Arbitration Clauses in Contracts
An arbitration clause is a provision in a contract that requires disputes to be resolved through arbitration rather than in court. The general purpose of arbitration clauses is to provide a more efficient and cost-effective way for parties to resolve disputes. There is a strong federal and Maryland public policy that favors arbitration where parties have agreed in advance to resolve disputes in that manner, as this reduces the load on the civil court system, and also respects the voluntary, private choices of persons and businesses.
Benefits for companies can include:
- Lower costs than litigating in court, as arbitration proceedings generally do not involve appeals of decisions made by the arbitrator.
- More control over the process and the outcome.
- Confidentiality of the proceedings and the outcome. Unlike civil court proceedings, where the public has a right to access non-privileged records and information about court proceedings are available through online resources such as the Maryland Judiciary Case Search, arbitrations are confidential by default.
- The possibility of a more favorable outcome, as arbitrations preclude jury trials that may be more favorable to consumers, and also preclude class action lawsuits against businesses. Instead, aggrieved consumers must litigate individually in an arbitration proceeding.
Benefits for consumers can include:
- Potentially lower costs than litigating in court, though consumers need to take into account the cost of the arbitrator, which generally must be shared with the other party and must be paid in advance to file an arbitration.
- A faster resolution than in court. Arbitrations can be resolved on average in less than a year, where actions in state courts like the Maryland circuit court may take years (https://go.adr.org/impactsofdelay.html)
However, there are also costs and drawbacks to consider:
- Consumers may have less protection under arbitration than in court, especially if they are not familiar with the process or do not have the resources to hire an attorney. Generally, arbitrations are governed by different rules of procedure than civil cases, which in some cases may limit rights to obtain discovery, or limit other litigation steps.
- Consumers may be limited in their ability to participate in class action lawsuits, which can provide more leverage in disputes, and also permit pooling of small claims for resolution making the class action more cost-effective for consumers in some cases.
- Companies may use arbitration clauses to limit consumer rights and protections.
The Maryland federal district court recently decided a case involving a broad, mandatory arbitration clause in an employment agreement between a car dealership and a former manager. Brown v. Brown’s Md. Motors, Inc. (U.S.D.C. June 10, 2022). In that case, the plaintiff had entered into an employment agreement that contained a broad arbitration clause, and was subsequently terminated from his employment. The plaintiff sought to have his day in court against his employer, but his employer filed a motion to compel arbitration. In response, the court analyzed plaintiff’s claims as to the enforceability of the arbitration clause, applying Maryland contract law to the dispute. Such defenses can include: (a) claims that the agreement was not entered into or was otherwise defective, (b) applicable contract defenses like unconscionability, or (c) in this case, claims that arbitration would prevent the plaintiff from vindicating important federal rights. Ultimately, the court dismissed these claims and ordered arbitration.
If you are considering an arbitration agreement, schedule a consultation on Zoom to review the details before you enter into the agreement.