate in court. AB 51 also prohibits employers from retaliating against applicants or employees who refuse to enter into mandatory arbitration agreements. The bill applies only to arbitration agreements “entered into, modified, or extended on or after January 1, 2020.” On December 9, 2019, the California Chamber of Commerce and several other trade organizations filed a lawsuit in federal district court seeking to enjoin enforcement of AB 51 on the grounds that it is preempted by the FAA. The district court has issued a preliminary injunction, prohibiting California from enforcing AB 51 until the lawsuit can be resolved.
In considering whether to require arbitration of disputes, parties should evaluate the benefits and risks of arbitration. There are a number of relevant considerations, and, depending on the type of contract and disputes anticipated, different factors may carry more weight.
The advantages of arbitration often include the following, which may be amplified due to court closures and restrictions in the wake of COVID-19:
- : Arbitrations can usually be heard more quickly than it takes for court proceedings to be heard. An arbitration hearing is usually shorter in length, and the preparation work less demanding. These considerations are of particular import given the global coronavirus pandemic. Countless courts have at least partially ceased operations. Jury trials are on hold in most jurisdictions. Arbitrations, however, are private and less dependent on the court system, so they are often continuing to proceed on schedule in spite of the pandemic. Moreover, the control the parties have over the arbitration process does not stop with the timing element. Parties may employ video conferencing for arbitration proceedings, a technology that is not readily available in most courtrooms, that can assuage social distancing concerns. Generally, control over the process is more important now than ever.
- : Some argue awards by arbitrators are lower than jury awards for comparable claims; however, it is generally more difficult to appeal an arbitration award and there is no motion practice to reduce a jury award.
- : Arbitration is usually simpler procedurally and less expensive than litigating in court. Of course, the cost of delay must be considered with regard to any court proceeding.
- : Parties can choose arbitrators with specific knowledge and expertise that may be relevant to the claims at issue.
- : Arbitrations are quasi confidential and final decisions are not published, allowing parties to keep their disputes mostly private. However, keep in mind that a party in a subsequent action could obtain discovery of records from an arbitration. In cases where confidentiality is important to the parties, a confidentiality stipulation may be appropriate.
- : Hearings are arranged at times and places to suit the parties, arbitrators and witnesses. In addition, the parties may choose to employ video conferencing to maintain social distancing while resolving disputes.
- : Arbitrators may not be as easily swayed by emotion as juries.
- : A party may believe that they benefit from appearing repeatedly before the same arbitrators, who come to know them and their cases.
- : Lower costs of litigation may mean lower liability insurance premiums.
- : Arbitration procedures can be segmented, streamlined or simplified, according to the circumstances, and videoconferencing can be used, as needed. These considerations are particularly significant in light of the coronavirus.
There are a number of concerns surrounding binding arbitration, which include the following:
- : Arbitrators are often precluded from or less willing to grant dispositive motions, making it difficult or impossible to get rid of a case summarily. Typically, parties are required to obtain leave of the arbitrator to bring a dispositive motion.
- : Easier access to arbitration may mean a proliferation of employee disputes over relatively minor matters that would not be heard in court.
- : Arbitrators have virtually unfettered discretion to decide issues of law, including evidentiary rulings, without interference by the courts.
- : Arbitrators have been known to “split the baby,” appeasing both sides of a dispute by awarding part of the relief requested to each side.
- : Arbitrators generally are not accountable to voters or the press the way judges are.
- : Costs of litigation in arbitration, while generally lower, may still be significant. A trial court judge does not charge a fee, but the fees for an arbitrator can be large. Moreover, when a legal issue is relatively minor and does not involve a large amount of money, small claims courts can offer a relatively quick and inexpensive method for resolving a dispute when compared to arbitration.
- : There is generally no right of appeal in arbitration unless the parties specifically provide for such right in the arbitration agreement. Regardless of any agreed-upon right of appeal, courts have limited statutory powers to vacate an arbitration award, but the court must find that the arbitrator exceeded his or her powers.
- : Arbitrations usually have a streamlined or reduced discovery process. This may result in reduced costs, but also may make it harder to get information, particularly from third parties by subpoena.
- : Unlike judges who are paid by taxpayers, arbitrators are paid by the parties and may have an incentive to appease repeat players.
In conclusion, arbitration is a powerful tool that provides litigants with an alternative to relying on courts for the resolution of disputes. Particularly during this time of unprecedented disruption to court systems, arbitration may offer parties the best avenue for timely adjudication of legal issues. The decision to implement or enforce an agreement to arbitrate should be made based on a consideration of several factors, outlined above. Should you wish to discuss how you or your business might use the tool of arbitration, please contact Ryan Baker, Brian Klein, Teresa Huggins or any of the attorneys at Baker Marquart LLP.
Download a PDF of this article