arbitration agreements: why arbitration might BE PREFERABLE TO LITIGATION, and how to enforce agreements to arbitrate

Many businesses face the question of whether to include an arbitration provision in their contracts, but are unsure what arbitration is and/or what the financial ramifications of arbitration may be for their business.  

Simply put, arbitration is an out-of-court proceeding.  By way of an example, in the case of a service agreement, an arbitration clause mandates that the client referenced in the service agreement must arbitrate any legal claims related to the services provided under the service agreement, rather than taking those claims to court.  A third-party neutral, otherwise known as an arbitrator, analyzes the claims and decides the outcome of the arbitration, much like a judge would oversee and decide a case if the issues were tried in court.

Some arbitration clauses provide for binding arbitration, which means that the parties must abide by the arbitrator’s rules, and that courts will enforce the arbitrator’s decision.  On the other hand, sometimes arbitration clauses are non-binding, which means that if the parties do not like the arbitrator’s decision, they are free to reject it and pursue resolution of the dispute in court.  Business owners should consult with qualified business attorneys when drafting or negotiating their company’s arbitration clause or agreement to determine which of these options makes the most sense for them.

There are good reasons why a company may elect arbitration.  First, arbitration may be less costly than litigation.  Discovery can be limited, reducing legal bills and administrative costs.  Second, arbitration is more confidential; the business does not have to fear media backlash or reputational injury from having a lawsuit filed against it in a local state or federal court.  Third, depending on the clause or agreement, the parties can work together at the negotiation stage to select an arbitrator with the appropriate expertise for any disputes arising from the service agreement.  Parties do not have this sort of freedom in selecting judges.  Finally, it is usually quicker to resolve claims in arbitration since courts in California are often flooded with lawsuits, and scheduling hearings in court can take months at a time.

For the reasons outlined above, most companies decide to include an arbitration provision in their service contracts.  Mere inclusion of an arbitration clause, however, does not mean that a lawsuit will never be filed for services arising from the contract.  Simply including a provision for arbitration in a contract does not divest California courts of jurisdiction to hear the matter.  When a lawsuit is filed despite an agreement to arbitrate, a business may seek to enforce the arbitration clause or agreement via a motion to compel arbitration and stay judicial proceedings.  Conversely, when a lawsuit has not yet been filed, a business may seek to enforce the arbitration clause or agreement by way of a petition to compel arbitration.
 
For a good number of small businesses and emerging companies in California, the California Arbitration Act (Cal. Civ. Proc. Code §§ 1280-1294.2) dictates the procedure of moving to compel arbitration.  (Note: In cases where the contract involves maritime or interstate commerce, the Federal Arbitration Act (9 U.S.C. §§ 1-16, 201-208, 301- 307) may apply.)  A business’ failure to move to compel arbitration is fatal to enforcement; it means that the company will have to defend against the lawsuit in court.  

In order to move to compel arbitration in California, a business must first plead:

1. A written agreement to arbitrate between the moving party and the party refusing to arbitrate;
2. A request or demand by one party to the other party or parties for arbitration of such controversy pursuant to and under the terms of their written arbitration agreement;  and
3. The refusal of the other party or parties to arbitrate such controversy pursuant to and under the terms of their written arbitration agreement.

Luckily for businesses, arbitration is a favored remedy in California, and most courts lean towards enforcement of an arbitration clause or agreement.  However, there are some exceptions.  A court may find that the clause or agreement is unenforceable due to unconscionability, waiver, revocation, and/or another pending court action with possibility of conflicting rulings.  

With regard to involuntary waiver in particular, a company may waive its right to enforce the arbitration clause based on:

1. Taking actions inconsistent with intent to arbitrate;
2. Case activity/procedural posture of the matter thus far;
3. Undue or suspicious delay;
4. Filing of a counterclaim without asking for a stay of the proceedings;
5. Engaging in discovery not available under arbitration; and/or
6. Prejudice to non-moving party.

The foregoing factors are not necessarily intuitive to non-lawyers, and courts have denied companies'  motions to compel arbitration on the basis that companies unknowingly, involuntarily waived their right to arbitrate.  Therefore, if your business gets into a dispute over an arbitration provision or agreement, it is imperative to seek advice of counsel right away in order to preserve your right to arbitrate the matter.  Counsel can effectively advise you what to do to ensure that your company does not waive its right to arbitrate under the agreement.  

Smith Shapourian & Mignano, LLP is available to answer any questions or concerns you may have regarding your business’ arbitration clause or agreement, as well as to help your business enforce an agreement to arbitrate.  Please contact us for a consultation.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.