by James C. Glassford, Attorney at Law

by James C. Glassford, Attorney at Law

Wednesday, September 7, 2011

What You Should Know about Arbitration of Contract Disputes

What is arbitration?
     Arbitration is a way of settling a dispute outside of court.  An arbitrator or a panel of arbitrators is selected.  The arbitrator conducts a hearing much like a judge sitting without a jury.  The hearing usually takes place in an informal setting, like an office or conference room.  After the hearing, the arbitrator makes an award.  Usually, the award can be filed in court and becomes a judgment.  The judgement can be enforced like any other judgment following a full-blown trial.
Can you be forced into arbitration?
     In most cases, you must agree to arbitration.  Otherwise, your dispute must go to court.  Many contracts contain arbitration clauses. Without one, you cannot be forced to arbitrate.  With one, you can be compelled by court order to arbitrate your dispute.
Can you invalidate an arbitration clause?
     The short answer is not likely.  With all the lawsuit congestion in our courts, judges love to see their docket of cases reduced.    Arbitration does just that.  
    The main way to defeat an arbitration clause is by showing that it is too one-sided.  This proof is very difficult.  The Supreme Court of California tells us that the agreement must have only a "modicum of bilaterality."  Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th 83.  What this means is anybody's guess.  In a recent case, the court found that the arbitration term in question met this test.   Chin v. Advanced Fresh Concepts Franchise Corp. (2011) 194 Cal. App. 4th 704.  The court examined the clause closely and thought that both parties had equal rights under the clause.  For example, the clause allowed either party to go to court to seek injunctive relief instead of going through with arbitration.  It ignored the reality that the franchisor would most likely seek an injunction against the franchisee, while the franchisee would most likely want to recover damages.  If the franchisee wanted damages, he would have to go to arbitration.  In other words, the franchisor gets to go to court, but the franchisee must arbitrate.  In sum, "modicum of bilaterality" means whatever the court wants it to mean. 
How do you find an arbitrator?
     The arbitration term itself may designate the arbitrator or at least the means of picking one.  In construction contracts, the parties often agree to arbitration according to the rules of the American Arbitration Association.  The AAA will assign an arbitrator to the case on request.  Other clauses merely state that the parties must agree to an arbitrator.  Courts have lists of arbitrators.  Most of the time, the parties easily reach agreement by exchanging a list of names chosen from a court list.  If agreement is not possible, the court will appoint an arbitrator for the parties and order the parties to arbitrate with that arbitrator.
Are the powers of an arbitrator limited?
     Although not boundless, the powers of an arbitrator are surprisingly broad.  For example, judges must follow the rules of evidence.  Arbitrators are not required to do so.  Code of Civil Procedure §1282.4(d).  Judges can only award damages according the law.  Arbitrators can fashion remedies that are flexible, creative and fair, based on their own “ ‘honest judgment’ ” and “ ‘ “good conscience” ’ ” rather than on “ ‘ “dry law.” ’ ”  Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal. 4th 362, 375.  In agreeing to arbitration, you should carefully limit the powers of the arbitrator to avoid a runaway award.  In the Chin case mentioned above, the parties agreed to limit the arbitrator's power to award damages to compensatory damages only, excluding noneconomic or punitive damages. 
Can you do discovery in arbitration?   
    Discovery can be quite limited in arbitration.  Code of Civil Procedure §§1283 et seq.  Discovery allows you to take depositions of witnesses and subpoena records before the hearing.  Sometimes your case will die on the vine if you cannot do discovery.  For example, in a case of wrongful termination based on discrimination, an employee may need to review all the employer's records relating to the claim.  Without the records, the employee may not be able to prove the claim.    Before agreeing to arbitration, you should give careful thought about this issue.  
Can you appeal the award of the arbitrator?
    The right to appeal is severely limited in arbitration.  It has long been held in our courts that the arbitrator is the sole judge of the facts and law, and his decisions in fact finding and applying the law cannot be reviewed on appeal.  Blue Cross of California v. Jones (1993) 19 Cal. App. 4th 220.  Appeal, however, can be taken when the arbitrator exceeds his powers or the award was procured by fraud, corruption or other undue means.  Code of Civil Procedure §1286.2.   
Should you agree to arbitration?
     If you have no bargaining power, this question really is whether you can walk away from the deal.  If you can negotiate for either the elimination of the arbitration term or revising it, by all means give it some thought.  Arbitrators have a lot of power, and their powers should be defined and limited.  Defining and limiting that power can be done in the arbitration term.  You may want the arbitrator to apply California law and not the justice of the wild west.  You may want to limit the remedies that he can apply.  You have many choices for taming the arbitrator.  Careful drafting of the agreement is the key to success down the road should any dispute be thrown up for arbitration. 

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