Two Kinds of Arbitration

Frequent guest commenter Rick Freeman made an important point yesterday in a comment to our post on the Apache v. Texaco case. Rick said, commenting not only on the Apache case but also on our post about Sen. West’s proposal that information about arbitrations be compiled:

Instead of a statute that says the decisions will be compiled, why not one that says that, in true arms length negotiated arbitration agreements, taxpayer financed Texas courts have NO jurisdiction to alter the arbitrator?s ruling. They only have jurisdiction to enforce it.

This comment highlights the critical distinction between arbitrations of the sort Apache and Texaco had, and arbitrations of the sort which Sen. West wants to start tracking.

The Apache v. Texaco case involved a sophisticated transaction between enormous corporate parties who wanted to jointly explore for oil under the Bohai Bay in China. One imagines fleets of lawyers poring over every detail of the contract over which Texaco eventually sued in arbitration.

In contrast, Sen. West’s proposal would only require the tracking of arbitrations conducted in consumer and employment cases, and it excludes a large segment of consumer arbitration, that is claims by homeowners against builders. In other words, Sen. West only proposes that the State track arbitration which is conducted pursuant to “take it or leave it” arbitration agreements. By way of example, your credit card agreement has an arbitration clause in it. As a credit card consumer, your options are: 1) be subject to the arbitration agreement; or 2) do not use the credit card (or any credit card, as a practical matter). This is a “take it or leave it” agreement to arbitrate, and it is quite common in consumer transactions and employment relationships.

When we talked about parties negotiating appellate review into arbitration agreements, therefore, we really meant in the context of sophisticated parties negotiating a commercial transactions. Consumers and employees do not negotiate the arbitration clauses in their lives; they take them or leave them. On the flip side, however, if those consumers and employees end up winning an arbitration, a well-developed body of case law tells them that their arbitral award ought to be easier and faster to uphold and enforce than a jury verdict. Large companies who impose arbitration on consumers and employees ought not to be able to later complain if the results in arbitration are not to their liking. Large companies dealing with other large companies, however, already have the ability to create some sort of right to complain at the front-end, when the agreement is being negotiated.

Without intending to, we seem to have highlighted this important schism in the world of arbitration yesterday. In the future, when waxing about arbitration generally, we will try to be more careful in distinguishing between commercial, negotiated arbitration agreements and consumer/employment arbitration. Thanks, Rick, for your comments. Maybe we do in fact need separate bodies of arbitral law for commercial disputes and consumer disputes.

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