Arbitration clauses have become a common feature in most commercial transactions, affecting both businesses and consumers. These clauses are present in nearly every type of contract, including credit card agreements, banking and loan documents, online service agreements, leases, and business contracts. Unfortunately, most people never fully read or negotiate these arbitration clauses, often assuming there’s no room for modification. While this may be true for some standardized agreements, such as credit card contracts or terms of service with tech giants like Google, many contracts still offer opportunities for negotiation—arbitration clauses included.
It’s crucial for all parties to thoroughly review and understand the scope and limitations of an arbitration clause before signing a contract.
What Are Arbitration Clauses?
Arbitration clauses dictate that any disputes arising under a contract must be resolved through arbitration rather than traditional court litigation. While arbitration can be more streamlined and cost-effective, it also comes with its own set of risks. One of the primary concerns is the level of authority given to the arbitrator.
The Importance of Reviewing Arbitration Clauses
Many people assume that if a dispute is arbitrated, the decision will align with the facts and the law. However, this is not always the case. Arbitrators are given broad discretion and can make decisions that don’t necessarily comply with the law or reflect the facts. An arbitrator’s decision can vary greatly from what either party expected, and because of the nature of arbitration, these decisions are often final and binding.
Limitations of Arbitration Decisions
Standard arbitration clauses do not allow for judicial review of an arbitrator's decision, meaning parties typically cannot appeal or ask a court to overturn the decision unless the arbitration agreement specifically includes such a provision. In most cases, the decision of the arbitrator is final, regardless of whether it follows legal reasoning or factual accuracy.
Can You Appeal an Arbitration Decision?
Under normal circumstances, arbitration decisions are not subject to appeal. However, the 2008 California Supreme Court case, Cable Connection Inc. v. DirecTV, Inc., changed the game for arbitration agreements. The court ruled that parties can contractually agree to allow judicial review of an arbitrator’s decision.
If you want the possibility of appealing an arbitrator's decision, your contract's arbitration clause must include specific language. According to Cable Connection, the following language would allow for judicial review:
“The arbitrator shall prepare in writing and provide to the parties an award including factual findings and the reasons on which the arbitrator’s decision is based. The arbitrator shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error. The decision of the arbitrator may be entered and enforced as a final judgment in any court of competent jurisdiction.”
Arbitration Clauses and Judicial Review in California
California courts are generally hesitant to allow the revision or appeal of arbitration decisions. Without an express provision allowing judicial review, parties are left without recourse, even if the arbitrator’s decision is inconsistent with the law. Therefore, it’s essential for anyone entering into a contract with an arbitration clause to consider negotiating this language to ensure a fair process.
Including the language from the Cable Connection case in your arbitration clause provides an important safeguard for both parties. Neither side should object to this provision since it only ensures that the arbitrator's decision complies with the law. If the arbitrator fails to do so, either party will have the right to seek judicial review.
Conclusion: Negotiating Arbitration Clauses
If you are entering into a contract with an arbitration clause, it’s crucial to fully understand its implications and consider negotiating terms that allow for judicial review. Including the right language in the arbitration provision can protect your rights in case the arbitrator's decision deviates from the law or the facts.
If you need assistance reviewing or negotiating an arbitration clause, feel free to contact our legal team for guidance.
This article was written by Patrick Casey, a business attorney with JRG Attorneys at Law in Monterey. For more information, you can reach Patrick at (831) 269-7114 or at patrick@jrgattorneys.com.