A Contract Bearing Arbitration Clause Binds the Parties to Arbitrate with Each Other in Case of any Dispute out of the Contract and No Party can Seek Remedy without Exhausting the Arbitration Procedure Embedded in the Contract. Discuss

Right from the beginning of the civilization till today, people have been using different methods to solve differences and disputes among themselves. These methods have varied from physical combat to large battles, negotiations to courtroom litigations and so on. The more time moved on, the pressure on judicial system kept on mounting enormously. As a result, alternative ways to solutions to disputes had to be invented. It is said that in the ancient times chess was invented to avoid wars in order to give solutions to disputes among states. So the urge was always there to avoid the hassles of wars and litigations. As a result, arbitration came into the picture which is defined as a legal method for the resolution of disputes outside the courts, where the parties to an argument refer it to one or more persons by whose decision they agree to be bound. The history of arbitration is far older than anyone can imagine. The great King Solomon was an arbitrator. Philip the Second, the father of Alexander the Great, used arbitration as a means to settle territorial disputes arriving from a peace treaty he had negotiated with the southern states of Greece as far back as 337 B.C.[1] Later it got a legal framework in the nineteenth century in England and America. Now days, it is quite natural to go for arbitration in case of disputes as business people are learning that whenever possible, it is more advantageous to reach practical and private agreements than to fight for years and spent huge amount of money in courtroom battles.

 Arbitration

          The essence of arbitration is that it is an agreement between two or more parties to try to resolve a dispute outside of the court system. The parties agree upon a third party as an arbitrator who will act as a judge and jury. The number of arbitrators depends upon the agreement between two parties. After giving the parties the opportunity to present their side of the story and to present any relevant documents or other evidence, the arbitrator will act as King Solomon to decide who wins and who loses.[2]

          Most type of arbitration has something in common which is standard in any arbitration clause

• Both parties must be willing to use the process
• It is private
• The decision is made by a third party, not the people involved
• The arbitrator often decides on the basis of written information
• If there is a hearing, it is likely to be less formal than court
• The process is final and legally binding
• There are limited grounds for challenging the decision[3]

Clause generally means the “portion of a contract that speaks to a specific issue”.[4] In the event of any dispute, claim, question, or disagreement arising from or relating to this agreement or the breach thereof, the parties hereto shall use their best efforts to settle the dispute, claim, question, or disagreement. To this effect, they shall consult and negotiate with each other in good faith and, recognizing their mutual interests, attempt to reach a just and equitable solution satisfactory to both parties. If they do not reach such solution within a period of time, then, upon notice by either party to the other, all disputes, claims, questions, or differences shall be finally settled by arbitration administered.[5] We can say “Arbitration Clause in a contract requiring the parties to submit all disputes arising from the contract to an arbitrator or group of arbitrators rather than to proceed with litigation. Usually, a breach or repudiation of a contract will not nullify the clause.”[6]

            Section 1 of the Arbitration Act (AA) 1996 states that the arbitration procedure is founded on following principles

• The objective of the arbitration is to obtain the fair resolution of disputes by an impartial tribunal without necessary delay or expense.
• The party should be free to agree how their disputes are resolved subject only to such safeguards as are necessary to the public interest.
• In matters governed by this part of the act, the court should not intervene except as provided by this part.[7]

It is significant that most of the provisions set out in the AA 1996 are not compulsory. The main purpose of the act is to empower the parties to the dispute and to allow them to choose how it is to be decided. Parties can choose a single arbitrator with relevant experience, or select an arbitral panel of three or five arbitrators. Obviously, the larger the panel, the more expensive the process is going to be, and this model is likely to be used in high value commercial disputes.[8]

When arbitration is used in lower value consumer disputes, the arbitrator often makes a decision based on the written evidence which the parties send in, and doesn’t hold a hearing. This is a much quicker, cheaper process. Once the parties have decided to use arbitration and the process has begun, they usually give up their right to seek a resolution of the matter elsewhere, such as in court or tribunal.

 Enforcement of Arbitration Clause

            There are certain characteristics of the arbitration clause which makes it enforceable no matter what is the situation of the contract.

• “A written provision in any . . . contract . . . to settle by arbitration a controversy thereafter arising out of such contract or transaction, . . . or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”[9] The arbitration clause must have to be a written one, but not necessarily signed.[10]
• There must be a knowing and voluntary waiver of the right to sue in court. Both the parties have to equally aware of the fact that going into the pre-dispute ADR agreement will revoke the right to sue in court before exercising the right of arbitration process. In determining whether an employee “knowingly and voluntarily” waived the right to sue in court, the court considers: “(1) plaintiff’s experience, background, and education; (2) the amount of time the plaintiff had to consider whether to sign the waiver, including whether the employee had an opportunity to consult with a lawyer; (3) the clarity of the waiver; (4) consideration for the waiver; as well as (5) the totality of the circumstances.”[11]

      Under these circumstances, if one party refuses to go for arbitration, another party can go to the court asking for the compulsion of another party for abiding by the arbitration clause.

• Petition to compel Arbitration

In the event that one party wishes to compel another party to arbitrate a dispute, the law offers a process to file a petition with the court to compel a party’s participation in arbitration proceeding.  More often, courts are asked to enforce an arbitration agreement with the filing of a motion to stay a lawsuit.[12]

One party may want to avoid the arbitration clause by going to the court and asking for a stay over it. In that case, if both parties confer to the fact that the arbitration clause may revoked, then the court will take over the judgment on its part. But if one party really want to assert the right to arbitrate the dispute, then most of the time courts favor and encourage arbitration of disputes.[13]

            Sometimes it may happen that parties to a contract containing an arbitration clause get confused whether to exercise the arbitration clause whereas the actual contract has become unenforceable for some reason or other. In such scenario, the arbitration clause has to be exercised due to

v    The Doctrine of Separability: It is a principle which recognizes an arbitration clause/agreement contained in a main contract as being sovereign from the main contract and as such it is treated as being independent from the main contract. Therefore, the validity of the arbitration clause/agreement is in no way bound or tied to the main contract and vice versa.[14] This doctrine protects the sincerity of the arbitration agreement to arbitrate and ensure that the parties’ intention to go for arbitration is not easily overturned. That is why; the obsoleteness of the main contract will not hinder the way of arbitration for both parties.

            So it is easily understood that the arbitration clause is a binding for both parties as the court and law encourages the entities to go for arbitration and settle the dispute outside of the court.

 Factors of Arbitrarility

            The arbitration clause is not enforceable if there is unconscionability. Unconscionability is generally recognized to include an absence of meaningful choice on the part of one of the parties to a contract, combined with contract terms that are unreasonably favorable to the other party.[15] There are two types of unconscionability where the arbitration may become null and void.

Ø     Substantive unconscionability

Substantive arbitrability refers to the terms and conditions of agreement that whether they are unfair and unreasonable. In such scenarios, Arbitration clauses are unconscionable where the “clauses involved are so one-sided as to oppress or unfairly surprise [a] party.”[16] In such cases, the arbitration clauses are so unrealistic that one party has been misled where a severe imbalance of bargaining power exists. Another thing that may happen under this principle is that contract terms may be so outrageous that they are impossible in the real world scenario.

• Procedural unconscionability

Procedural unconscionability involves the circumstances surrounding the execution of the contract between the two parties and occurs where no voluntary meeting of the minds was possible.[17] The court considers several factors including age, education, intelligence, business acumen, and experience in similar transactions–whether the terms were explained to the weaker party, and who drafted the contract while determining procedural unconscionability. The most important point is whether each of the parties involved in the contract have that educational and mental acumen to clearly understand all the terms and conditions of the contract or not.

 There are other factors which will come under consideration if somebody does not want to go for arbitration.

• Assent: Both parties’ assent to the arbitration agreement is very much necessary to make that clause work. In Seawright v. American General Financial Services, a case decided by the Sixth Circuit on November 13, 2007, the court determined that continued employment after the announcement of an arbitration agreement was considered “assent” to the agreement under Tennessee law.[18]
• Mutuality: Both the parties need to be obligated to arbitrate the dispute. The agreement has to be mutual and both parties can only bring claims in arbitration.[19]
• Excessive Filing Fees: If it so happens that the filing fees for arbitration is costlier than going for a litigation, then the court may decide to go for litigation process because at the end of the day the main idea of arbitration process was to minimize the cost and the hassles.
• Limitations of Remedies: If the arbitration agreement limits remedies that the parties would otherwise get under statute then the court may decide to go for legal litigation process because it would undermine the rights protected by the statute. In Yost v. Procare Automotive Services, the Cuyahoga County Court of Appeals determined in 2007 that an arbitration agreement was substantively unconscionable where it limited an employee’s right to obtain attorneys fees in connection with a potential punitive damage award under section 4112.99.[20]
• Clerical Error: An arbitration clause may become void because of clerical error wherein the clause refers to an arbitration institution which does not exist or cannot be easily identified. A literal interpretation would rule these clauses as ineffective. However, where the institution referred to can be identified with a significant degree of certainty, such a clause would remain effective. For example, in the ICC Case No. 5103 (1988), it was held that a clause referring to the non-existent “International Section of the Paris Chambers of Commerce” should be interpreted as a valid reference to the International Chambers of Commerce.[21]

Considering the goal of an arbitration clause and the principles of the doctrine of separability, courts always tend to give the judgment on the favor of executing the arbitration function. However, there are cases where the arbitration clause was not drafted correctly and the resultant award was overturned. This was the position taken by the Ukraine Supreme Court on October 13 2010 in ?r??l?rmittal ?mbalaj ??lig? San??? ve ????r?t ?n?n?m S?rk?t? v. VKT ARDO LLC.

            Though the court always encourages going for arbitration procedure for any kind of disputes, it has the authority and power to bring justice to the situation. It not only has the power to revoke the appointment of an arbitrator on application of any of the parties where there has been a failure in the appointment procedure, but it also has powers to revoke authority of the arbitrator. This power comes into play on the application of one of the parties in circumstances where the arbitrator:

• Has not acted impartially
• Does not possess the required qualifications
• Does not have either the physical or mental capacity to deal with the proceedings
• Has refused or failed to properly conduct the proceedings, or has been dilatory in dealing with the proceedings or in making an award, to the extent that it will cause substantial injustice to the party applying for their removal.

Under s 45, the court may, on application by one of the parties, decide an preliminary question of law arising in the course of the proceedings.[22]

            Earlier, there were provisions of challenging the award of the arbitrators in the civil court which used to undermine the main objective of the arbitration procedure which is to be quick and cost effective. But later, laws have been reformed to reduce the grounds of appeal so that not anybody and everybody go to the judiciary to challenge the arbitration award. Now, once the decisions have been made, there are limited grounds for appeal. The first ground arises under s 67 of the AA 1996 in relation to the substantive jurisdiction of the arbitral panel, although the right to appeal on this ground may be lost if the party attempting to make use of it took part in the arbitration proceeding without objecting to the alleged lack of jurisdiction. The second ground arises under s 68 on the basis of some serious irregularities affected the operations of the tribunal.

 Advantages

            There are numerous advantages to be gained from using arbitration rather than the court system:

• Privacy:

Arbitration tends to be private procedure. This has the twofold advantage that outsiders do not get access to any potentially sensitive information and the parties to the arbitration do not run the risk of any damaging publicity.

• Informality:

The proceedings are less formal than a court case and they can be scheduled more flexibly than course proceedings.

• Speed:

Arbitration is generally much quicker than taking a case through the courts. Where, however, one of the parties makes use of the available grounds to challenge an arbitration award, the prior costs of arbitration will have been largely wasted.

• Cost:

Arbitration is generally a much cheaper procedure than taking a case to the normal courts. Nonetheless, the costs of arbitration and the use of specialist arbitrators should not be underestimated.

• Expertise:

The use of a specialist arbitrator ensures that the person deciding the case has expert knowledge of the actual practice within the area under consideration, and can form their conclusion in line with accepted practice.

 Disadvantages

There are no guarantees that arbitration will be a fair process. As noted, once a decision is rendered in a binding arbitration, the parties are generally stuck with that decision. Without the right to appeal, there is always the risk of being subject to the whims and prejudices of the arbitrator. Overall, this is probably the biggest drawback to the arbitration process.

Identifying other drawbacks will typically depend upon the side of the fence. For example, if a party were concerned about a large jury verdict in the event a dispute ever arose, that party would negotiate for an arbitration clause so as to keep things out of court if a dispute happens to arise. For example, in view of the potential for a large jury verdict on a wrongful termination case, this might explain why an employer would want an arbitration clause in an employment contract. Given the potential for a large jury award on a malpractice action, this would also help to explain why a medical provider would want a patient to sign an arbitration clause.[23]

            The significance of arbitration which is a form of Alternative Dispute Resolution derives from the longstanding hassles and delays in the civil courts. In order to make solutions to disputes easier and quicker, ADR came into the picture and it evolved into a practical resolution to all the parties. As the judiciary system is already overloaded with too much pressure, it is encouraged by the court to meet up all the disputes outside of the legal proceedings through arbitration. That is why there are so many bindings and restrictions that a contract bearing “arbitration clause” binds the parties to arbitrate with each other in case of any dispute out of the contract and no party can seek remedy without exhausting the Arbitration Procedure embedded in the contract.