February 23, 2016

The Risks of Arbitration


This article originally appeared in the February 22, 2016, edition of the Daily Journal of Commerce

Arbitration has become increasingly common in recent years. Many contracts, for both businesses and consumers, now include a provision that requires disputes be resolved in arbitration. While arbitration is a very cost-effective way to resolve disputes, there are inherent risks involved. By choosing to bypass the court system, you are also choosing to bypass the certainty that the decision rendered will be in agreement with the law. Though there is never complete certainty that a court will rule in perfect agreement with the written law (which is why our system includes appeals courts), there is far more certainty compared to arbitration.


Mediation and arbitration are governed by Chapter 36 of the Oregon Revised Statutes, and nowhere within does it state that the arbitration decision must be based on the laws in effect. More specifically, ORS 36.695 states that arbitrators do not have to base their decision on how a court would decide, “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).”


Instead of defining the criteria that arbitrators must use to make decisions, Chapter 36 is concerned with the rules of how and in what circumstances a dispute moves to mediation or arbitration. The court only decides to move the dispute to arbitration and enforces the arbitration decision. All other matters are referred to the arbitrator. Grounds for appealing an arbitration decision exist but are limited. The reason they are limited is that arbitration is designed as an alternative to court trials. It would defeat the purpose of arbitration to have the courts heavily involved in decisions made by arbitrators.


Let’s look at an example in real estate law, which relies heavily on boilerplate documents. One of these documents, the earnest money agreement, is used in almost every real estate transaction. An earnest money agreement is a show of good faith similar to a security deposit. It requires a potential buyer to deposit a certain sum of money, oftentimes in an escrow account, to let the seller know that he or she is serious about purchasing the property.


The form commonly used in Oregon contains a provision that specifies the arbitration will be administered by the Arbitration Service of Portland. However, the provision does not indicate what the internal rules of the arbitration service are, nor does it specifically state that the arbitrator is required to follow the law. Most alarming of all, there is no warning that the parties may not be given the protections of the disclaimers and waivers contained in the earnest money agreement. Depending on the opinion of the arbitrator, moving to arbitration could undo a large part of what you believed you were entitled to by the agreement.


So what do you do when you receive a contract with an arbitration provision? Revise it instead of signing it. You should be careful about signing any arbitration agreement, particularly if the provision does not state that the arbitrator must award based on the law, and failure to do so is grounds to vacate the award. I encourage you to consult an attorney on how to best revise arbitration provisions to protect yourself from unwanted surprises.


For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.

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