Arbitration Agreement FAQ
Arbitration agreements are contracts wherein two or more parties agree to have a neutral party, called an arbitrator, hear and decide their dispute instead of having a judge or jury decide the dispute in court.
Generally speaking, arbitration is the use of a neutral third party to resolve a dispute. It is frequently used as a substitute for traditional judicial proceedings. Sometimes, arbitration is mandated by law. For example, statutes provide for arbitration of disputes within certain types of businesses (e.g., utility services) and for disputes against the government. In addition , under the Federal Arbitration Act and the California Arbitration Act, regardless of the parties’ relative bargaining positions, large sectors of commercial and consumer contracts require arbitration of virtually any dispute arising out of the contract. When they are included in a contract, arbitration agreements relieve the parties of the need for extensive discovery and eliminate long motions and appeals. They also can result in the private and confidential resolution of the dispute. In addition, they often shorten the time and decrease the expense of every stage of the dispute, from filing the action through final resolution.
California Arbitration Laws: Overview
California arbitration laws have some distinct characteristics that set them apart from other states. For example, California law requires that an arbitration must be a mutually binding agreement between both parties. An employer may not force an employee to sign an arbitration agreement without compensating the employee in some way. For example, if you are an employer and you require your employees to sign an arbitration agreement as a term of their employment (such as in an employment agreement), you must offer them additional compensation in exchange for signing the agreement. Alternatively, you should enter into a written agreement just for an arbitration without any connection to employment.
The California Rules of Court contain rules that are supposed to make sure that arbitrations are as affordable as possible. The rules address the payment of court and arbitrator fees, the attendance of witnesses, the production of documents, and discovery. California requires arbitrators to take steps to ensure the parties they are equally sharing the costs of the arbitration, and if not, the arbitrators must explain why the fees are disproportionate. If an arbitrator does not comply with this requirement, the arbitrator will probably be subject to disqualification.
Additionally, California arbitration laws are designed to prevent a defendant from trying to move the case into arbitration when it will be completely unfair to the plaintiff due to differences in resources (e.g., real estate agents vs home buyers). If a party can show that the defendant has dispelled such a substantial or grossly disproportionate sum of money in litigation that it will be fundamentally unfair to continue, the court should deny the motion to compel arbitration.
Furthermore, although the arbitration agreement will be enforced as long as it is not completely unconscionable or otherwise invalid, the court will still keep the authority to decide whether there is evidence that excluding punitive damages in the employment contract is unfair for the purpose of determining what damages are recoverable in the arbitration.
Benefits of Arbitration in California
California arbitration agreements have been favored by employers for many years at the conclusion of work injury, contract, and consumer law disputes as a way to make a fast resolution while allowing the parties to avoid long, drawn-out litigation. Similar to courts, contractual arbitration agreements in California provide certain privileges to the parties: they are confidential, decision-making is cost effective, jurisdiction can be chosen, and it can be quicker to a resolution than the lengthy court processes.
Cost is one of the most recognized advantages of arbitration agreements in California. Statistics show that approximately 18% of civil law cases in the state are settled by arbitration panels. They range from $5,000 to $7,500 per case. In contested cases before a court, costs can easily exceed past $50,000 in attorney’s fees and hiring experts. In addition, court delays often force litigants to wait years for a resolution. This is often due to a large backlog in the court system, especially with the budget cuts in California over the last five years. Arbitration avoids larger fees and delays because of a smaller caseloads and private arbitration centers that can hold more hearings than a court can hear from pleading to settlement.
Arbitration agreements in California are also confidential. Court records are open to the public and the media. Employers and businesses often want to keep information about a case from becoming public knowledge. Confidentiality provisions in arbitration agreements are given deference by the courts.
In California, the arbitrator is selected by the parties. This means that the parties get to retain their choice of an arbitrator or have the right to select a panel of arbitrators. The parties can choose one or three arbitrators, based on their unique circumstances. Having the ability to choose the panel or arbitrator has advantages in complex legal matters. Evidence and testimonies will be presented to the arbitrator who understands the intricacies of the issue before him or her.
Clauses Frequently Found in a California Arbitration Agreement
The following are common clauses found in a California arbitration agreement:
Selection of Arbitrators. Parties will include clauses that pertain to the selection of arbitrators. A common clause may read "The arbitrator shall be selected from a list provided by [name of the arbitration association] and shall have 15 years experience in [insert the named field]. If the parties cannot agree on an arbitrator from the list, the American Arbitration Association shall appoint the arbitrator." California courts have long-held that an arbitration provision requiring "good faith efforts to agree on an arbitrator" is sufficient.
Discovery Limitations. A common agreement may state: "The parties agree that any discovery permitted will be limited as follows: [insert number of depositions, expert witnesses, interrogatories, request for production, etc.]." Any limitations of discovery should be specifically noted.
Binding Nature. "The parties agree that they shall be bound by all the rules and regulations of [insert the name of arbitration association] and that any decision or award shall be final and that there shall not be any appeal from the award except for those as set forth within the [name of Arbitration code, such as the Revised Uniform Arbitration Act]."
Will an Arbitration Agreement Be Enforceable in California?
Generally, courts will compel arbitration under California Civil Procedure Code Section 1281.2 unless the arbitration agreement is found to be unconscionable or otherwise invalid. See Cable Connection, Inc. v. DirecTV, Inc., 44 Cal.4th 1334, 1345-46 (2008). However, there are additional factors that courts consider when deciding whether to enforce an arbitration agreement, including:
Of particular note, courts apply a more demanding test to invalidate an arbitration agreement on unconscionability grounds. See Kinney v. United HealthCare Servs., Inc., 70 Cal. App. 4th 1322, 1330 (1999). In other words, unconscionability cannot be used to strike down an arbitration agreement unless the agreement is "unconscionable in the general way, affecting [a] large number of employees," and not just "unconscionable as to a handful of individual employees." Williams v. 24 Hour Fitness USA, Inc., 74 Cal. App. 4th 57, 73 (1999).
California courts are also charged with the task of determining whether the consumer agreeing to the arbitration agreement had "equal bargaining power with the draffic [i . e. the employer that drafted the arbitration agreement] and reasonable expectations of the contract terms." Graham v. Scissor-Tail, Inc., 28 Cal. 3d 807, 818 (1981). The Graham court concluded that there were unequal bargaining powers, noting "[a]n employee cannot go into another industry or business without risking the loss of his or her investment in the present one…to expect him to risk loss of his investment or risk employment elsewhere is unreasonable."
Fortunately for employees in California, the state courts are the most employee-friendly when it comes to forcing employers to include certain term and conditions in arbitration agreements. California courts require arbitration agreements to "stand on equal footing with all other contracts" as opposed to "adhere to unique rules, such as that they must be superior to all other public policies." Armendariz v. Foundation Health Psychare Servs., Inc., 24 Cal.4th 83 (2000).
Recent Developments in Arbitration Law
In California, recent cases have put limits on arbitration agreements—particularly in the employment context. For example, the California court of appeal issued an opinion in July 2018 that arbitration agreements are not appropriate in cases involving private attorney general actions under the California Labor Code. (See Iskanian v. CLS Transp. Los Angeles, LLC (2018) 154 Cal.App.4th 1363.) The decision explains that the state has a strong public policy to enforce California Labor Code provisions. This trend is not just limited to arbitration clauses. Employers’ waivers or limitations on class claims, as a part of arbitration agreements, may also receive stricter scrutiny by California courts. In February 2017, California courts struck down a waiver of class claims for wage and hour actions in California because it was unconscionable. (See Yi v. Cigna-Int’l Corp. (N.D. Cal. 2017) 2017 WL 89003. This highlighted a gradual erosion in the permissiveness of class and representative action waivers. In the coming months, there will likely be additional attempts to limit the use of arbitration agreements as more cases are decided. As with any legal issue, employers may wish to seek independent counsel to evaluate the impact of these trends to their specific circumstances.
Arbitration vs. Mediation vs. Litigation: Which is the Better Dispute Resolution Method?
California statutes direct courts to enforce arbitration agreements, so you may find yourself relying on an agreement to decide a dispute with a person or company in California. In many circumstances, an arbitration proceeding is a great way to seek a resolution of the matter.
Nevertheless, arbitration is not the only process available; in fact, it has significant differences from other key processes—mediation and litigation—in which parties attempting to resolve a dispute may engage.
Arbitration vs. Mediation
Many people conflate arbitration with mediation, but these are two very different methods designed to encourage dispute resolution without resorting to litigation. When parties agree to mediate, they are asking a neutral third party to facilitate a negotiation—a mediated agreement can serve to resolve the dispute without the parties litigating. Unlike an arbitrator, a mediator does not render a decision. Instead, mediators help parties talk through the issues involved to reach a resolution. A mediated agreement does not have to be legally enforceable—the idea is that the parties can agree to anything they want. Nevertheless, an enforceable written contract is the best result for a mediated agreement (it should satisfy most elements of a contract by being in writing, signed, with a "meeting of the mind" on all essential terms). A mediated agreement that is not in writing may be difficult to enforce, unless the parties take further steps to execute a new contract. If the parties can’t resolve the dispute during mediation, the process ends. They can then proceed with litigation or arbitration, whichever is preferable.
Arbitration vs. Litigation
Arbitration is more similar to litigation than to mediation in that the parties can present their case to a neutral third party (an arbitrator) for a binding decision. Like a court proceeding, arbitration does not typically provide the opportunity for any further proceedings unless there is some showing of fraud, bias or other impropriety on the part of the arbitrator. The written decision of the arbitrator is final, and cannot typically be appealed. Because arbitration is more like a court proceeding, it has been said to be better suited for situations where the parties are likely to have more complex legal and factual issues. For simple contracts, mediation may be preferable. A decision to arbitrate and a decision to litigate are made in consideration of a variety of factors, including:
How to Write a California Arbitration Agreement
Arbitration agreements, like most legal agreements, are creatures of contract, meaning they are interpreted like any other contract. A valid contract is generally enforceable in California and must contain four key elements: (1) parties capable of contracting; (2) a definite purpose; (3) lawful subject matter; and (4) consideration.
In the context of arbitration, the definition of "party" encompasses, at a minimum, the employee and employer. Each party must have the contractual capacity to enter into an agreement and understand its essential terms and conditions. In signing an arbitration agreement, the person is affirmatively acknowledging her capacity to enter into the agreement voluntarily as the consideration for the agreement .
The term "consideration" is the bargaining that involves a legal benefit to one party or a legal detriment to the other. Consideration can be seen in the exchange of mutual promises. Where the consideration is equal, the terms are easily identifiable. For example, the employer promises to arbitrate with the employee and, in exchange, the employee promises to arbitrate with the employer. If the consideration exchanged by the parties is not equal, the relationship between the consideration given and the promise conveyed is immaterial provided that something of value is being given.
In addition, the agreement must also meet other requirements set forth by the California Uniform Arbitration Act, Code of Civil Procedure section 1280 et seq.
