Schelberg & Ross LLP - Contract Arbitration

1) The "Contract" Part of Contract Arbitration.
Contract arbitration, as the name implies, is the product of an agreement or a contract. In other words, the parties to a purchase and sale agreement, or other commercial contract, include a provision in their contract obligating them to resort to arbitration should a dispute arise in the course of their dealings. The contract can, and usually does, designate the ground rules for the arbitration, including the types and limits of the remedies available to the prevailing party. It also usually provides that the arbitrator's decision will be final and binding. By agreeing to submit their disputes to binding arbitration, the parties are giving up their right to have the case heard by a judge in court and, in all but the most unusual circumstances, their right to appeal the arbitrator's decision.

In the usual case the party with the stronger bargaining position gets the better of any contract negotiation. There is little that a typical consumer or merchant bargaining with a large corporation can do to level the playing field. Usually commercial transactions involve printed form contracts with all of the significant operative provisions in boiler plate. The "negotiation" involved is often nothing more than a presentation of the contract for signature on a "take it or leave it" basis. In many cases, the person presenting the contract is an agent of the economic giant with no authority to negotiate the terms of the contract, should the weaker party initiate such discussions. Moreover, in many such situations, the weaker party is not afforded time to study the contract or seek input from his advisers. It is not unusual for contracts involving large sums of money or great potential liability to be accepted by the weaker party because he feels he really has no other practical alternative. Binding arbitration clauses, particularly when coupled with other provisions of the contract which limit the parties' available remedies or place limits on the types and amounts of allowable damages, are often the most egregious examples of this heavy handedness. Fortunately, California has begun to respond to the problem but, for the time being, merchants and consumers must still be wary.

California is often thought of as our most progressive state in the area of consumer protection. It has frequently led the way in protecting the rights of consumers and leveling the playing field for merchants engaged in commerce with parties having disproportionately strong bargaining positions. Therefore, it is not surprising to find in the statutory and decisional law of California, the genesis of legal theories that may ultimately return integrity and fairness to the alternative dispute resolution process. These theories are based in significant part on the equitable concept of unconscionability.

The application of the concept of unconscionability to contracts is not new. However, it has traditionally been made available only to consumers, presumably on the basis that consumers are less sophisticated in legal and economic matters and unlikely to have the economic strength of a corporation or other business entity involved in commerce. Thus, when the Uniform Commercial Code was adopted in some form in virtually all U.S. jurisdictions, the concept of unconscionability in contracts between merchants and consumers was expressly recognized with respect to the sales of goods or services that fall within the ambit of Uniform Commercial Code. Unfortunately, while this was a significant step in the direction of consumer protection, it did nothing to protect the smaller businessman in merchant-to-merchant transactions which are expressly excluded from the Uniform Commercial Code. In 1979, when UCC Code Section 3-302 was adopted by the California legislature and incorporated into California's version of the Uniform Commercial Code, there was much debate about the character and scope of the unconscionability concept as it would apply to California contracts. Ultimately, the California legislature, in a move that is unique among the 50 states, decided to incorporate the unconscionability provisions of UCC Section 3-302 not in the Uniform Commercial Code itself, but instead in the California Civil Code where it was incorporated into Civil Code Section 1670.5. The effect of this bold move by California's legislature was to introduce the concept of unconscionability to the entire the spectrum of contract law. This gave merchants a new tool with which to combat oppressive practices.


				CONTRACT ARBITRATION The Deck May be Stacked Against You Arbitration, often thought of as "a great leveler," permitting smaller less powerful litigants to avoid the sometimes prohibitive costs of a traditional court trial, may have gone the way of many other protective mechanisms and institutions in our society and become a "tool of the mighty." Powerful business entities have learned in some cases it is more expedient to simply use their economic power and the bargaining position it affords them to "stack the deck" in their favor in an arbitration proceeding. There are essentially two methods by which powerful business entities gain the advantage in arbitration. One is a direct result of the exercise of economic power; the other is a more subtle, indirect form of manipulation, that nevertheless can have a significant effect on the outcome of an arbitration proceeding. 1) The "Contract" Part of Contract Arbitration. Contract arbitration, as the name implies, is the product of an agreement or a contract. In other words, the parties to a purchase and sale agreement, or other commercial contract, include a provision in their contract obligating them to resort to arbitration should a dispute arise in the course of their dealings. The contract can, and usually does, designate the ground rules for the arbitration, including the types and limits of the remedies available to the prevailing party. It also usually provides that the arbitrator's decision will be final and binding. By agreeing to submit their disputes to binding arbitration, the parties are giving up their right to have the case heard by a judge in court and, in all but the most unusual circumstances, their right to appeal the arbitrator's decision. In the usual case the party with the stronger bargaining position gets the better of any contract negotiation. There is little that a typical consumer or merchant bargaining with a large corporation can do to level the playing field. Usually commercial transactions involve printed form contracts with all of the significant operative provisions in boiler plate. The "negotiation" involved is often nothing more than a presentation of the contract for signature on a "take it or leave it" basis. In many cases, the person presenting the contract is an agent of the economic giant with no authority to negotiate the terms of the contract, should the weaker party initiate such discussions. Moreover, in many such situations, the weaker party is not afforded time to study the contract or seek input from his advisers. It is not unusual for contracts involving large sums of money or great potential liability to be accepted by the weaker party because he feels he really has no other practical alternative. Binding arbitration clauses, particularly when coupled with other provisions of the contract which limit the parties' available remedies or place limits on the types and amounts of allowable damages, are often the most egregious examples of this heavy handedness. Fortunately, California has begun to respond to the problem but, for the time being, merchants and consumers must still be wary. California is often thought of as our most progressive state in the area of consumer protection. It has frequently led the way in protecting the rights of consumers and leveling the playing field for merchants engaged in commerce with parties having disproportionately strong bargaining positions. Therefore, it is not surprising to find in the statutory and decisional law of California, the genesis of legal theories that may ultimately return integrity and fairness to the alternative dispute resolution process. These theories are based in significant part on the equitable concept of unconscionability. The application of the concept of unconscionability to contracts is not new. However, it has traditionally been made available only to consumers, presumably on the basis that consumers are less sophisticated in legal and economic matters and unlikely to have the economic strength of a corporation or other business entity involved in commerce. Thus, when the Uniform Commercial Code was adopted in some form in virtually all U.S. jurisdictions, the concept of unconscionability in contracts between merchants and consumers was expressly recognized with respect to the sales of goods or services that fall within the ambit of Uniform Commercial Code. Unfortunately, while this was a significant step in the direction of consumer protection, it did nothing to protect the smaller businessman in merchant-to-merchant transactions which are expressly excluded from the Uniform Commercial Code. In 1979, when UCC Code Section 3-302 was adopted by the California legislature and incorporated into California's version of the Uniform Commercial Code, there was much debate about the character and scope of the unconscionability concept as it would apply to California contracts. Ultimately, the California legislature, in a move that is unique among the 50 states, decided to incorporate the unconscionability provisions of UCC Section 3-302 not in the Uniform Commercial Code itself, but instead in the California Civil Code where it was incorporated into Civil Code Section 1670.5. The effect of this bold move by California's legislature was to introduce the concept of unconscionability to the entire the spectrum of contract law. This gave merchants a new tool with which to combat oppressive practices.