The Dangers of Arbitration

Arbitration amounts to privatization of dispute resolution. Many of the States, including Alabama, had a stated policy specifically excluding the possibility of contracting away the right to go to court before federal legislation preempted state law. In 1925, Congress enacted the Federal Arbitration Act to require dispute resolution through arbitration if the parties to a contract agree to binding arbitration for dispute resolution. In the 1980s, the Supreme Court upheld that legislation and after that, arbitration quickly expanded. Arbitration has now displaced the role of courts in most matters involving a contract, regardless of the nature of the dispute. The provisions of that Act are binding on both state and federal courts. Those who enter into an arbitration agreement must submit to arbitration rather than going to court. The Federal Arbitration Act applies to all transactions involving interstate commerce and overrides any state law to the contrary.

While the law seemingly went somewhat unnoticed in Alabama, and perhaps other states, until 20 or 30 years ago, during that period of time, arbitration has largely superseded the availability of court remedies in connection with any matter involving interstate commerce where anyone has entered into a contract with a corporation. Purchases of automobiles, disputes about employment, and other instances that pit corporate America against individuals are well within the coverage of the law.

Arbitration has become large business. Arbitrators are paid well for their services. With corporate America often pitted against consumers and private individuals, the economics of arbitration make the playing field very uneven. While the results of arbitration are often private and confidential, the corporations of America that engage in the process are likely to know the results. After all, they engage in arbitration far more frequently than the isolated individuals. Arbitrators who favor corporate America are much more likely to be successful than those who favor the individuals who use arbitration services only one time. With regard to justice, the same fault exists that caused Judge Frank Johnson to find the work of Alabama justices of the peace who had a financial interest in the outcome of the cases they heard to be unconstitutional.

The United States Constitution has two clauses of interest in analyzing the soundness of arbitration as public policy. Article III, Section 1 provides that, "The judicial power of the United States shall be vested in one Supreme Court, and in such inferior courts as the Congress may from time to time ordain and establish." The article goes on to provide for the financial security of judges so as to make certain that their impartiality is not threatened by the outcome of cases. In other clauses, the executive power is vested in the President, and legislative power is vested in Congress. State constitutions generally provide for a similar separation of powers. Separation of powers is generally considered a fundamental aspect of the liberty guaranteed by the United States Constitution. Access to courts is also a part of that freedom.

The second constitutional provision of interest is found in Article I, Section 10 of the Constitution which provides, "No State shall...pass any...law impairing the obligation of contract...." At the time the Constitution was written and adopted in 1789, the study of modern economics was a relatively new science. Adam Smith had published The Wealth of Nations in 1776, the same year that colonies declared their independence in the Declaration of Independence. Contract rights, the enforcement of contract rights, and property rights are a basic assumption of the economic theories posited by Smith. The importance of these elements for economic development did not escape the writers of the Constitution. Economic theory requires adequate provision for enforcement of contracts and property rights. An arbitration agreement is, in a sense, a contract; but it presents a conundrum. It is a contract to privatize the very right to enforce the contract in court.

The Federal Arbitration Act has been upheld as being supported by the Constitutional provision related to freedom of contract and under the commerce clause. That finding seems to me to totally ignore the fact that in passing the Federal Arbitration Act, Congress passed a law vesting arbitrators selected by corporate America with the judicial power of federal and state governments. There is generally no appeal from a finding and award made by an arbitrator. One is reminded of the Islamic idea of justice in which there is no appeal from the local tribunal. If an arbitrator makes a mistake of law or fact *** well, ***too bad! So much for the old adage that everyone is entitled to his or her day in court.

Editors note: As an alternative to arbitration, Alabama provides parties to a lawsuit to settle their differences through mediation. ALA CODE § 6-6-2 states as follows:

(a) For purposes of this section, "mediation" means a process in which a neutral third party assists the parties to a civil action in reaching their own settlement but does not have the authority to force the parties to accept a binding decision.

(b) Mediation is mandatory for all parties in the following instances:

(1) At any time where all parties agree.

(2) Upon motion by any party. The party asking for mediation shall pay the costs of mediation, except attorney fees, unless otherwise agreed.

(3) In the event no party requests mediation, the trial court may, on its own motion, order mediation. The trial court may allocate the costs of mediation, except attorney fees, among the parties.