On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) finalized a new rule banning arbitration agreements that prevent class action suits against banks and other financial institutions.  The rule will be effective 60 days after its publication in the Federal Register and is expected to spark legal and political fights. Knowing arbitration may be taking a spotlight in the news, we thought an overview of the topic may be helpful.

WHAT IS ARBITRATION?

Arbitration is a type of Alternative Dispute Resolution (ADR) that takes place out of court by submitting claims for consideration to a panel of one or more arbitrators.  Arbitrators are not judges; however, they do review evidence submitted by the parties that will usually include a hearing before the arbitrator that is similar to a condensed trial.  The arbitrator will then make a decision.  If the parties agreed the arbitration is binding, the arbitrator’s decision will be final, with very limited appeal rights.

Federal legislation expresses support for the use of arbitration clauses in the form of the Federal Arbitration Act.  Many states, including Iowa and Nebraska, have similar statutes supporting the use of arbitration.

HOW DOES ONE USE ARBITRATION IN LIEU OF RESOLVING DISPUTES IN COURT?

The most common way a dispute ends up in arbitration is through enforcement of an arbitration clause in a contract that is disputed between parties.  However, certain industries may require arbitration in lieu of court proceedings.  Parties to a dispute may also determine arbitration would be more appropriate than pursuing a suit in state or federal courts.

WHERE CAN YOU EXPECT TO SEE ARBITRATION CLAUSES?

Contracts of almost any nature can include a clause that requires arbitration in the event of a dispute.  In the case of the CFPB rule, mentioned above, arbitration clauses are frequently found in contracts for banking and financial products such as bank accounts, investment accounts, and credit cards.  Arbitration clauses are commonly found in anything from cable television contracts, to nursing home agreements, construction contracts, employment matters, and commercial contracts.

WHAT ARE THE PROS AND CONS OF ARBITRATION?

  • Arbitration is conducted outside of the judicial system. That means, arbitration proceedings will not necessarily be public record and may be strictly confidential.  Similarly, arbitration is not subject to judicial oversight.
  • The Federal Arbitration Act (FAA) severely limits judicial review of arbitration decisions. Under the FAA, courts can only review arbitration awards where the arbitrator does not follow the terms of the arbitration, where one or more of the arbitrators is biased, or when an arbitrator directs one of the parties to do something illegal.
  • Arbitration clauses in contracts can dictate various rules and conditions regarding a potential arbitration proceeding. This could include where the arbitration takes place, who will pay for the arbitration, whether the arbitration is binding or non-binding, whether parties also waive their right to class action proceedings or judicial proceedings, or whether the arbitration must be conducted in accordance with a specific arbitration agency (such as the Arbitration Association of America (AAA)).
  • Depending on how the arbitration is conducted, it can be quicker and cheaper than bringing a dispute before a court; however, various factors such as filing fees and the number and expense of arbitrators may make arbitration more expensive.
  • When selecting an arbitrator, it may be possible to select an individual with expertise in the particular subject matter of the dispute.

THE TAKEAWAY

In general, people and businesses typically find themselves in arbitration because they enter into contracts with clauses requiring arbitration in the event of a dispute.  Those arbitration clauses often address a variety of topics relating to the arbitration that can be advantageous for the party drafting the contract, or conversely, disadvantageous for the non-drafting party to the contract.  Careful contract negotiations can reap the benefits arbitration may have to offer, while avoiding potential pitfalls that can also be associated with arbitration.  Looking at a contract with an arbitration clause?  Call Angie to avoid unintentional surprises and make sure your rights are protected.