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November 03, 2015

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Michael Risch

The first paragraph hits home and makes a nice point. I recently had to file an arbitration clause for a small amount of money I believed I was owed. The clause was under the AAA consumer rules, which dictate that the company paid all arbitrator fees, but it also a) said the arbitration would be where I live (even though the company is in one state and the contract was in another and not my own) and that they would even reimburse me the AAA filing fee.

No class action, but that's about as fair as you can get for a dispute resolution clause, and I filed a claim I would ordinarily have walked away from if had to pay even the court filing fee.

Tamara Piety

Good point about the myriad other ways in which many businesses exploit information asymmetries. However, arbitration may implicate constitutional access to the courts, while there is no constitutional guarantee of a particular type of warranty or damages scheme. So that may justify singling out arbitration clauses for closer scrutiny, mightn't it?

Kim Krawiec

"However, arbitration may implicate constitutional access to the courts, while there is no constitutional guarantee of a particular type of warranty or damages scheme. So that may justify singling out arbitration clauses for closer scrutiny, mightn't it?"

Closer legal scrutiny, perhaps, but I don't think that's what Mark is referring to.

[M][@][c][K]

This is a long post.

A large chunk of my practice is arbitration – but usually international arbitration and usually for sums 7 figures or higher. I am generally pretty supportive of arbitration – I’m a fellow of the Chartered Institute of Arbitrators and a member of a few other arbitration organisations and I have been counsel in high value arbitrations in Asia, Europe and North America. The CIArb is worldwide by the way, but does do a lot of construction arbitration at a local level in several countries.

Inter-business arbitration is a very different animal from the sort of arbitration the New York Times was profiling. First, companies have professional advisors when entering into arbitration agreements, which usually leads to more care in selecting the arbitration organization (and I will say that AAA and JAMS have a less than sterling reputation outside the US) and the clause – which means many will prefer 3 arbitrator Tribunals rather than a single arbitrator (and the sums at stake usually support the cost.) Second, dispute resolution clauses tend to be more carefully written, often with an escalation path with mandatory senior officer participation, sometimes with mediation and then finally arbitration. The clause may also contain a “home field advantage” provision for the defendant.

The reason businesses choose these clauses vary, but in my experience the main ones are: (a) avoiding local court systems, which are often corrupt, slow and chauvinist (and the latter is a factor in parts of the US, especially with juries); (b) speed – arbitration can be faster (especially after the ICC changed its rules and practices to speed things up); (c) confidentiality; (d) more reasonable discovery, etc. which is driven by the fact that the arbitrators can focus on the case, rather than a clogged docket (as many judges have to.) That said, everyone checks out likely arbitrators very thoroughly – there are a lot of “tell me about ….” phone calls; and (e) sometimes in big projects the ability to deal with issues – “on the fly.”

However, the New York Times series focused on what has been a pretty troubling development in arbitration, and that is the push into low value consumer disputes and employment law. The concern – which by the way I have heard US lawyers in high value international practice express – is that some corporations are using arbitration in ways that are designed to tilt the entire table in their favour. The first time I think I saw this was in the 1990s, when the leading New York “white shoe” firms collectively decided to adopt arbitration clauses in their employment arrangements with associates, that specified tribunals formed from partners in the other white shoe firms.

These situations differ significantly from commercial arbitration. In commercial (inter company) arbitration, whether or not to have an arbitration clause is a negotiated term, as is the location, the choice of law, the seat, the place and the arbitration body and rules – plus each side gets to pick an arbitrator. By contrast in the consumer and employment arbitration cases, the vendor/employer usually picks the arbitration organization, which can be tiny, and that organization can supply a closed list of its arbitrators. The vendor/employer’s counsel will usually be better situated to make “tell me about…” calls, and since the typically single arbitrator might need some expertise in a relevant area, the list supplied by even the large arbitration organisations will contain the “usual suspects.”

The reason this is an issue is that arbitration organisations are essentially businesses, and arbitrators are “judges for hire.” This leads to the so called “frequent flyer” problem, especially in consumer and employment cases, that the organization, or the arbitrator needs to be aware that an adverse ruling could cost that arbitrator a lot of business. Moreover, counsel for frequent flyers tend to know the arbitrators pretty well (or know a colleague who does) – even if the current party they represent is not one that the arbitrator has dealt with before. Again in commercial arbitration that fact is offset by using three arbitrators – both sides get to pick one they are comfortable with, both sides get an effective veto of the third/chairman.

All of this points to the big concern- that there is abuse of the arbitration system occurring in the US by some corporations in consumer and employment cases, and that this abuse is beginning to garner a lot of adverse attention. A quick read of the comments to the New York Times article (and the inevitable letters from the US Chamber of Commerce) will reveal the other problem, a certain short sightedness about the risks to arbitration from these abuses. It is quite plausible that the US will adopt legal changes that are far broader then necessary to prevent the abuses, that damage arbitration seriously (and because of the scale of the US economy have a worldwide impact.) It is also plausible that by bringing arbitration into public disrepute, these practices will undermine the adoption of ADR, which in my opinion is broadly a positive process and good for most users.

An idea of where this might lead can be found in EU law. There the Council Directive 93/13/EEC on unfair terms in consumer contracts in Articles 3(1), 3(3) and Annex 1(q) effectively prohibits arbitration clauses in consumer form contracts. Article 3(1) of the Directive states that "a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer." Article 3(3) references the annex’s “an indicative and non-exhaustive list of the terms which may be regarded as unfair” where the annex lists:

"excluding or hindering the consumer's right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions."

The justification for this provision was set forth in the ECJ decision (European Court of Justice, 27 June 2000:

"the system of protection introduced by the Directive is based on the idea that the consumer is in a weak position vis-à-vis the seller or supplier, as regards both his bargaining power and his level of knowledge. This leads to the consumer agreeing to terms drawn up in advance by the seller or supplier without being able to influence the content of the terms"

Orin Kerr

Interesting comment, [M][@][c][K]. Thanks for posting.

[M][@][c][K]

When I said "This leads to the so called “frequent flyer” problem, especially in consumer and employment cases, that the organization, or the arbitrator needs to be aware that an adverse ruling could cost that arbitrator a lot of business."

I meant to say:

This leads to the so called “frequent flyer” problem, especially in consumer and employment cases, that the organization, or the arbitrator is inevitably aware that an adverse ruling could cost that arbitrator a lot of business.

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