[Legal Issues] Arbitration: What is it and do I need it in my contracts?

Arbitration is an alternative forum to have disputes resolved. This process occurs and is conducted outside of the civil justice system and eliminates the use of jurors to decide facts. Arbitration is different than mediation. Mediation is also an alternative process to resolve disputes between litigants but it is used much more in the civil litigation system to reduce court case loads. Mediation is a non-binding process and is entered into between adversaries to resolve a dispute. Mediation is voluntary. Arbitration is a more formal process than mediation and can be non-binding on the parties. For the purpose of this article, the process of arbitration will be in the nature of binding arbitration. Hence, the decision of the arbitrator is synonymous to a ruling from a judge.

Arbitration has been used as an alternative dispute resolution process for many years. This process was originally used primarily between large companies who wanted to resolve disputes in private. Also, many sports fans have heard of players going to arbitration to resolve a salary dispute. Arbitration has become more common in consumer-related disputes during the past ten years. “Consumer vs. Company” disputes resolved in arbitration have risen considerably in the last decade. The purpose of this article is to give some background on arbitration, what it means, how it works and hopefully educate you as a business owner on whether this is a process you want available to you if you are sued by a customer.

BACKGROUND. The federal government instituted the Federal Arbitration Act, which is located at 9 U.S.C. §1-15 (1980). This Act sets out the parameters of how a dispute will be litigated in the arbitration process. If a customer files a lawsuit against your business and you have an arbitration clause within your contract, your counsel can file a Motion to Compel the arbitration clause to be enforced and stay the current civil proceedings. Essentially, all states have their own arbitration statutes (laws). However, some states have statutes that prohibit “pre-dispute” agreements. In essence, these are laws that prohibit individuals entering into an agreement on how they will resolve a dispute if they have one in the future. Since the federal government instituted the Federal Arbitration Act, attorneys are able to compel arbitration under the Federal Arbitration Act because federal law will preempt state law. To invoke the Federal Arbitration Act, counsel will have to establish, to the Court’s satisfaction, that the agreement with that customer has a “substantial effect on interstate commerce” and the arbitration clause is contained in a valid agreement [see Allied-Bruce Terminix Company, Inc. v. Dobson, 513 U.S. 265, 272 (1995)].

Although it can be somewhat more complex at times, it is not difficult to establish a substantial effect on interstate commerce. Typically, courts are shown how the aggregate business that you conduct comes into contact with other states. For instances, chemicals you use in your daily business are purchased and transported across state lines, vehicles you buy from local dealerships are manufactured in other states and typically you have financing you use to run your business that originates from banks across the United States and possibly in other countries. In 2003, the United States Supreme Court issued an opinion styled The Citizens Bank v. Alafadco, Inc., et al. 539 U.S. 52 (2003). This case says very specifically that the Federal Arbitration Act encompasses a wide range of transactions that effect commerce in the aggregate. Therefore, you may have an instance where your involvement with another customer is limited and that individual interaction with that customer may not affect interstate commerce, but your business as a whole in the aggregate does affect interstate commerce. Once you establish that your business has a substantial effect on interstate commerce, you then simply need to demonstrate to the court that you have a valid written agreement with the customer that contains an arbitration clause. Since this article is distributed in all 50 states, this author encourages you to have an attorney draft the arbitration clause you use in your agreement, because some states can narrow the clause to some degree. Regardless, once the arbitration clause is determined to be valid, the court will compel the lawsuit filed against your company to arbitration and stay the court proceedings. The court will then lose jurisdiction over making determinations as it relates to its merit, but retain jurisdiction to enforce judgments.

HOW THE PROCESS WORKS. Once a new case is in the arbitration process, the rules change. For instance, many arbitrations are conducted with much less discovery than a civil lawsuit. The arbitrator, who will be chosen by the parties through a selection process, will limit the amount of depositions that can be taken, if any, along with limiting the amount of written discovery or questions that are exchanged between the parties. Traditionally, arbitrations have a shorter timeframe between the inception of the suit and the conclusion. In a jury system setting, some cases can last three (3) or four (4) years before they are heard by a jury. Some arbitrations can be filed, heard and concluded within eight (8) months. Therefore, there is more of an expeditious manner in the way arbitration cases are disposed of compared with the civil jury system. Also in arbitration, the rules of evidence are somewhat more relaxed. This is dictated by how the arbitrator likes to proceed. For instance, a witness in an arbitration would come and testify that he heard another witness tell someone something. This would be hearsay in a civil system before a jury and would not be permitted by the court. However, since the case is pending in front of an arbitrator and not a jury, the rules in arbitration allow the arbitrator some flexibility on what is allowed in as evidence. In the civil justice/jury system, there are rules of evidence that will have to be adhered to strictly. If not, an appellate court could reverse the trial judge’s decision to allow certain evidence in as error.

TERMITE CONTRACTS. Arbitration clauses have become very common and customary in termite contracts in the past 10 years. The movement toward arbitration was a reaction to some jury awards that were being issued by some juries and upheld by courts that appeared to be out of character. There was a belief, and there is still a belief, that arbitration awards are substantially less than jury awards. This may have some accuracy to it, but it would be foolish to believe that just because your case is in arbitration, the arbitrator is not going to award damages nor will he or she award punitive damages. That arbitrator is free to award damages that he or she feels are just under the circumstances of the case. Therefore, it is a false comfort to believe that just because just you are in arbitration, a judgment would be substantially less than it would be in a civil jury system.

THE APPELLATE PROCESS. Another issue that revolves around arbitrating cases versus trying them before a jury is the appellate process. Typically, if one party is not satisfied with an award from a jury or judge in the civil process, they can seek an appeal to an appellate court. That court may agree that some error occurred at the trial court level and reverse the judgment against them and require them to try the case again or simply render a decision in their favor. Although this is possible in the arbitration process, there is a heightened standard imposed on an appellate court in viewing arbitration decisions. Although there has been several cases issued recently by the United States Supreme Court, an opinion was issued in 2008 which gave lawyers a framework of what will have to be established for an arbitrator’s award to be vacated or modified. In Hall Street Associates, LLC v. Mattel, Inc._U.S.­_128 S.Ct. 1396 (2008), the United States Supreme Court ruled that an arbitrator’s award can be vacated or modified if one (1) of four (4) grounds are met. These four (4) grounds are found to be the Federal Arbitration Act. Specifically, to have an appellate court reverse, modify and/or vacate an arbitrator’s award the individual and/or company appealing will have to establish one or more of the following: 1) that the award was procured by corruption, fraud or undue means; 2) there was evidence, partiality, or corruption in the arbitrator; 3) where the arbitrator was guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy or of any other misbehavior by which the rights of any party have been prejudiced; and 4) the arbitrator exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted is not made. See, 9 U.S.C. § 10(A) (1-4). Clearly, during the next few years there will be a significant amount of litigation over what these four (4) criteria actually mean and under what circumstances they will be applied.

CONCLUSION. It is clear that arbitration has served a purpose in not only civil litigation, but significantly in legal situations involving pest control. I have had the opportunity to arbitrate many cases under various scenarios. I have also been able to try cases before juries. Ask any lawyer their preference and you will get a different answer from each. The arbitration clause does give you the ability to compel arbitration in instances that you believe are better to be handled in a more private manner through the arbitration process versus a more public manner through the court system. Although arbitration is not an entirely private matter, it can be a more closed forum. The decision to have arbitration clauses within your contractual agreements with customers is a business decision. Having arbitration clauses within your contract will not eliminate lawsuits. It simply gives you an alternative on how to handle a lawsuit once filed. Arbitration is a process that is available to you under the law, but choosing that option is one that should be thought through thoroughly and discussed with counsel before it is pursued since there are advantages and disadvantages for the arbitration process just as there are advantages and disadvantages for the civil jury system.

In summary, each instance where litigation is pursued whether that dispute is compelled to arbitration is one that should be decided on a case by case basis rather than a blanket decision without looking at all potential outcomes.

M. Andrew Donaldson, Esq., is a partner with the law firm Ryals, Plummer, Donaldson, Agricola & Smith, P.C., based in Montgomery, Ala., and has represented pest control companies nationally for 10 years.