LEGAL
Arbitration clauses are a staple of nearly every business contract.
Although they can vary somewhat, these clauses generally provide that, should a dispute arise between the parties to the contract, they will forgo litigation in favor of arbitration.
These arbitrations are usually, but not always, administered by the American Arbitration Association (AAA) or some similar private organization.
The AAA does not actually conduct arbitrations itself, but instead provides rules and procedures for arbitrators to follow, in addition to providing administrative support.
For anyone familiar with arbitration clauses, this should all be old news.
But, as a new ruling illustrates, arbitration isn't quite as fully stocked as the courts are with legal avenues.
The decision is Quench LLC v. Liquor Group Wholesale, out of the U.S. Middle District of Florida.
The ruling is the result of a motion to vacate an arbitration award.
The dispute was between a group of liquor-manufacturing California corporations (the petitioners) and Liquor Group Wholesale (LGW), a liquor distributor.
After an arbitration award that was "largely in favor of" the petitioners, LGW moved the court to vacate this award, arguing two theories.
First, that the arbitrator lacked jurisdiction over LGW and second, that the arbitrator prejudiced LGW by waiting until after the final hearing before deciding if newly-named respondents were subject to the arbitrator's jurisdiction.
Under U.S. law, there are only four specific circumstances under which a court may vacate an arbitration award:
Even within these limited avenues, the battle to vacate an arbitration award is a steeply uphill one.
First, an arbitrator need not state the reasons for the award.
Instead, the presumption is that arbitration awards are correct.
To overcome this presumption, the moving party must assert sufficient grounds to vacate the award.
However, for an award to be vacated, the reviewing court must be unable to infer any ground for the decision from the facts.
In other words, the reviewing court presumes the arbitration decision is correct, even without any explanation from the arbitrator himself, unless the court can fathom no basis for the decision.
Obviously, this isn't like an appeals court reviewing a district court decision.
Under these legal circumstances, it should come as no surprise that the court denied LGW's motion to vacate.
Albeit the respondent's attorney seemingly made several missteps (at least according to the opinion) that the court relied upon in making this ruling, but it seems unlikely that LGW would have prevailed even if these missteps were absent.
To make this loss even more stinging for LGW, the court confirmed the arbitrator's award of $34,160 to the petitioners, and additionally allowed for the petitioners' recovery of attorney's fees and costs (in an amount to be later determined).
Although it isn't standard procedure for the prevailing party to make the loser reimburse its costs, it is fairly standard for arbitration clauses to include such a provision (e.g., "prevailing party...shall be entitled to recover its reasonable costs, attorneys' fees, including costs and fees on appeal").
The lesson here isn't to just avoid arbitration and the clauses that bind parties to such dispute resolution methods.
There are many benefits to using arbitration instead of the courts, such as lower costs and much higher privacy protections.
The lesson, though, is to simply be aware of the rights forfeited by using arbitration, and to realize that, absent a completely bonkers decision by the arbitrator, you will be bound by the result of arbitration.
Jeremy Byellin is a practicing attorney in the state of Minnesota and a writer for the Westlaw Insider blog. His articles for the blog cover a wide range of legal topics, with a specific focus on major legal developments and cyberlaw.
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