Beware of that Arbitration Clause!
"Any and all claims, disputes and/or other matters in question brought by either party against the other arising out of or relating to this Agreement or the performance or breach thereof shall be decided by arbitration in accordance with the Rules of the American Arbitra-tion Association then pertaining as the exclusive remedy and means for resolving such claims, disputes and/or other matters in question."
Do you recognize the above language, and if you do, do you understand its implications? Most people would answer in the negative. And yet the above language is a portion of a standard arbitration clause, the kind found in many real estate contracts, in construction contracts, and even in Limited Liability Company Operating Agreements. It's also found on tickets to sporting events, transportation providers — and pretty much any agreement to use services provided by a large corporation.
The implications of such language in an agreement can be far-reaching. Unfortunately, as with many miscellaneous paragraphs in legal documents, this powerful provision is often overlooked or ignored by the buyer — until something goes wrong.
You may remember the huge scandal involving a passenger being removed against his will from a commercial airline. Although in this case the airline, fearing adverse publicity, settled with the victim under an agreement of total secrecy, in fact many such clauses in ticketed events or services are written to significantly limit any victim's ability to recover damages, no matter how badly the victim may have been treated.
Since there are advantages and disadvantages to including an arbitration clause in an agreement, or agreeing to be bound by one, it is important to understand the ramifications of entering into an agreement which contains such a binding provision.
By executing and entering into an agreement of any kind which contains a binding arbitration clause, you are foregoing or waiving your right to a trial in a court of law. While one of the advantages of arbitration versus trying a case in the court system is the expense, you are giving up your constitutional right to have your case heard by a judge or jury.
Arbitration can be much less expensive than a court trial and is also much less formal, given that the rules of evidence (forbidding much hearsay and requiring proof of the evidence's legitimacy itself, for instance) do not apply in an arbitration proceeding. While this can be helpful and a benefit to some parties, it can cause many problems for others.
Because formal rules of evidence do not apply in this type of alternative dispute resolution, the success or failure of an arbitration can turn on the quality of the arbitrator. Irrelevant and even prejudicial testimony could be permitted in an arbitration, because the parties and attorneys are not bound by evidentiary rules. Therefore, it is essential to choose a competent arbitrator who can discern the irrelevant, prejudicial, and even false testimony.
A disadvantage of arbitration is the lack of a record. If a record needs to be created, arbitration is not the best course of action, as these proceedings are not usually recorded or transcribed, thus exposing the parties to the risk of prejudicial or false testimony not being preserved for later action.
Another aspect to consider is the issue of discovery. Discovery is the formal process by which the parties to a judicial contest exchange facts, information and documents about their respective cases, once litigation has begun. Discovery is much more extensive in judicial proceedings and the parties will obtain much more information about their adversaries' positions and legal arguments, than they might going into an arbitration proceeding.
So, even if the parties are bound by an arbitration clause foregoing their ability to file a lawsuit and institute court proceedings, they should still consider a form of discovery, such as a documents exchange, to secure needed information.
An arbitration clause has its advantages and disadvantages; however, it is not a provision that should be taken lightly. If there is any doubt about whether to enter into an agreement containing such a clause, it is imperative that you seek the appropriate legal advice before moving forward to a contract or an agreement.
At Brown, Brown & Young, we welcome the opportunity to advise you as to whether or not to proceed with an agreement that includes a binding arbitration clause. Please call us at our offices in Bel Air or Elkton to schedule an appointment!