Commercial Arbitration Agreements…The Pitfalls & Practicalities

Burman, Critton, Luttier and Coleman LLP Blog

By: Benny Lebedeker, Esq.

Due to the fact that they are so prevalent in the marketplace, understanding commercial arbitration contracts is necessary. Whether you are purchasing an appliance or shares of a corporation on the New York Stock exchange, the chances are that tucked away in the fine print of a contract or receipt is a provision which states that you have waived your right to file a lawsuit in the event of a dispute with the provider of the good or service you are purchasing, and that you agree to submit any such disputes to binding arbitration.

Arbitration, defined most simply, is the submission of a dispute to a private forum. Originating in large part from the organized labor movement, the original idea was to streamline the resolution of disputes by submitting them to a person or panel of persons who would act as a private judge. The rationale was that if the parties got to choose the decision makers, they could select a person who had knowledge of the subject matter. For instance, if the dispute involved a disagreement between a shop foreman and a manager who worked in a steel mill, an arbitrator who had past experience working in a similar mill could be selected. This person might have additional insight into the dispute based upon his own experiences and, the theory goes, be in a better position to resolve the dispute. Over time Courts began routinely enforcing such provisions, and the current state of the law is that arbitration provisions are not only enforceable, but that they are favored under the law.

Unfortunately, the nature and scope of arbitration agreements have radically changed over time. What began as a means of resolving disputes between experienced labor and management negotiators was soon being applied to securities transactions, commercial goods, and even nursing home contracts. The nature of the process and the nature of the arbitrators have changed over time too, and not for the better. Professional arbitration services, some good and some bad, have proliferated. In many instances these services are established to serve a specific constituency, sometimes with draconian results.

For instance in November of 2009 the attorney general of the State of Minnesota, Lori Swanson, announced that she had a settled a suit with several consumer credit card issuers, including JP Morgan Chase. According to the suit some thirty credit card had met in secret and agreed to require all card holders to submit to binding arbitration. The issuers then used almost exclusively an arbitration service named the National Arbitration Forum. Not surprisingly, the use of a captive arbitration service led to highly skewed results, with the card issuers winning almost all of the disputes submitted by consumers. The suit and evidence also reflected that the National Arbitration Forum misled consumers about their ties to the credit card issuers. Unfortunately, this firm has been involved in disputes with similarly unfair arbitration agreements, including arbitration services which prohibit a consumer's attorney from participating in parts of the dispute resolution process and permit an arbitrator to disqualify an attorney who engages in "unnecessary advocacy" on behalf of the client.

Consequently, consumers have to consider the following when they locate an arbitration provision in a contract which they are signing:

1. Do I want to give my right to a jury trial if a dispute arises? If not, can I obtain this good or service from another merchant who will not require arbitration?

2. What service and rules govern the arbitration process to which I am agreeing? Will I be treated fairly in the process, or does the agreement require me to arbitrate in a forum which favors the merchant?

Although there are legal defenses to the enforceability of arbitration agreements, they tend to be very narrow and litigating to avoid the effects of the agreement can be expensive. Often times the existence of the agreement is discovered by the consumer only after the product or service has caused considerable injury or loss to the consumer. The smart consumer therefore consults with an attorney before signing such agreements. If however you are in a situation where an accident or loss has already occurred and the person who caused the injury or loss is telling you that your rights are limited by an arbitration agreement, call your trusted advocates at Burman, Critton, Luttier & Coleman.