Understanding Binding Arbitration

[imoldernu]

Have you ever signed contracts for goods, services or anything else that contained an agreement that disputes would be subject to binding arbitration?

This recent article, challenging a company's right to require work contract agreements be resolved by binding arbitration has come under scrutiny.

Complaint At Indiana Menards Leads To Company-wide Changes | News - Indiana Public Media

I have no insight into this, but was surprised to see that court costs are subject to being borne by the complainant.

So... Has anyone here been involved in binding arbitration?

Is there any other way to receive services that require this type of agreement, or is this simply a "put-off" to absolve companies from pesty small claims court suits?

Thoughts?

[eytonxav]

Court costs can be very expensive for high value disputes (I'm not talking small claims matters). Except for certain types of breaches, most large companies write into the agreement and prefer to settle disputes via arbitration, sometimes its done via representatives appointed by each party as an initial effort and if that doesn't resolve the matter, binding arbitration may be called for following the rules established by the American Arbitration Association and the parties. However, certain types of breaches, as specified in the contract, may be subject to court settlements and forego the arbitration process.

The link you posted is an employee matter and goes beyond my commercial knowledge of buyer/seller agreements.

[Texas Proud]

Reading the article it seems that there was something specific that they did wrong, not that arbitration would stand in other cases...


Almost all companies now put an arbitration clause in their contract... I do not think you can do business today without signing some, if not most, of your contracts with it in....

[rodi]

Here is my personal experience with arbitration.

We hired a contractor. He did not live up to the agreed upon work/price and eventually abandoned the job because we would not pay for work not delivered. We'd paid for significantly more work than he provided. He also hadn't paid all of his subcontractors. His contract called for arbitration rather than court.

We filed a claim against him. (Well over $100k... so a big claim) We had to pay to file. It went through a process that took a month or so before they assigned an arbiter (judge type person). At this point - the arbiter needs to be paid. It's supposed to be split evenly between the two parties. We paid our part. The contractor did not pay his part. The process screeched to a halt.

So now - our options were to pay the contractors half of the fees, or walk away and pursue other legal remedies. We chose NOT to pay the contractors part... and pursued other legal action. Eventually we were able to negotiate a settlement (with the state attorney's office negotiating) that allowed him to keep his contractors license if he paid us damages. The settled amount was about 1/2 our losses. And he stopped paying about 1/2 way through the schedule... so we only recovered about 1/4 of our losses.

Arbitration is supposed to be cheaper... but that assumes both parties pay their share of the fees. Any money paid into the arbitration association is gone... So the amount we paid is lost.


My other experience with arbitration was as a witness in a very high stakes intellectual property case. The panel was opposite of what you would call impartial.... One panel member (three arbiters on the panel) was so in the tank for the other side it was embarrassing. With arbitration there is no appeals process.... so you're screwed if you have an arbiter who is biased.

I'm not a fan of arbitration.

[2017ish]

Quote:

Originally Posted by rodi ... With arbitration there is no appeals process.... so you're screwed if you have an arbiter who is biased [or clueless]. ....

We've had mixed results for our clients in arbitration. Tough to say which route is better/worse. There are more than a few clueless judges as well--and many of their decisions are discretionary and essentially insulated from appeal. On average, if not in a specialized court (such as a business court), the arbitration process is faster/cheaper.

For individuals though, however, I think I'd typically prefer the judicial process, if there is a choice.

[Avocadorunner]

You should have had a "stipulated judgment" for the settlement amount. The terms of the settlement would have provided that you would file the stipulated judgment if he failed to pay per the terms of the settlement. You would then be able to attach assets per your state's judgment collection procedure to satisfy the remaining amount.
Call the Contractors State License Board (www.cslb.ca.gov) and explain that he is in default of the settlement. They may suspend his license. You can probably make a claim against his contractors license bond, which in CA is $12,500. You may also be able to now file a civil action against him for breaching the terms of the settlement agreement.

Talk to a lawyer.

[eytonxav]

Quote:

Originally Posted by rodi My other experience with arbitration was as a witness in a very high stakes intellectual property case. The panel was opposite of what you would call impartial.... One panel member (three arbiters on the panel) was so in the tank for the other side it was embarrassing. With arbitration there is no appeals process.... so you're screwed if you have an arbiter who is biased. I'm not a fan of arbitration.

In all the commercial contracts I have ever drafted, intellectual property disputes were always carved out of the arbitration process.

[eytonxav]

Quote:

Originally Posted by rodi Here is my personal experience with arbitration. We filed a claim against him. (Well over $100k... so a big claim) We had to pay to file. It went through a process that took a month or so before they assigned an arbiter (judge type person). At this point - the arbiter needs to be paid. It's supposed to be split evenly between the two parties. We paid our part. The contractor did not pay his part. The process screeched to a halt.

So how did the arbiter rule or was he wanting payment upfront? Anyway it seems to me, that the contractor essentially had a default judgement working against him from the arbitration proceedings. Also, seems like your legal action and state attorney did not do a very good job for you either.

[rodi]

To clarify.

We had not gone to arbitration, we were still in the discovery phase. We'd reached the point where the arbitration company wanted more money and he refused to pay. We were consulting with a lawyer. We were told by both the arbitration company and the lawyer that his refusal to pay did not stipulate a judgement... it just freed us from the arbitration clause.

We absolutely DID pursue through the CSLB. And anyone who's dealt with them knows you need OVERWHELMING proof or they drop the ball. Heck, if you don't stay in close contact they'll drop the ball. Once the CSLB investigator concluded our claim had merit - it was referred to the state attorney's office. They worked with us and the contractor. It was due to go to an administrative law judge to potentially pull his license and the contractor settled that morning. He agreed to have his license on probation and to make regular payments. When he stopped making payments we went back to the state attorney's office and the CSLB and his license was revoked.

The complaint and agreement show on his license record (public database). Liens show against him in the grantor/grantee county database (public database). But you can't squeeze blood from a turnip. We collected his bond, the bond of one of the subs (who was actively participating in the abandonment of our project). And we got 10 months of the negotiated payments. All in we received less than half of the total loss.

Back to the arbitration. The fees for construction disputes are based on the claim amount. Ours was high so the fees were high.
We had paid $7900 to American Arbitration Ass. and another $5500 to the arbiter when it blew up. Not to mention a few thousand to a lawyer who was advising us on the process. (We were doing our own work - but using him for advice on process... we had the facts of the case, documentation, etc and knew the facts of the case better than him.) It was insult to injury to learn that the money we'd paid for arbitration was yet another LOST sum of money.

[eytonxav]

Sorry you had such a horrible experience. The moral of the story, choose your contractors very carefully, there are a lot of dirtbags out there.

[rodi]

Quote:

Originally Posted by DFW_M5 Sorry you had such a horrible experience. The moral of the story, choose your contractors very carefully, there are a lot of dirtbags out there.

I agree. Not sure we'd ever go with a General Contractor again. We'd do owner-builder. Even the company we hired to pick up the pieces turned out to have some sketchy practices. (Slapping us with a lien for work they admit they billed for but didn't deliver.)

I learned a lot. Not the least of which - don't sign a construction contract for large sums of money when there is an arbitration clause.

(FWIW - I did do due dilligence... but references can be faked and previous jobs can be misrepresented.)

[imoldernu]

A change in the rules...maybe.

This U.S. Regulator Wants to End Mandatory Arbitration for Consumers - Fortune

Quote:

The Consumer Financial Protection Bureau (CFPB) proposed barring financial firms from including fine print in contracts that mandates arbitration in the event of a dispute over products ranging from checking accounts to credit cards. The agency said the clauses prevent consumers who have been wronged from receiving justice and compensation through the courts.

First step in changing the law... Time will tell.

[zinger1457]

Quote:

Originally Posted by rodi To clarify. We absolutely DID pursue through the CSLB. And anyone who's dealt with them knows you need OVERWHELMING proof or they drop the ball. Heck, if you don't stay in close contact they'll drop the ball. Once the CSLB investigator concluded our claim had merit - it was referred to the state attorney's office. They worked with us and the contractor. It was due to go to an administrative law judge to potentially pull his license and the contractor settled that morning. He agreed to have his license on probation and to make regular payments. When he stopped making payments we went back to the state attorney's office and the CSLB and his license was revoked.

Works a lot different in Arizona when filing a claim with the state contractor board against a contractor. The state attorney doesn't get involved, just you, the contractor, and a judge selected by the contractor board. If you win your claim you get paid directly from the state contractor board from a fund created from contractor license fees. It's then up to the contractor to pay back the state contractor board.

[rodi]

It does sound different... The state (California) licenses the contractor... and imposes punishments against the contractor if they violate contracting law. So the process was first - the CSLB investigates... if they decide there is substance to the complaint (this is a hard hurdle to get past - few claims get past this point.) it is referred to the states attorney for prosecution with an administrative law judge. (vs civil or criminal). Any "judgements" awarded by the administrative law judge are largely unenforceable except that failure to pay restitution to both the CSLB and the consumer would result in the license being suspended and/or revoked. In our case we settled the morning we were due to go to the administrative law court - and our agreement was submitted instead. Also in our case - he made payments to us and separate payments to the CSLB (to pay for the cost of the investigation) and then stopped... So they yanked his license.

If he wants to contract again - he'll need to finish paying the CSLB... but we're out in the cold.