I don’t let my real estate and construction clients sign optional arbitration provisions in contracts. Whenever I see an arbitration provision in a draft contract, I strike it out with extreme prejudice. Then I invariably get the question from the agent/broker/attorney on the other side: “What’s wrong with arbitration? It’s faster and cheaper than Court!”
The deal-breaking issue is the virtually-unlimited power of arbitrators.
Arbitrators are not bound by the law, or the facts, of your case. Let that sink in. They can decide whatever they want. They can ignore the evidence and testimony in your case on a whim. They can choose not to follow the laws applicable to your case, so long as they don’t violate an expressly-written public policy. And the only way you’ll convince a judge to overturn an arbitrator’s award is if you can show that the arbitrator was “biased,” or that they “exceeded their powers,” both of which are nearly impossible to prove in California. And even if you did succeed, the judge would just order you to have another arbitration.
Courts are slower, but they self-correct.
In Court, if a judge rules incorrectly on the law of your case, you can file a motion to reconsider, file a writ or appeal. In Court, if a jury finds facts not based on the evidence, the judge can declare a mistrial, or direct entry of a judgment notwithstanding the verdict, or you can still appeal. When an arbitrator rules incorrectly, you’re stuck with it, forever.
Is giving that much power to a stranger to make a one-time decision with no oversight a good idea? Sure, if the stakes of the case are low and you can afford to lose.
Arbitration isn’t even actually cheaper.
Court or arbitration, either way you have to pay your attorney to prepare a complaint (or demand) and serve it. Except in Court, you pay an appearance fee, which can be waived if you can’t afford it. Arbitrators, however, require deposits up front – usually much larger sums than a Court’s appearance fee. Further, because arbitration is so much faster, the bills come more frequently. You’re more likely to over-spend on discovery because of the compressed timeline. My pet theory is that arbitration is too fast – people do not have time to cool off, or consider what better things they could be spending their money on, and that actually makes it harder to settle before the hearing.
What do I do if the other side insists on arbitration?
If the other side absolutely, positively insists on arbitration and you can’t afford to cancel the deal? Insist that the contract require using a retired judge from JAMS – Judicial Arbitration and Mediation Services – with the optional “appeal” procedure.
Hope that helps.