ARBITRATION CLAUSES:
ONE SIZE DOES NOT FIT ALL

Arbitration clauses are now commonly found in employment and commercial contracts as the designated method of dispute resolution. The potential advantages of choosing binding arbitration over court litigation vary, but often include the following: (1) avoidance of jury trials and potentially large jury awards; (2) disputes are generally brought to a hearing and concluded much sooner than those that are litigated in court; (3) reduced dispute resolution costs and legal fees in most instances; and (4) avoidance of lengthy and costly appeals. The potential disadvantages of improperly using arbitration clauses can include costly litigation, delay, and frustration.

Not all Arbitration Clauses are Enforceable
Expansive federal and state arbitration statutes provide for the enforcement of agreements to arbitrate. However, despite this apparent legislative approval of arbitration as an alternative forum for dispute resolution, courts do not always enforce arbitration clauses. Arbitration provisions that are offered to a party with unequal bargaining power, on a take-it-or-leave-it basis, or on terms that shift the costs of arbitration to the other party and without fully advising them of the rights they are giving up, have been held to be unenforceable.

Arbitration in Employment Relationships
In employment relationships governed by both employment contracts and employee handbooks, courts have refused to enforce arbitration clauses where the employees had no opportunity to negotiate the clause, did not knowingly agree to waive their jury trial rights, and where the employees were required to pay half of the upfront costs of the arbitration (filing fees and arbitrators' fees). For employee handbooks specifically, Oregon courts generally have not warmly accepted the practice of including arbitration clauses. In a 2004 decision, an Oregon federal district court held that an employee must knowingly agree to arbitrate employment disputes before any statutory rights are waived. The court added that if the employee gives up the right to a jury trial in exchange for employment, that condition must be explicitly presented to the employee, and the employee must explicitly agree to waive that specific right. Gaines v. Mr. Formal, Inc., 2004 U.S. Dist. LEXIS 15290 (D. Or. 2004).

Commercial Contracts
The enforceability of arbitration clauses is also a key issue in drafting commercial contracts. Businesspeople understand that when two businesses exchange their respective standard contract forms with conflicting terms, litigation in court is sometimes necessary to determine which of the parties' contract terms will be enforced (sometimes called a "battle of the forms"). Given this possibility, it is important to determine from the outset which party's contract provisions will control the business relationship. If a business wants to ensure that its contract terms control the relationship, it should make acceptance of each offer expressly limited to its terms. And those terms - including the arbitration clause - need to be enforceable, at least if the business wants to avoid costly litigation.

When proposing a commercial contract containing an arbitration clause, or when a company finds itself potentially subject to an arbitration clause, take the time to determine if the particular clause is likely to be enforceable. Not doing so may result in costly litigation over the arbitration clause itself before the underlying contract dispute can be resolved.

Drafting Tips
There are many elements to crafting an enforceable arbitration clause. Some of the key elements are set forth here. Properly drafted arbitration clauses should identify the arbitration service provider, the rules that will govern the proceeding, the laws that will govern the dispute, and the location where the arbitration will take place. The clause should specify how many arbitrators will be used, and allocate responsibility for upfront expenses. The arbitration clause should provide that the arbitration is binding, and should make clear whether all disputes - or just particular types of disputes - are subject to resolution by arbitration. Arbitration clauses may also expressly encourage, or even require, that the parties participate in mediation prior to arbitrating their dispute. Arbitration clauses may also address attorney fees and costs, and can include provisions allowing arbitrators to award the costs of arbitration to one or more of the parties. If the parties will be free to seek injunctive or equitable relief from a court to compel or enforce the arbitration award, the arbitration clause should so provide.

Ask an Expert
Employers and companies utilizing arbitration as a dispute resolution mechanism should be cautious in drafting arbitration clauses. Again, the disadvantages of using a poorly-drafted arbitration clause can be significant, and can outweigh the potential benefits to be gained.

If you would like assistance reviewing, drafting, negotiating an arbitration clause, please contact Randall L. Duncan, Chair of our Closely Held Business Team, or Robert A. Kerr, a partner in Dunn Carney's employment law practice group. We will be happy to accommodate your request.

Closely Held
Business Team

The Closely Held Business Team - Dunn Carney is dedicated to assisting business owners in navigating through the opportunities and challenges the law presents to advance each owner’s success in business. They understand the multifaceted issues business owners face each day and the need for responsive and proactive legal counsel.

Team members include:
Randy Duncan, Team leader
Bob Allen
Shane Antholz
Ric Ashe
John Barhoum
Merrill Baumann
David Buono
Brian Cable
Jack Cooper
Ken Davis
Tim Hering
Frank Hilton
Elizabeth Howard
Scott Jonsson
Robert Kerr
JoDee Keegan
Kelly Martin
David Rossmiller
Eric Smith
Kyle Stinchfield
Dan Vidas
Matt Wilmot
Bob Winger
David Zehntbauer