May 27, 2016

The Risks of Arbitration: Part 2


This article originally appeared in the May 23, 2016, edition of the Daily Journal of Commerce

In the February edition of the DJC Dirt Law Column, I warned of the risks of arbitration. Recently, the dangerous arbitration statute, ORS 36.695, has come into play in an important Oregon Supreme Court decision, Couch Investments, LLC v. Peverieri.

The dispute was about who should be liable for storm water drainage improvements required by the Oregon Department of Environmental Quality. Peverieri, the landlords, believed that Couch Investments should be responsible. Couch Investments, the tenants, believed that Peverieri should be responsible. They both signed a stipulation to arbitrate and limit claims. In that stipulation, there was a very consequential phrase to the case “The only issue to be resolved through arbitration is whether [tenant], as tenant, or [landlords], as landlord, are liable under the lease that is the subject of the above actions (the lease) for the cost of storm water drainage improvements required by the Oregon Department of Environmental Quality (the DEQ Issue).”

After the arbitration proceedings, the arbitrator ruled that Couch Investments should make the necessary improvements and that Peverieri should foot the bill (assuming the bill is under $32,500). Peverieri believed that the arbitrator overstepped his bounds in prescribing a remedy because the decision he was faced with per the stipulation was who was liable. He was not asked to do anything beyond that.

All the way up to and including the Oregon Supreme Court, the courts ruled in favor of Couch Investments. Why? Because the quoted section of the stipulation could easily be interpreted as “the only issue we are covering is storm water drainage” and not as “the only thing the arbitrator can decide is liability for storm water drainage improvements.” Couch Investments argued that there were many disputes involving the relationship between these two entities and the quoted section of the stipulation was to express that only the dispute concerning storm water drainage would be covered in arbitration.

The court likely would have ruled in favor or Peverieri if they more explicitly expressed their intent to waive ORS 36.695(3), which gives the arbitrator broad powers by stating, “As to all remedies other than those authorized by subsections (1) and (2) of this section, an arbitrator may order such remedies as the arbitrator considers just and appropriate under the circumstances of the arbitration proceeding. The fact that such a remedy could not or would not be granted by the court is not a ground for refusing to confirm an award under ORS 36.700 (Confirmation of award) or for vacating an award under ORS 36.705 (Vacating award).”

In fact, in the opinion issued by the Oregon Supreme Court, Justice Martha Lee Walters draws attention to Peverieri’s failure to waive the rules of arbitration statues numerous times. Specifically, she states, “In this case, tenant contends, the parties did not waive or vary the arbitrator’s default authority to order remedies; the stipulation to arbitrate contains no express invocation of ORS 36.610(1), and a waiver cannot be implied from its wording.”

That statute she mentioned, ORS 36.610(1), gives parties the ability to waive or vary the effect of the requirements of ORS Chapters 36.600 to 36.740. Those are a lot of rules that can be changed, but only if they are altered before the arbitration agreement is signed. The real kicker is that Peverieri may very well have been trying to do just that. Yet, not only were they unable to receive the protections they were hoping for because the stipulation was too vague, but the stipulation was specific enough in other regards that it qualified as a valid agreement to arbitrate under ordinary principles of state contract law, and as a result they were unable to vacate the arbitration by proving the agreement to arbitrate was null. So remember to invoke ORS 36.610(1) and be specific about what rules you want changed the next time you enter an arbitration agreement.


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