Binding Arbitration: Yes or No? You’ll never have a runaway jury with an arbitration. But you’ll also be hard-pressed to get appellate review of a skewed arbitration award.
In most cases there’s no clear-cut formula for determining whether trial or arbitration will better serve the unique needs of your case. Carefully analyzing the several trade-offs between trial and arbitrations may make one option more attractive. Procedural cost is one of the trade-offs worth considering in deciding whether to enter into a binding arbitration agreement.
Private arbitrators are paid by the parties. Judges are paid by taxpayers. We don’t use three-judge panels in trial court but binding arbitrations are sometimes determined by three-arbitrator panels. In lengthy cases, arbitration costs can add up fast. Such costs can be a significant consideration for parties involved in arbitration. Many arbitrations involve claims between parties with highly disparate financial resources. A well-funded party may want to force a matter into arbitration for the very reason that the other side may be financially disadvantaged by high arbitral costs.
Arbitration agreements usually don’t account for such financial disparities, but sometimes the law does. Arbitration agreements are typically written in absolute terms: If either party requests binding arbitration, the other side must arbitrate regardless of the cost. But what happens if the respondent truly cannot afford substantial arbitration costs involved in a complex arbitration matter?
The case of Weiler v. Marcus & Millichap Real Estate Investment Services, Inc. (2018) 22 Cal. App. 5 th 970 is instructive. Plaintiffs in that case had previously been wealthy. They lost millions of dollars in a soured real estate investment. They filed a complaint against the defendant seeking substantial damages arising from allegedly poor real estate investment advice. The Defendant filed a motion to compel arbitration, which was granted. A panel of three arbitrators was to decide the matter. After spending more than $15,000 in arbitration costs, the plaintiffs filed a separate suit in court asking that the defendant either be ordered to pay the plaintiff’s share of arbitration costs or that the arbitration be remanded to the superior court for a court trial.
The Defendant moved for summary judgment. The court analyzed the issue as one of whether or not the arbitration agreement was unconscionable due to the costs of arbitration, concluding that any unconscionability was to be determined at the time the arbitration agreement was made and not years later down the road when a dispute arose. Because plaintiffs were wealthy when the arbitration agreement was made, the court found no unconscionability due to the cost of the arbitration proceedings. It granted defendant’s motion for summary judgment.
On appeal, the court of appeal reversed and stated:
“Though the law has great respect for the enforcement of valid arbitration provisions, in some situations those interests must cede to an even greater, unwavering interest on which our country was founded – justice for all. . . [A] party’s fundamental right to a forum she or he can afford may outweigh another party’s contractual right to arbitrate.” Id. at 973-974.
The effect of the court’s reversal was that the plaintiffs were given the opportunity to present evidence in the trial court about their financial situation for the purpose of demonstrating whether or not they could afford the very expensive fees that would certainly be incurred in the arbitration process.
So, what’s the take home? Arbitration agreements are enforceable – except for when they aren’t. This case highlights one of the many considerations involved in determining whether to enter into an arbitration agreement in any given situation.
Robert Jacobs is a neutral with Judicate West. He litigated cases throughout California for more than 30 years and now serves as a mediator and arbitrator in Real Estate, Business, Construction, Personal Injury, Employment, Medical and Dental malpractice and Trust Litigation cases.