What To Do When Your Contract Has an Arbitration Clause

You may not want to sign a contract that has an arbitration clause. And if you did sign one, you would have to go to arbitration, which may not be to your advantage.

Some contracts have arbitration clauses that are in the fine print, such as in employment and insurance contracts. Usually, in these cases, you have no choice but to accept the arbitration clause. Otherwise, you will not be insured or you will not be accepted for employment. What happens if you now have a claim and forced to arbitrate? What do you do when your contract has an arbitration clause in its fine print?

What is an arbitration clause

Most arbitration clauses in contracts will have the following same or similar wording:

“Any dispute, claim or controversy arising out of or relating to this Agreement shall be determined by arbitration.”

Why avoid an arbitration agreement?

Arbitration can be more expensive

Although many claim that arbitration is less expensive, it can actually cost more for a litigant. In arbitration, the parties share the cost of the arbitrator’s fees, which can be thousands of dollars. For example, if you were awarded by the arbitrator the amount of $100,000, but the costs of arbitration were $50,000, you will only receive $75,000 because the $50,000 cost will be shared between the two parties ($25,000 each). In contrast, other than legal fees (which can even be on contingency), parties don’t have to pay for the cost of the judge.

Arbitrators award less than juries

In addition, history has shown that arbitrators award less than juries in claims.

Some arbitrators may have bias

Arbitrators are claimed to be independent and impartial. However, some arbitrators may favor companies due to the potential of repeat business, giving them the incentive to either award lower amounts or rule in favor of companies rather than individual complainants.

Unavailability of discovery

Discovery is the procedure to obtain records and other documents from the adverse party and other third parties. Discovery is available in courts. Arbitrators, on the other hand, do not have the power to compel non-parties (such as financial institutions and medical providers) to comply with their subpoenas.

Given these reasons, it is sometimes to the best interest of a party to avoid arbitration.

Defenses from arbitration

Your first level of defense when you are forced to arbitrate is find legal grounds to avoid an arbitration agreement. Here are some grounds:

The agreement was never formed.
The agreement was formed but void.
The claim is outside the scope of the arbitration agreement.
The other party waived their right to arbitrate by litigating.

One of the most commonly used grounds to avoid arbitration is that the claim is outside the scope of the arbitration agreement. For example, the arbitration clause states that all disputes relating to the agreement are subject to arbitration. However, if the claim does not involve the performance of the contract but misrepresentation that occurred prior to the contract, this can be a claim outside the scope of the arbitration agreement.

Illegal actions may not be subject to arbitration

An argument may also be raised that illegal actions are not subject to arbitration.

For example, in New York, under CPLR § 7515, discrimination and sexual harassment claims cannot be subjected to pre-dispute agreements to arbitrate. For this reason, the New York State Division of Human Rights can still proceed to hear these claims, despite the existence of an agreement to arbitrate in the employment contract.

Some states have also barred agreements to arbitrate in bad-faith insurance claims. Bad faith insurance occurs when the insurance company acts in bad faith in the claims process and unreasonably refuses to pay a legitimate claim. Some examples are delaying approval of a claim or payment, imposing additional paperwork requirements beyond that required by the policy, and denying claims without basis.

Grounds to vacate or modify an arbitral award

If you are in New York and unhappy with the arbitral award, you need to file an application to vacate or modify the award within 90 days from receipt under CPLR § 7511.

Grounds to vacate an arbitral award

The grounds to vacate depend on whether you participated or not in the arbitration proceedings.

If you participated in the arbitration proceedings, the grounds to vacate are:

corruption, fraud or misconduct in procuring the award; or
partiality of an arbitrator appointed as a neutral, except where the award was by confession; or
an arbitrator, or agency or person making the award exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made; or
failure to follow the procedure, unless the party applying to vacate the award continued with the arbitration with notice of the defect and without objection.

If you did not participate in arbitration proceedings, the grounds to vacate are:

the rights of that party were prejudiced by one of the grounds specified in paragraph one; or
a valid agreement to arbitrate was not made; or
the agreement to arbitrate had not been complied with; or
the arbitrated claim was barred by limitation under CPLR § 7502(b).

Grounds to modify an arbitral award

The court will modify the award on the following grounds:

there was a miscalculation of figures or a mistake in the description of any person, thing or property referred to in the award; or
the arbitrators have awarded upon a matter not submitted to them and the award may be corrected without affecting the merits of the decision upon the issues submitted; or
the award is imperfect in a matter of form, not affecting the merits of the controversy.

Although arbitration is claimed to be a less expensive alternative method of dispute resolution to litigation, this is oftentimes not the case. Awards in arbitration are also lower. When you are faced with a forced arbitration clause in your insurance or employment contract, consult with an arbitration lawyer to know your defenses and remedies. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].