The U.S. has been a staunch supporter of arbitration since 1925, when the U.S. Arbitration Act became law. The Arbitration Act makes arbitration agreements binding and simple to enforce, without significant exception. Rather suddenly, a substantial backlash against mandatory arbitration has appeared on the scene. One of the clearest indicators is the proposed Arbitration Fairness Act (H.R. 1020) that was introduced in the House of Representatives in February of 2009, and is still very much in play. While the anger is not directed at construction dispute arbitration, the concern is that commercial arbitration will end up being limited in important ways, as well as mandatory arbitration schemes where the use of arbitration is seen as one-sided and unfair.

The proposed AFA would limit the scope of the Arbitration Act to exclude from its coverage: a) disputes between an employer and employee arising out of their employment relationship; b) consumer disputes between an individual and the seller or provider of real or personal property, services, money, or credit for personal, family, or household purposes; and c) disputes between a franchisor and a franchisee.
More significantly, the AFA would take away in all arbitrations the arbitrators’ authority to determine the validity and enforceability of arbitration agreements. This is a hallmark of U.S. arbitration law that has been generally successful in keeping courts from interfering in the interpretation and enforcement of arbitration agreements. It would be a major departure from current federal policy and several decisions of the United States Supreme Court.

Supporters of the proposed change believe that mandatory arbitration is being used in ways unfair to parties of unequal bargaining power who routinely fail to read the “fine print” mandating arbitration in many consumer transactions, such as when opening a bank account or obtaining a credit card. Among other objections, opponents fear that adding such restrictions would have the unintended consequence of reducing the effectiveness of arbitration as a cost effective remedy for commercial disputes. In reality, the pending legislation is likely to undergo significant revisions in both House and Senate committees before any final votes are taken.

While the construction industry is not specifically targeted by the AFA, concerns have arisen that subcontractors and suppliers, for example, may attempt to claim unequal bargaining power when confronted with standard arbitration clauses contained in many form subcontracts. As a result, those concerned about cost effective and efficient dispute resolution in the construction industry, both within the U.S. and internationally, are following the AFA’s progress through Congress closely.
Laura Kamas
Andrew Ness

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2 comments

  1. I am in favor of the Arbitration Fairness Act; if this bill passes it will not mean you can’t arbitrate disputes between businesses; it will mean you can’t force consumers to arbitrate by use of binding mandatory arbitration clauses. Consumers could still voluntarily arbitrate after a dispute arose.

    The bill restores the Federal Arbitration Act to its original purpose and intent, which is to let businesses on equal footing arbitrate. Consumers are not on equal footing with businesses because they don’t do repeat business with the arbitrators.

    The repeat player effect leads to bias. In one example, the National Arbitration Forum was found to have actual financial ties to companies it arbitrated disputes for. The Minnesota attorney general sued NAF over this.

    Arbitration certainly does exist as a problem in real estate cases. Arbitration clauses in builder contracts and home warranty policies hamstring homeowners and hide complaints. One arbitration firm was being run by a twice disbarred lawyer! These may be viewed as big benefits to businesses but the unfairness to the consumer is crystal clear. Arbitration in nearly every consumer transaction now is almost always non negotiable and biased; this is why the Arbitration Fairness Act is good for the public even if it would end a sweet deal for businesses who believe escaping accountability is a legitimate business practice. Honest businesses have nothing to fear from this, but they DO have something to fear from dishonest businesses that under cut them, and do things that result in more and more regulations.

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