Monday, June 2, 2008

Arbitration Clauses

You probably don't know it, but you've likely agreed to settle disputes by arbitration rather than in court. This is because many companies now routinely insert into their fine print arbitration clauses that cut off access to the courts (except for very limited circumstances). Oh, and those same clauses pick who the arbitrator will be. Of course, consumers get no say in this and often don't even know the clauses are in there. They only find out when the company does something wrong, violates the contract, and they try to sue, only to find out that they aren't allowed to.

Now, don't get me wrong, I have nothing against arbitration. It can be a much quicker and cheaper way to settle a dispute. I'm all for it. I'd just rather it be voluntary rather than pushed in an adhesion contract. Given what is at stake and what those clauses represent, nothing less than giving up your constitutional right to a day in court, I'd say anything less would be unacceptable. Some see these clauses as no different as any other contract clause. I beg to differ. (And I did in the comments to that post). I proabably even generally agree that it can be bad for the courts to nullify provisions of contracts for being adhesion contracts. That creates a lot of uncertainty. But I draw the line when it comes to totally giving up your right to even have a neutral magistrate hear your contract dispute.

It might be different if there was a neutral organization that was part of the judicial branch (fully funded by the taxpayers and fees, like the court system) that handled arbitration. A system that was like that, and whose members were selected like judges are selected (by election or appointment) would be acceptable. Then you'd at least be no worse off than you would be in court. But where who gets to decide is set by the dominant party, that is unacceptable, any more than it would be to get to select which judge decides your case. Even worse than that, the salary of the arbitrator is pretty much paid by the corporation through the business it sends to him or her through those contracts. That is a pretty strong incentive to find for the corporation. Which is why I'd rather see such clauses totally optional on the part of a consumer. You check the box, you get arbitration, otherwise, you get your day in court. And then it should also allow the consumer to choose the arbitrator. Then it couldn't be said that it wasn't fair and that it wasn't freely bargained for.

Absent that, or absent arbitrators being elected officials, I don't see how enforceing adhesion contract arbitration clauses is anything but unfair.


The Barefoot Bum said...

The problem, of course, is that workers, renters and (often) consumers have no choice at all but to sign these sorts of agreements, and employers, landlords and producers have very little incentive (if any at all) to unilaterally provide a fair rather than biased dispute resolution process.

Contracts have no value other than to grant a veneer of legitimacy to exploitation unless the parties signing the contracts have equal power to negotiate terms, either directly or indirectly by enacting laws and establishing a truly neutral system of dispute resolution.

DBB said...

Exactly, which is why I don't think arbitration provisions that weren't freely negotiated for should ever be enforceable.

Courts have, in the past, refused to enforce any sort of adhesion provisions, but that is pretty much gone now after decades of conservative attacks on established precedent. In Michigan, all contracts are enforced as written, period.

I don't think such provisions should ever be enforced where they take away your right to ever get to court in the first place - not unless they were freely negotiated for. If we do nothing else about adhesion contracts, at least we can give people their day in court before an unbiased (hopefully) tribunal.

Ted F. said...

Oh, and those same clauses pick who the arbitrator will be.

Post proof or retract. No one has a clause that does that. You've been told this several times, and you continue to repeat this fiction.

They only find out when the company does something wrong, violates the contract, and they try to sue, only to find out that they aren't allowed to.

An arbitration clause doesn't forbid anyone from suing. You've been corrected on this, but you continue to repeat this fiction.

A system that was like that, and whose members were selected like judges are selected (by election or appointment) would be acceptable.

Arbitrators are selected by the mutual agreement of the parties to the arbitration. So, again, what's your objection, other than to a fictional regime that has nothing to do with American arbitration clauses?

nothing less than giving up your constitutional right to a day in court

You have the constitutional right to remain silent. Does that mean if a criminal agrees to a plea bargain, it has to be revoked because the criminal is "giving up" multiple constitutional rights?

Are confidentiality agreements necessarily forbidden because one is "giving up" the constitutional right to free speech?

All contracts require one to give up something in exchange for something else. If the contract doesn't make you better off, don't sign it. That's what freedom of contract means, and for someone who calls himself a libertarian, you're awfully blase' about having government interfere with what people can agree to do or not do.

Courts have, in the past, refused to enforce any sort of adhesion provisions, but that is pretty much gone now after decades of conservative attacks on established precedent.

Wow, is that a view of history that is 180 degrees away from reality. It's actually quite the opposite: courts enforced contracts as written for centuries, and liberals have been doing away with the established precedent over the last half-century to permit government interference in freedom of contract. Where do you get all these fictions you spout about arbitration and contract law? Are you making it up, or is there someone shameless out there that is spreading falsehoods?

DBB said...

I don't have time to go through all this right now, but I will - I can answer your last question first - for decades there have been built into contract law all sorts of provisions, including protections against enforcement of certain adhesion contracts. I learned about some of it in Law School. I have read more specifically about that law in Michigan, but frankly, I don't know the details and haven't bothered to delve into them because they are all moot - the current Michigan Supreme court, the most conservative Supreme Court of all 50 states, did away with all of them in one fell swoop.

Here's the case:

(Rory v Continental Insurance)

So in that respect, Michigan law is quite simple. Contracts are enforced as written, period, with no execptions. (Except for the usual ones like fraud, duress, etc, which really are about whether there ever was a contract at all).

You are correct in that there can be arbitration provisions that allow for mutual choices, but that's not what we are talking about here - while that is a step up, it still is a problem. (In fact, I said that would be a good option - where consumers can pick whether or not the contract will have an arbitrarion clause and can pick the arbitrator).

And I never said that arbitation means you can NEVER go to court, I said that it makes it almost impossible, which it does - and for good reason - the whole point of having binding arbitration is the binding part - court review of that is extremely limited, and so it can be extremely difficult to overturn an arbitrator's decision. That is good if the intention is to make in an alternative to court - after all, what's the point of having arbitration if you just end up going and litigating afterwards anyway. The downside is, where arbitration is in an adhesion contract, the weaker party is stuck and pretty much has no recourse in court for the same reasons.

DBB said...

I should briefly add that under Rory, when I say no exceptions, I mean other than contracts which violate the law or public policy, which is pretty standard - can't contract for something illegal - like a hit man - and the public policy exceptions are basically whitled down to nothing (and are hard to establish anyway - public policy means basically that there is already law that says something can't be done, which almost makes it the same as the law exception - you can't just argue nebulous "public policy" - you'll automatically lose).

DBB said...

Ok, to answer the rest of your questions - arbitration clauses routinely include limitations on who can arbitrate - selecting a particular private arbitration organization. But even if all it says is someone mutually agreeable, again, that puts the consumer at a disadvantage - because the company probably already has someone in mind while the consumer, never having done arbitration or even knowing what it is, doesn't know anything about it. What if the consumer actually does find someone, though? What's to stop the company from saying no?

And I'm sorry, arbitration clauses do not always allow selection of an arbitrator based on mutual agreement only. And what's to stop a company from putting in an arbitration clause the name of the organization or even an indvidual who will be the aribtrator? After all, a contract is a contract, right? It's not like the consumers have any choice in the matter. If I were the lawyer for a corporation putting in the language for adheison contracts that all consumers of my products have to agree to (and often don't even know they are agreeing to) - then I'd put in there my uncle Bob, the arbitrator, as the arbitrator of choice. The consumer has no complaint - after all, they agreed to the contract when they bought my product. Don't like it, don't buy my products.

Your example of the surrender of constitutional rights is missing one ingredient - the examples you give are things people freely negotiated for. Would you consider it fair for someone to give up their right to a criminal trial based on some text buried in an adhesion contract on some can opener they bought, text they never read and would never have agreed to had they even known about it?

I am all for freedom of contract. Hell, I'd even allow contracts on things that are currently illegal because I don't think the government has any business getting in the way of a valid business relationship (such as with drug sales or prostitution).

I'm even not all that upset about adhesion contracts in general, though they are on shaky ground - at least it keeps things simple if you just enforce contracts as written. I simply draw the line with one specific thing - if you want to essentially remove the option from having a contract dispute resolved in court, that surrender of that basic right needs to be 100% voluntary and cannot be enforced where it was simply part of an adhesion contract. This certainly won't tie up the courts into knots like it would if you gave this sort of examination to any provision.

It would be simple to implement this too - include as part of every adhesion contract a section that a consumer must check off and sign if the arbitration clause is to be valid - (with appropriate warnings about how you are giving up your right to use the courts (not completely, but in most cases)) - then if the adhesion contract author wants to make use of that arbitration provision, either they show that section checked off and signed, or its off to court. Nice, simple, fair.

And where there was actual negotiation between equal parties, you won't even need that - if GM and GE make a contract that includes an arbitration provision, then it will simply be enforced (because it is not an adhesion contract).