When entering into an agreement, businesses are often faced with whether to agree to a contract containing a mandatory arbitration provision. Arbitration is generally a contractual proceeding by which the parties to a controversy agree to, in order to obtain a speedy and inexpensive final disposition of the disputed matter, select arbitrators or judges of their own choice, and by consent submit the controversy to those arbitrators for determination.[1]
Many businesses and attorneys drafting and negotiating contracts give little thought to the arbitration provisions. They may simply acquiesce rather than thinking through the potential pros and cons of entering into a binding agreement containing a mandatory arbitration clause.
Arbitration is favored under both federal and Texas law.[2] Arbitration awards are entitled to great deference in a court of law.[3] In Texas, written arbitration agreements are valid and enforceable if the agreement is to arbitrate a controversy that exists at the time of the agreement or arises between the parties after the date of the agreement.[4] Likewise, federal law provides that arbitration agreements are valid, irrevocable, and enforceable, except on such grounds as exist at law or in equity for the revocation of any contract.[5]
Trials are Public; Arbitrations are Private.
The privacy afforded by an arbitration proceeding makes it an attractive forum for resolution of business disputes. Unlike court proceedings, which are public events, arbitration proceedings take place in a private setting and do not become part of the public record.[6] This means that the public and members of the press are not entitled to attend the arbitration hearing and observe the testimony of witnesses and presentation of evidence that a business might prefer remains out of the public eye. This also means that other potential claimants and their attorneys will not have easy public access to the record of the arbitration proceeding, including arbitration materials disclosing a party’s claims or defenses, admissions made by a party, or the identity of a party’s fact or expert witnesses. Because the arbitration award is not published, it does not create any precedent that must be followed in the future. For these reasons, many large companies include arbitration provisions in their employment agreements.
Arbitrations Involve Less Time and Money.
Arbitration is often thought of as a streamlined process that is less expensive than a traditional lawsuit. In fact, it is intended as a lower cost, efficient alternative to litigation.[7] Arbitrations involve far less written and deposition discovery than a traditional lawsuit, resulting in substantial cost savings. For example, arbitration of disputes over consumer contracts theoretically reduces the merchant’s operating costs, thereby producing savings passed on to the consumer in the form of lower prices.[8] Arbitration awards typically are final and non-appealable, producing finality in outcomes much more quickly than lawsuits in which the parties may pursue appeals and possibly even new trials for years after the entry of judgment. Because there is no right of appeal in arbitration, both parties avoid having to incur the expense of appellate legal fees after the award is issued.
However, the cost savings may not be as obvious in a high-dollar complex contract dispute where, for example, a three-arbitrator panel is appointed and must expend substantial time managing the arbitration process from preliminary matters through preparing for and conducting a four-to-six-week hearing. Although judges’ salaries are funded by public resources, arbitrator fees, which vary based upon the arbitrator’s credentials, knowledge, and experience, are paid by the parties and are a significant expense in addition to each party’s own attorney’s fees. And, unlike trials, which are conducted in “free” public courtrooms using available courtroom technology resources, arbitration hearings take place in private venues, the cost of which is funded by the parties.
Outcomes Determined by Arbitrator, Not a Jury of Peers.
There is no right to a jury trial in an arbitration proceeding. Instead, the outcome is decided by the arbitrator or panel of arbitrators selected by the parties. The arbitrator most likely will be a professional with specialized skills, knowledge, and experience who is qualified to decide the dispute. By contrast, a traditional jury panel likely will consist of unsophisticated citizens with wildly varied backgrounds, points of view, and experience levels. In most complex contract disputes, it would be perceived as less risky to have a dispute decided by a qualified and seasoned arbitrator or panel. However, the risk posed by a flawed arbitration award may be far greater than a rogue jury verdict considering that the flawed arbitration award cannot be appealed.
These are but a few considerations that should be weighed by businesses before signing off on an agreement containing a mandatory arbitration provision.
The Texas Business Court; a Fresh Alternative to Arbitration.
Effective September 1, 2024, the recently created Texas Business Court opened for business in five divisions located in the major business centers of Texas.[9] The Texas Business Court has jurisdiction with respect to certain specific commerce and corporate governance-focused claims.[10]
Unlike civil court judges, Business Court judges are required to have ten or more years of experience in complex civil business litigation, business transaction law, and/or as a civil court judge. Ten Business Court judges have already been appointed by Governor Greg Abbott.[11]
Business Court litigants are entitled to an in-person jury trial, and Business Court judges must issue written opinions on dispositive matters, at the request of a party, and on important issues. Appeals from the Business Court will be heard by the newly created Fifteenth Court of Appeals.[12]
In concept, the Texas Business Court presents a happy medium between arbitration and traditional litigation, combining the streamlined arbitration process and enhanced knowledge and competence of an arbitrator with the lower cost public forum, access to a jury trial and appeals process. Eventually, the Texas Business Court may provide more predictability and less risk with a known slate of qualified judges and written precedents to be followed, as compared to an arbitrator or panel of arbitrators.[13] It remains to be seen whether the Texas Business Court will progress disputes to resolution more quickly than arbitration (usually 12 months).[14]
Time will tell if the Texas Business Court will become a viable forum for disposition of complex contract disputes within its jurisdictional arena that should be considered by businesses in their contract negotiations.
Initiating Arbitration.
A party seeking to enforce an arbitration provision must file a motion to compel arbitration.[15] That party has the burden of showing that (1) there is an agreement to arbitrate and (2) the opposing party refused to arbitrate.[16] The party seeking to avoid going to arbitration can raise affirmative defenses to the enforcement of the provision.[17] Those affirmative defenses include arguing that an arbitration agreement is either substantively or procedurally unconscionable, or both.[18] Substantive unconscionability refers to the fairness of the arbitration provision itself, whereas procedural unconscionability refers to the circumstances surrounding adoption of the arbitration provision.[19] Waiver can also be raised as a defense to a motion to compel arbitration.[20]
A court’s ruling on a motion to compel arbitration is subject to an appeal.[21]When a trial court’s ruling on a motion to compel arbitration is appealed, the ultimate issue is whether that arbitration agreement is against public policy or unconscionable, which is a question of law for the appellate court.[22]
Conclusion.
Arbitration can be a cost-effective way to handle an otherwise burdensomely expensive dispute, but it comes with potential drawbacks that should be considered during the contract negotiation process. The new Texas Business Court may eventually provide a viable alternative to arbitration as an agreed forum for resolution of contract disputes.
[1] Blue Cross Blue Shield of Tex. v. Juneau, 114 S.W.3d 126, 134 (Tex. App.—Austin 2003, no pet.) (citations omitted).
[2] See In re Olshan Found. Repair Co., LLC, 328 S.W.3d 883, 892 (Tex. 2010)
[3] Id.
[4] Tex. Civ. Prac. & Rem. Code § 172.031.
[5] See In re Poly-America, L.P., 262 S.W.3d 337, 347 (Tex. 2005) (quoting 9 U.S.C. § 2) (“Section 2 of the FAA provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”) (emphasis added by the Court).
[6] See 3 L of Intl Trade § 70:15 (“In addition to being a “friendlier” environment, arbitration is a private process. Unlike court proceedings, arbitration proceedings do not become part of the public record and are generally not public events”) (citations omitted).
[7] Id., at 893.
[8] Id.
[9] Katherine D. Hoke, Texas Business Court Shaping Up with Judicial Appointments, https://shieldslegal.com/texas-business-courts-shaping-up-with-judicial-appointments/ (July 17, 2024); see also Daena Goldsmith Ramsey, Texas Governor Greg Abbott Signs Bill Creating New Texas Business Court to Open September 2024, https://shieldslegal.com/texas-governor-greg-abbott-signs-bill-creating-new-texas-business-courts-to-open-september-2024/ (November 28, 2023).
[10] Id.
[11] Daena Goldsmith Ramsey, Texas Governor Greg Abbott Signs Bill Creating New Texas Business Court to Open September 2024, https://shieldslegal.com/texas-governor-greg-abbott-signs-bill-creating-new-texas-business-courts-to-open-september-2024/ (November 28, 2023).
[12] Katherine D. Hoke, Texas Business Court Shaping Up with Judicial Appointments, https://shieldslegal.com/texas-business-courts-shaping-up-with-judicial-appointments/ (July 17, 2024).
[13] Brittany Ringel Walton, Advising Corporate Clients on Dispute Resolution in the New Texas Business Court –An In-House Attorney’s Perspective, 106 The Advoc. (Texas) 30, 31 (2024) (“The Texas Business Court may provide more predictability with a known slate of judges versus party-appointed arbitrators”).
[14] See id. (“Timing: Unknown whether the Texas Business Court will progress cases to resolution more quickly than arbitration (which is usually 12 months), but presumably the specialized business court will not have backlogs that hamper district courts”).
[15] S.C. Maxwell Fam. P’ship, Ltd. v. Kent, 472 S.W.3d 341, 343 (Tex. App.—Houston [1st Dist.] 2015, no pet.).
[16] Tex. Civ. Prac. & Rem. Code § 171.021
[17] Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168, 177 (Tex. App.—Dallas 2013, no pet.) (citations omitted).
[18] See Id., at 180-182 (Discussing a party’s arguments that the arbitration agreement was unconscionable).
[19] Taylor Morrison of Tex., Inc. v. Skufca, 650 S.W.3d 660, 677-78 (Tex. App.—Houston [1st Dist.] 2021, no pet.) (citations omitted).
[20] Pilot Travel Centers, LLC, 416 S.W.3d at 182.
[21] See Id., at 172, 175 (reviewing an interlocutory appeal of a motion to compel arbitration).
[22] Royston, Rayzor, Vickery, & Williams, LLP v. Lopez, 467 S.W.3d 494, 499 (Tex. 2015) (citations omitted).
