Guest blogger Rick Freeman contributes commentary about a recent San Antonio Court of Appeals opinion about the enforceability of arbitration clauses. In my last article I discussed the need for fairness in arbitration agreements. Failure to have fair terms in the arbitration agreement or failure to provide a fair arbitration proceeding will result in a perceived lack of legitimacy in the arbitration result. If arbitration results are not perceived to be legitimate determinations of the disputes, arbitration as a dispute resolution method will ultimately fail. A recently decided case by the San Antonio Court of Appeals highlights one large area of perceived unfairness and illegitimacy. In the recently decided case of Olshan Foundation Repair Company v. Ayala, [No. 04-04-00829-CV], the San Antonio Court of Appeals ruled that an arbitration provision, specifically because of its high cost, was unconscionable and therefore unenforceable. I will leave it to you to read the relatively short opinion and dissent, but I will summarize the facts and arguments. The Ayalas hired Olshan to do repairs on their foundation. The repairs cost $22,000. Arbitration was compelled. The cost of arbitration as required by the contract was estimated by AAA at $63,000. The Ayalas owed $33,000 of that amount. They were invoiced by AAA and the invoice was due and payable upon receipt. At a second hearing, the trial court ruled that the cost of the arbitration (almost 50% of the annual income of Mr. Ayala and almost 3 times the cost of the repairs) was unconscionable. The court denied the arbitration on the basis of the unconscionable cost. The San Antonio Court of Appeals affirmed the trial court’s decision. The Court specifically stated that the cost of the arbitration was “shocking” to them. The dissent argued that unconscionability, as of the time of the making of the contract, was not proved by the Ayalas and that arbitration should be compelled. This type of unfairness is regularly seen in arbitration provisions. Although the high cost of arbitration effectively eliminates the rights of many individuals to litigate their claims, this is the first appellate decision that I am familiar with that has ruled the arbitration provision to be unenforceable, specifically because of the cost. The U.S. Supreme Court case of Green Tree Fin. Corp. and the Texas Supreme Court case of FirstMerit Bank both hold that the cost could make arbitration unconscionable, but in those cases, the Courts ruled that the evidence of cost presented was only of a possibility of unconscionable cost. Both Courts rules that evidence of a possibility is not enough to overturn the arbitration provision. It will be interesting to see if the Texas Supreme Court decides to accept the Olshan case for its determination. Suffice it to say, costs like in Olshan are the kind that cry out to be ruled unconscionable. In addition, any arbitration clause that effectively denies individuals the ability to litigate their claim because of high costs, ought to be declared unconscionable. Otherwise, what we have is a dispute system that is decided by income and not the facts. More and more of the arbitration clauses I am seeing effectively shut off individuals from the right to litigate a claim because of the high cost of the arbitration. If arbitration provisions that price people out of the ability to arbitrate are upheld by the Courts, the legitimacy of an entire dispute resolution system will suffer greatly. And, in my opinion, the system will ultimately fail because of its lack of legitimacy.
Continue reading...The Texas Supreme Court did not hand down any opinions this morning, but it did grant three petitions for review. If time permits, we may offer a bit of discussion as to the cases the Court has decided to review. For now, however, I’ll just post links to the underlying opinions, so that curious readers can stay up to speed. We’re still figuring out the scope of this blog, so we’re not sure if discussion of the granting of Petitions for Review would be useful to readers or practical for us to undertake. Comments are, as always, welcome. The first opinion the Court has decided to review is a bailment case out of Houston involving an agreement to store and sell bull semen. The second case the Court will hear is also from Houston, involving two close corporations organized to run a day spa. The opinion in that case is lengthy, and it contains discussions of numerous legal issues that may arise when a small business fails to turn out the way its principals envisioned. Finally, the Court granted a petition for review in a negligence case from El Paso. In that case, the El Paso Court of Appeals affirmed a trial court’s judgment that a company could be liable when one of its employees, under the influence of methamphetamine, shot an El Paso police officer. According to the Court of Appeals opinion, the testimony at trial indicated that methamphetamine use was common among the members of Defendant’s maintenance crew staying in El Paso while repairing railroad tracks, who used the drug to “stay alert and awake” while working twelve hour shifts, six to seven hours a week. Oral arguments in these three cases will be in late November. Technorati Tags: litigation, Texas Supreme Court, law
Continue reading...They’re in the news again. The National Arbitration Forum has just issued a decision in favor of AARP’s right to its pharmacy web address . Its nice to see an organized, reasoned opinion with references to other opinions ( both within and outside NAF ) and court cases as precedent. And on another happy note, in case there was any doubt, Bill Cosby IS Fat Albert. A panel of World Intellectual Property Organization arbitrators has ruled that Mr. Cosby owns the domain. A growing number of stars (who could turn down Julia Roberts ) have benefitted from arbitrations under ICANN whether done by WIPO, NAF or other authorized arbitrators. But all is not perfect in Domain Name Dispute Resolution World . Some experts debate the pros and cons of our current ICANN system. If STARS keep winning under the current system, however, I doubt we will see much change anytime soon. For more general information about domain name disputes, see a paper we presented in 2001 on the subject (the paper, of course, is a few years old and certainly needs updating). Technorati Tags: arbitration, ADR, law
Continue reading...One of the big selling points for arbitration has been discovery is supposed to be cheaper and less formal. Many in practice would disagree, concluding instead that discovery has either become sloppy and incomplete or every bit as contentious, prolonged and expensive as the system its supposed to be an alternative to. In an effort to explore the problems and potential solutions, the National Association of Securities Dealers has announced a two year voluntary pilot project designed to deal with discovery in securities arbitrations. Many who arbitrate in venues other than the NASD would argue “it ain’t the only discovery system that’s broken!” Let’s hope the NASD lead in looking at the issues (regardless of the process they have proposed) will spur the AAA, ICC, NAF, WIPO, JAMS and others to look critically at their own rules and get proactive in updating them. Technorati Tags: arbitration, ADR, law
Continue reading...Disputing is published by Karl Bayer, a dispute resolution expert based in Austin, Texas. Articles published on Disputing aim to provide original insight and commentary around issues related to arbitration, mediation and the alternative dispute resolution industry.
To learn more about Karl and his team, or to schedule a mediation or arbitration with Karl’s live scheduling calendar, visit www.karlbayer.com.
Disputing is published by Karl Bayer, a dispute resolution expert based in Austin, Texas. Articles published on Disputing aim to provide original insight and commentary around issues related to arbitration, mediation and the alternative dispute resolution industry.
To learn more about Karl and his team, or to schedule a mediation or arbitration with Karl’s live scheduling calendar, visit www.karlbayer.com.