Ethics of Commercial Arbitration Clauses
As previously discussed, going to court to solve a dispute is a costly endeavor, and for large companies, it is
possible to incur millions of dollars in legal expenses. While arbitration is meant to be a form of dispute
resolution that helps disagreeing parties find a low-cost, time-efficient solution, it has become increasingly
important to question whose expenses are being lowered, and to what effect. Many consumer advocates are
fighting against what are known as forced-arbitration clauses, in which consumers agree to settle all
disputes through arbitration, effectively waiving their right to sue a company in court. Some of these forced
arbitration clauses cause the other party to forfeit their right to appeal an arbitration decision or participate in
any kind of class action lawsuit, in which individuals who have a similar issue sue as one collective group. For
example, in 2006, Enron investors initiated a class action lawsuit against executives who hid the company’s
losses and were awarded $7.2 billion dollars. While this example represents a case where the company being
sued was clearly in the wrong, it is important for large companies to be ethical in their use of arbitration
clauses. They should not be used as a way to keep wrongdoings “quiet” or to limit consumers’ abilities to
obtain rightful retribution for products and services that do not perform as promised.
Arbitration Procedures
When parties enter into arbitration, certain procedures are followed. First, the number of arbitrators is
decided, along with how they will be chosen. Parties that enter into willing arbitration may have more control
over this decision, while those that do so unwillingly may have a limited pool of arbitrators from which to
choose. In the case of willing arbitration, parties may decide to have three arbitrators, one chosen by each of
the disputants and the third chosen by the elected arbitrators.
Next, a timeline is established, and evidence is presented by both parties. Since arbitration is less formal than
court proceedings, the evidence phase typically goes faster than it would in a courtroom setting. Finally, the
arbitrator will make a decision and usually makes one or more awards.
Not all arbitration agreements have the same procedures. It depends on the types of agreements made in
advance by the disputing parties. Consider the following scenario: the owner of a large commercial office
building uses a lease agreement, which stipulates that arbitration will be used to settle the renewal terms of a
lease. For example, the lease may state that, at the end of year one, the second year’s lease payment will be at
current market value, and if the tenants cannot agree on that value, they will then allow an arbitrator to
decide. If the building owner feels that the renewal rate should be $40/square foot and the tenant feels it
should be $20/square foot, an arbiter who may not be an expert in local real estate values might decide to
resolve the dispute by using a rule of thumb, such as “splitting the difference.” In this case, the arbiter might
decide that $30/square foot represents a fair lease renewal rate.
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Chapter 2 Disputes and Dispute Settlement
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