Arbitration clause

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An arbitration clause is a clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside the courts, and is therefore considered a kind of forum selection clause. It is also known as the "Scott v. Avery clause."

Arbitration clauses are frequently paired with class action waivers which prevents contracting parties to file class action lawsuits against each other. In the United States, arbitration clauses also include a provision which requires parties to waive their rights to a jury trial. All three provisions have attained significant amounts of support and controversy, with proponents arguing that arbitration is equally as fair as courts and a more informal, speedier way to resolve disputes, while opponents of arbitration condemning the clauses for limited appeal options and allowing large corporations to effectively silence claims through "private justice".[1]

Use and enforceability[edit]

Canada[edit]

All provinces except for Quebec have adopted an arbitration code similar to the United Nations Commission on International Trade Law's Model Law. Quebec has opted instead to require that arbitrations would be subject to the province's own Civil Code, including Quebec's Code of Civil Procedure. Arbitration in Canada is primarily administered by the ADR Institute of Canada and the British Columbia International Commercial Arbitration Centre.[2]

Class action waivers lack a uniform policy across Canada, as the Supreme Court of Canada has found that provincial legislation governed disputes, though in Seidel v. TELUS Communications, the court found that because a class action waiver was attached to an invalid arbitration agreement, the class action waiver was void. The province of Ontario, per the Consumer Protection Act of 2002, has banned class action waivers. A court of appeals in British Columbia also found that class action waivers were unenforceable and unconscionable in Pearce v. 4 Pillars Consulting Group due to the contract in question being a standard form contract written by 4 Pillars and giving little bargaining power to Pearce.[3]

Mainland China[edit]

China allows arbitration clauses to exist, though the Supreme People's Court has found that an arbitration clause that does not specify an "arbitral commission" is invalid and unenforceable.[4]

France[edit]

French law generally supports arbitration, though declares that capacity, marriage and divorce cannot be arbitrated. However, under Article L. 623-32 of the French Consumer Code, France considers class action waivers "abusive", and therefore null and void.[5][6]

Germany[edit]

German law excludes disputes over the rental of living space from any form of arbitration,[7] while arbitration agreements with consumers are only considered valid if they are signed,[8] and if the signed document does not bear any other content than the arbitration agreement.[9]

United States[edit]

The federal government has expressed a policy of support of arbitration clauses, because they reduce the burden on court systems to resolve disputes. This support is found in the Federal Arbitration Act, which permits compulsory and binding arbitration, under which parties give up the right to appeal an arbitrator's decision to a court. In Prima Paint Corp. v. Flood & Conklin Mfg. Co., the U.S. Supreme Court established the "separability principle", under which enforceability of a contract must be challenged in arbitration before any court action, unless the arbitration clause itself has been challenged. Today, mandatory arbitration clauses are widespread in the United States, including by 15 of the largest 20 U.S. credit card issuers, and 7 of the 8 largest cell phone companies, and 2 out of 3 major bike sharing companies in Seattle.[10]

A significant challenge to arbitrate agreements arose out of South Carolina through the case Hooters v. Phillips. In the 1999 case, a federal district court found that Hooters modified its dispute resolution rules in 1996 to be unfair enough that the court held that the agreement was unconscionable, partly due to Hooters requiring that all of the arbitrators in dispute resolution cases be selected from a list pre-approved by the company, which included Hooters managers. In April of 2022, the United States Court of Appeals for the Fourth Circuit found that in Coady v. Nationwide Motor Sales, because Nationwide Motor Sales' contract enabled them to be the sole party permitted to modify the contract that Coady signed. Citing Hooters v. Phillips, the court expressed when an employer has the ability “in whole or in part” to modify the arbitration provision without notice to its employees.[11][12]

In 2022, the U.S. Congress passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFASASHA), which excludes these types of complaints from arbitration clauses, including retroactively. Congress also included a ban on class action waivers for claims covered under the act. Under the law, claims which are filed after March 3, 2022 and fall under the scope of EFASASHA shall have agreements to submit disputes to binding arbitration and class action waivers within contracts signed deemed unenforceable. EFASASHA allows for claims to be submitted to binding arbitration after they are filed, however motions to compel arbitration shall be invalid. The law was championed by Gretchen Carlson, a former FOXNews host sexually harassed for many years by then CEO Roger Ailes; she also opposes the use of non-disclosure agreements to shield perpetrators.[13] Some legal agencies raised concerns that the law could allow for claims attached to a sexual harassment or sexual assault dispute to bypass arbitration as well.[14]

Fairness[edit]

The use of the clause has been criticized for its unfairness. In the US in 2020, workers who challenged their employers through forced arbitration won their cases just 1.6 percent of the time.[15] This prompted members of the United States' Democratic Party to present bills limiting the scope of arbitration clauses, most notably the Forced Arbitration Injustice Repeal Act (which has yet to pass) and the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, which was signed into law in 2022 by president Joe Biden.[16]

Contractual language[edit]

A number of international arbitration bodies provide sample arbitration clauses for parties to use. Examples of these are:

  • The Chartered Institute of Arbitrators:

    Any dispute or difference arising out of or in connection with this contract shall be determined by the appointment of a single arbitrator to be agreed between the parties, or failing agreement within fourteen days, after either party has given to the other a written request to concur in the appointment of an arbitrator, by an arbitrator to be appointed by the President or a Vice President of the Chartered Institute of Arbitrators.

  • The London Court of International Arbitration:[1]

    Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.

    The number of arbitrators shall be [one/three].

    The seat, or legal place, of arbitration shall be [insert city or country].

    The language to be used in the arbitral proceedings shall be [insert language].

    The governing law of the contract shall be the substantive law of [insert governing law].

  • The International Court of Arbitration:[2]

    All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

  • The American Arbitration Association:[17]

    Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial [or other] Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

In keeping with the informality of the arbitration process, the law in England and Wales is generally keen to uphold the validity of arbitration clauses even when they lack the normal formal language associated with legal contracts. Clauses which have been upheld include:

  • "arbitration in London – English law to apply"[18]
  • "suitable arbitration clause"[19]
  • "arbitration, if any, by ICC Rules in London"[20]

Courts in England and Wales have also upheld clauses which specify resolution of disputes other than in accordance with a specific legal system. These include provision indicating:

  • that the arbitrators "must not necessarily judge according to the strict law but as a general rule ought chiefly to consider the principles of practical business"[21]
  • "internationally accepted principles of law governing contractual relations"[22]

See also[edit]

Footnotes[edit]

  1. ^ "Arbitration Pros and Cons". www.nolo.com. Retrieved June 24, 2022.
  2. ^ Rosenberg, Charles; Morgan, Eric (December 17, 2019). "Fraternal Twins: An Overview of Arbitration Law in the U.S. and Canada". Osler. Retrieved June 24, 2022.
  3. ^ Armstrong, Stephen; Bjorkquist, Sonia (September 7, 2021). "Riding the wave: recent developments with class action waivers". Osler. Retrieved June 24, 2022.
  4. ^ "International Arbitration as a Means for Dispute Resolution With Chinese Exporters | Insights | Holland & Knight". www.hklaw.com. Retrieved June 24, 2022.
  5. ^ "Class/collective actions in France: overview". Practical Law. Retrieved June 24, 2022.
  6. ^ Pouzilhac, Aramis Law Firm-Cédric de; Carrega, Marion (February 25, 2022). "In brief: arbitration agreements in France". Lexology. Retrieved June 24, 2022.
  7. ^ Section 1030 subsection 2 Zivilprozessordnung
  8. ^ To be correct: A certain form, as defined by statute, of an electronic signature using a chip card and a PIN code is also sufficient
  9. ^ Section 1031 subesction 5 of the Zivilprozessordnung.
  10. ^ Did you read the fine print? We did. These are the rights you give up by renting a LimeBike or ofo
  11. ^ "Fourth Circuit Affirms Limits on Forced Arbitration for Employment Disputes". Correia & Puth. May 13, 2022. Retrieved June 24, 2022.
  12. ^ "Hooters of Am., Inc. v. Phillips, 173 F.3d 933 | Casetext Search + Citator". casetext.com. Retrieved June 24, 2022.
  13. ^ Congress approves bill to end forced arbitration in sexual assault cases
  14. ^ "Signed Into Law: Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act". www.mcguirewoods.com. Retrieved June 24, 2022.
  15. ^ "As closed-door arbitration soared last year, workers won cases against employers just 1.6 percent of the time". Washington Post. ISSN 0190-8286. Retrieved October 27, 2021.
  16. ^ Bustos, Cheri (March 3, 2022). "Text - H.R.4445 - 117th Congress (2021-2022): Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021". www.congress.gov. Retrieved June 24, 2022.
  17. ^ American Arbitration Association (2013). "Drafting Dispute Resolution Clauses: A Practical Guide". p. 10. Archived from the original (PDF) on June 2, 2016. Retrieved July 31, 2016.
  18. ^ Swiss Bank Corporation v Novrissiysk Shipping [1995] 1 Lloyd's Rep 202
  19. ^ Hobbs Padgett & Co v J C Kirkland (1969) 113 SJ 832
  20. ^ Mangistaumunaigaz Oil Production v United Kingdom World Trade [1995] 1 Lloyd's Rep 617
  21. ^ Norske Atlas Insurance Co v London General Insurance Co (1927) 28 Lloyds List Rep 104
  22. ^ Deutsche Schachtbau v R'As al-Khaimah National Oil Co [1990] 1 AC 295

External links[edit]

Further reading[edit]

  • Gary Born. International Arbitration and Forum Selection Agreements: Planning, Drafting and Enforcing book (2010)