Arbitration has become commonplace for businesses due to its cost savings and faster claim resolutions. Oklahoma courts have formally shown their favor toward arbitration for these very reasons.
The alternative dispute resolution process of arbitration often affords the involved parties an opportunity to resolve claims and disputes inexpensively and expeditiously by having a claim or dispute heard entirely by an independent arbitrator. As opposed to filing a lawsuit, the arbitrator’s decision and award is final and rarely allows opportunity for appeal.
Arbitration also takes fact-finding out of the hands of randomly selected jurors and places the trust of judgment with an experienced arbitrator in the field of the claim or dispute. Arbitration is voluntary between parties, primarily through contractual agreement, and serves to resolve a specific claim in its entirety without further judicial relief, except to enforce the arbitrator’s judgment and award.
While arbitration may be cost effective and efficient for corporations, individuals brought into arbitration will likely not receive the same benefits. Individuals are commonly surprised when they discover that one of their signed contractual agreements, such as a credit card agreement or the terms and conditions of software, has a mandatory arbitration provision in the fine print.
Mandatory arbitration in a contractual agreement is usually non-negotiable, unless the company provides the other party an opportunity to waive. Larger corporations with an extensive clientele base can afford a customer’s displeasure of such an arrangement, although smaller companies mandating arbitration may be faced with a different attitude from its local customer base or employees, which the small company may not be able to ignore.
So, should a company insert a mandatory arbitration clause in its business agreements and contracts? Like the answer to all legal questions, it depends.
In dealing with business-to-business disputes, mandatory arbitration benefits businesses. The cost-effectiveness of mandatory arbitration is viewed in terms of long-term costs savings when compared to litigation in state or federal court. An arbitration may cost several thousands (possibly in excess of tens of thousands) of dollars, depending on the number of claims and the complexity of the claims. Arbitration is also comprised of limited and expedited discovery.
Litigation, on the other hand, is far more expensive. In fact, the cost of discovery in litigation alone may equate to or exceed the entire cost of the arbitration process.
The cost-savings are also a direct byproduct of the expedited nature of the arbitration process. Mandating arbitration will cause businesses to rest assured knowing a dispute or claim will be handled and resolved quickly, thereby reducing hourly attorneys’ fees, hourly expert witness fees, and other associated costs.
The other most-cited positive feedback for mandatory arbitration is that this alternative dispute resolution process keeps a dispute or claim out of the hands of 12 random jurors. These jurors may not be able to comprehend the subject matter of the litigation, may not pay attention, or may be initially biased based on preconceived notions.
On the other hand, an impartial arbitrator, who should be an expert in the field of the dispute, can focus on the key issues of the case and provide a legally sound resolution without irrelevant considerations.
Why would someone want to avoid the arbitration in contractual agreements with all of these positive benefits? Simply, businesses will not, although individuals will.
Consumers and employees of a business requiring mandatory arbitration may look at the provision as a strong-arm attempt by the business. Precluding the individuals from other legal remedies can unnerve or even scare away the consumer or employee.
Consumers often glance over the fine print of such provisions and readily sign the agreements with no further thought until an issue arises. Employment contracts, on the other hand, are more often read in their entirety by the employees prior to signing, especially stand-alone mandatory arbitration agreements proposed after an initial employment agreement or contract. Therefore, employees may be more reluctant to sign such agreements containing a mandatory arbitration clause.
Common reasons for an individual rejecting a mandatory arbitration clause include:
• Setting the mandatory arbitration in a city and/or state that is inconvenient to the individual and convenient to the business;
• The high cost of arbitration to an individual, though comparatively low cost of arbitration to a business; and,
• Precluding further legal remedies outside the arbitration setting is disconcerting to an individual while it may limit additional liability for a business.
Based on these factors, it is not surprising to learn consumers and employees distrust the arbitration system and forcing arbitration upon these individuals may result in unforeseen negative impacts.
Of course, arbitration is a two-way street. An award of arbitration has little to no judicial review or appeal procedure. If a business finds itself in a losing battle during arbitration, it is going to have a limited number of avenues to address resolution outside settlement or at the hands of the arbitrator.
Mandatory arbitration will be appropriate for businesses in some circumstances and inappropriate in others. Businesses should first consult with legal counsel to discuss the specific requirements for mandatory arbitration clauses in each applicable state.
Essentially, there is no black-and-white formula that can affirmatively tell a business if mandatory arbitration is proper for insertion into the business’ contractual agreements. In the end, mandatory arbitration will require a business to weigh pros and cons and determine if the cost savings, expedited dispute resolution process and use of an impartial arbitrator will outweigh the cons of potentially negative consumer and employee feedback. The ultimate answer will be a business decision.
Attorney Spencer C. Pittman is a member of the litigation team at Winters & King.