Businesses commonly insert arbitration clauses in its contracts and consumer user agreements with the intent to avoid costly litigation. When drafting an arbitration clause, businesses must not only weigh the benefits and drawbacks of including such a clause, but must also consider its enforceability and the scope of what the parties will be required to arbitrate. Under the Ohio Arbitration Act, arbitration clauses are "valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract." Ohio Rev. Code § 2711.01(A). Two recent decisions from Ohio appellate courts highlight the presumption that arbitration clauses are enforceable and that parties opposing the arbitration must satisfy a high burden in order to overcome that presumption.
The purpose of this article is not to address the merits or demerits of choosing to insert arbitration clauses. There is a general view that arbitration is less expensive than litigation and more "business friendly." But, the lack of complete and consistent procedural, discovery and evidentiary rules, coupled with new "Commercial Docket" courts in Ohio, the decision to include an arbitration clause must be carefully considered before entering into any agreement. Rather, the purpose of this article is to review the recent caselaw relating to under what circumstances courts will defer to the strong public policy endorsing arbitration and compel the claims arbitrated.
Ohio courts have generally ruled that Ohio law "reflects a strong policy favoring arbitration of disputes." Taylor Bldg. Corp. of Am. V. Benfield, 117 Ohio St. 3d 352, 357, 2008-Ohio-938, ¶25. In fact, there is a "strong presumption in favor of arbitration." McCann v. New Century Mortgage, Cuyahoga App. No. 82202, 2003-Ohio-2752, ¶17.
In Moran v. Riverfront Diversified, Inc., Montgomery App. No. 24545 (Ohio App. Dec. 9, 2011), the trial court denied the defendant's motion to compel arbitration because the arbitration clause was included in a service contract between an individual and business, and the clause was unconscionable and therefore the contract was unenforceable. But the appellate court reversed. The trial court found the arbitration clause to be procedurally unconscionable because (1) it was adhesive in nature, (2) the plaintiff was eighty-eight years old, (3) the plaintiff lived at home, and (4) the plaintiff had little business experience. Id. at ¶22. The appellate court found these to be insufficient to prove procedural unconscionability, stating that "an unequal bargaining position is not, in and of itself, a sufficient reason in law or equity to hold [an] arbitration agreement unenforceable." Id. at ¶23. The appellate court found that the plaintiff was a "self-sufficient elderly woman [who] signed a contract containing a clear arbitration provision that she acknowledged having read," and that there was no evidence suggesting that the plaintiff was defrauded or coerced into agreement to the arbitration clause. Id. at ¶¶24-26.
The trial court had also found the arbitration clause to be substantively unconscionable due to the cost of arbitration and because the mechanics of the arbitration process and its costs were not explained to the plaintiff. Id. at ¶27. The appellate court disagreed, finding no obligation for the defendant to explain the arbitration to plaintiff, who "did not appear to have been misled, expressed no lack of understanding at the time, and asked no questions." Id. The appellate court added that the plaintiff failed to provide evidence that the arbitration costs were prohibitively expensive, that they would exceed her litigation costs, or that she was unable to pay for the costs of arbitration. Id. at ¶28-29. Accordingly, the appellate court determined that the facts were insufficient to support a finding of unconscionability and remanded the case for the trial court to conduct an evidentiary hearing on the matter and for further proceedings. Id. at ¶33.
In Reyna Capital Corp. v. McKinney Romeo Motors, Inc., Montgomery App. No. 24538 (Ohio App. Dec. 30, 2011), plaintiff Reyna Capital Corp. ("Reyna") sued defendant McKinney Romeo Motors Inc. ("McKinney), alleging that McKinney owed money, plus interest, to Reyna pursuant to various agreements. Id. at ¶¶1-2. McKinney filed a third-party complaint against The Reynolds and Reynolds Co. ("Reynolds") and other third-party defendants, seeking indemnity for the claims brought by Reyna, and alleged breach of contract, breach of warranty, and fraud. Id. at ¶3. The third-party defendants moved to compel arbitration of McKinney's third-party complaint, and McKinney opposed the motion, arguing, among other things, that the arbitration provision was unenforceable because Reynolds waived its right to arbitration and because the case had "witnesses too numerous, and factual issues too complex, for the limitations on discovery set forth in that provision." Id. at ¶¶4-6. The trial court granted the motion to compel arbitration, and the appellate court affirmed the trial court's decision. Id. at ¶¶8, 57. The appellate court found that Reyna was a subsidiary of Reynolds, but the two entities proceeded independently of each other, and therefore Reyna's filing of a lawsuit did not estop or waive Reynolds' right to compel arbitration. Id. at ¶¶48-53. The court also found that the limitation on the parties to two depositions was reasonable, given that McKinney agreed to the arbitration provision in an arms-length transaction and because it keeps with the cost-reducing purpose of arbitration. Id. at ¶¶54-56. Furthermore, the court determined that concern regarding the complexity of the matter was addressed by the arbitration provision that required an arbitrator who was both an attorney and an expert in the relevant field. Id. at ¶56. The appellate court, therefore, affirmed the trial court's finding that the arbitration clause was enforceable with respect to all claims brought by McKinney in its third-party complaint. Id. at ¶57.
These two cases illustrate the lengths to which Ohio courts will go in order to favor the presumption that arbitration provisions are valid and enforceable. Businesses must then weigh the advantages and drawbacks of arbitration. Parties often use arbitration because it lends towards speedier resolution and is less costly. But, the goal of speed and cost can come at a sacrifice. Reyna Capital certainly stands for the notion that parties can unintentionally place broad constraints on their own ability to fully present evidence when they constrict the number of witnesses with no exception. Arbitration also permits parties to select arbitrators who have specific subject matter expertise. By contrast, arbitration often does not give parties a right to appeal and may provide little or no discovery. Oftentimes, arbitration can also lead to unwanted compromises or "split the baby" awards.
If a business decides to use an arbitration clause, then it should assess what items it wishes to include within the arbitration clause, such as the location of arbitration or number of arbitrators, and whether other matters, such as consolidating arbitral proceedings commenced under related contracts, should be left out of the clause. Businesses should also consider whether the arbitration will be binding or non-binding, along with the rules for the arbitration process. For instance, businesses in the construction industry may consider using the Construction Industry Arbitration Rules of the American Arbitration Association. Ultimately, businesses can benefit greatly from including an arbitration clause, but should carefully consider the benefits, such as lower costs and speedier resolution, with the drawbacks, such as limited discovery or the possibility of losing a right to appeal the arbitrator's decision, before deciding to include an arbitration clause in contractual agreements.
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Ken LeCroix |