Friday, February 18, 2011

How You Can Contract for Arbitration and Get California Courts

You sign up an agreement that clearly states that any dispute will be arbitrated or sent to judicial reference.  Since you’re located in California, your contract also selects California law to govern the contract.  A dispute comes up . . . and you’re stuck in California superior court.  How did that happen?  A recent California Supreme Court case is a good opportunity to talk a bit about the importance of careful drafting when it comes to dispute resolution.

The Tarrant Bell case decided that California courts have discretion not to enforce a contract that provides for disputes to be resolved by judicial reference.  For those of you not up on the arcana of California alternative dispute resolution, judicial reference (sometimes called “rent-a-judge”) is a procedure in which the parties find and pay for their own judge, facilities etc.  It’s different from arbitration in that the “referee” has the status of a California Superior Court judge, the dispute is resolved entirely according to California procedural rules, and the results can be appealed through the California courts like any other court case.  Like any other court case, the proceedings are also public.

The particular case involved a dispute between a mobile home park owner and the residents over failure to provide promised services.  The court refused to enforce the judicial reference clause that was in some, but not all, of the residents’ leases because splitting the residents into two procedures (one in public court, the other in front of a referee) risked inconsistent rulings.

This case matches up judicial reference with California’s arbitration statute and federal and state cases that give California judges the same discretion over enforcing arbitration provisions.

For arbitration, there’s an easy fix for this particular problem.  If you want California law to govern your contract and you want your dispute resolution provision to stick, your choice of law provision should have the following exception:  “except that the parties intend enforcement of Section [____] (arbitration) to be governed by the Federal Arbitration Act, 9 U.S.C. § 1 et seq., not California Code of Civil Procedure §§ 1280 et seq.”  Judicial reference is a California phenomenon, so there’s no fix for that.

Enough of the technical stuff.

I'm not a litigator.  I want to talk about what went wrong in the drafting stage.

The first problem was that a group of closely related agreements was drafted inconsistently.  Consistency is a clear priority for companies, like the mobile home park owner, who have a series of agreements with similarly situated people who might be aggregated by a plaintiffs’ lawyer into a class.  The contracts don’t necessarily have to be completely non-negotiable, but some provisions, with dispute resolution the prime example, should not vary.  Over time, you're going to want to update your forms.  So if you're signing up relatively long-lived contracts, think about building in ways to update the non-core terms for existing contracts.  Companies often do this by incorporating a set of standard terms and conditions and providing that it can change those terms and conditions from time to time, either by posting a new set on its website or by giving the other party notice of the change.

Consistency is also very important in transactions that require a bunch of related contracts.  The arbitration cases I’ve linked to above, for example, both involve construction projects.  A single construction project involves lots of separate contracts:  general contractor, subcontractors, architects etc.  In those cases, a dispute over the project brought all of those contracts into play, but they didn’t all provide for arbitration, so the court ordered everyone into court.

Don’t let this happen to you.  Lawyers rightly often use unrelated contracts from their form files as the basis for a series of related contracts.  That’s OK as a starting point if they are conformed to each other.  Dispute resolution is only one of various provisions that have to be thought through and made consistent across all contracts.  As a client, it’s not your job to get this done or to understand any of the details.  But if similar provisions (especially in the “Miscellaneous” section in the back) aren’t obviously consistent (different ordering, titles etc.), you should raise the issue and get a thoughtful response.