Arbitration Clauses in Contracts: What You Need to Know
February 26, 2020
Arbitration, not to be confused with mediation, is a form of alternative dispute resolution for resolving disputes outside of court. The American Bar Association defines arbitration as a private process where disputing parties agree that one or several individuals can make a decision about a dispute after receiving evidence and hearing arguments. Arbitration is different from mediation because the arbitrator, though neutral like a mediator, has the power to decide how the parties’ dispute will be resolved.
In Florida, arbitration is governed by the Florida Rules of Civil Procedure and Chapters 44 and 682 of the Florida Statutes. Although parties to a lawsuit can be ordered by a court to arbitrate (known as court-ordered non-binding arbitration), most often parties find themselves in voluntary and binding arbitration after entering into an agreement relating to their business relationship that contains an arbitration clause.
Arbitration clauses usually include certain terms, such as: (a) where the arbitration will take place, (b) the specific provider or private organization that will administer the proceeding and provide an arbitrator (such as the American Arbitration Association (AAA) or JAMS), (c) the number of arbitrators that will hear and decide the case, and (d) whether the costs will be split by each party or whether the prevailing party is entitled to recover their reasonable attorneys’ fees and costs. Arbitration clauses can also carve out or exclude certain issues that must be brought before a court, such as injunctive relief. However, newer rules, such as the AAA’s rules issued in 2013 make its new procedures more court-like in many respects. For example, newer rules allow for emergency injunctive relief, dispositive motions, and appellate procedures to be administered by an arbitration appellate panel.
Below is a sample arbitration provision from the American Arbitration Association (AAA):
Any dispute, controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by binding arbitration administered by the American Arbitration Association (AAA) in accordance with its Commercial [or other] Arbitration Rules which shall take place in West Palm Beach, Florida, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
Voluntary arbitration can be binding or non-binding, but typically parties opt for binding arbitration when they choose to include an arbitration provision in their contracts – so that the decision of the arbitrator brings finality. Advantages of binding arbitration include more streamlined litigation and results and often times, simpler procedures. Additionally, arbitration is more flexible than litigation when it comes to scheduling, and they are confidential because the public forum of the courtroom is eliminated. An arbitration action, unlike one in litigation, does not create a public record and it can keep ugly disputes out of the public’s eyes, which can be particularly harmful to one’s reputation or a company’s ongoing business.
Another signification advantage of arbitration is that if the subject matter of the dispute requires special or technical knowledge (such as with construction, real estate, healthcare or intellectual property law), the parties can choose an arbitrator who has expertise in that particular field.
Like all things, however, binding arbitration also has disadvantages. Perhaps the most significant is that a binding arbitration ruling can be difficult to appeal (in very limited circumstances set forth in Section 44.104(10)), and can only be set aside in situations in which the objecting party is able to prove that the arbitrator was biased or that the decision violates public policy. Additionally, the rules of evidence may not be strictly enforced in arbitration, and there is no automatic right to discovery, such as depositions or written discovery requests (although the parties can certainly agree to it and request it depending on the type of dispute). And arbitration can be expensive—sometimes more expensive than litigation. Arbitration filing fees can be considerably more than state or federal court filing fees and, in addition to paying for your own lawyer, the litigants will be responsible for paying for the hourly rates of the arbiter(s). Fee schedule for a claim brought under the AAA’s Commercial Rules can be viewed here.
These disadvantages notwithstanding, however, more and more parties are opting to include arbitration provisions in their commercial agreements, undoubtedly to reap the benefits that binding and private arbitration offers.
It’s important to know that courts in Florida generally favor arbitration provisions and try to resolve any ambiguity in favor of arbitration. Because arbitration provisions are contractual in nature, however, construing those provisions and the contracts in which they appear is still a matter of contract interpretation for the court. Shotts v. OP Winter Haven, Inc., 86 So. 3d 456, 464 (Fla. 2011). Accordingly, when a party to an arbitration clause contests its enforceability, it is for the court, not the arbitrator, to determine “whether a valid written agreement to arbitrate exists.” Id. at 471.
When evaluating whether to compel arbitration pursuant to written agreement, a court must consider: “(1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived.” Hobby Lobby Stores, Inc. v. Cole, No. 5D18-3809, 2020 WL 34288, at *1 (Fla. 5th DCA Jan. 3, 2020). An arbitration clause can be defeated by any defense existing under contract law. See id.; Shotts, 86 So. 3d at 464.
If you’re considering adding binding arbitration clauses to your agreements, or need advice on the validity or enforceability of an agreement to arbitrate, be sure to consult an experienced contract and business litigation lawyer.
The AV-rated attorneys at Chane Socarras, PLLC regularly handle various complex business and contractual disputes, litigation in alternative dispute forums like arbitration and mediation. For more information on this or other topics related to arbitration, click here to contact the business litigation firm of Chane Socarras, PLLC or call us at (561) 309-3190.