by Kenneth F. Whitman, Esq.

While the answer to this question is a matter of opinion, reliable or trustworthy opinions are usually based upon some compelling arguments. As an initial matter, you may be scratching your head, thinking, “Ugh…. More legalese...  Help! I am not sure that I understand exactly what arbitration is, and what it means for my company.”

To summarize as briefly as possible, arbitration is a binding form of alternative dispute resolution. So that’s helpful, no? Okay, the bottom line is that as a result of the binding language in your agreement with your customers (your Terms and Conditions), any disputes between the customer and your company must be resolved by an independent third-party referee or judge rather than a court.

This person is most often a practicing attorney or retired judge that works as an independent contractor for an Alternative Dispute Resolution company and is selected by the parties. He is paid for his time and ultimately renders a decision in the matter, which is binding on the parties.

Should one of the parties refuse to recognize and comply with this decision, the other party may go to court and ask the judge to enforce the decision reached in arbitration via a court issued order or judgment.  The enforcement of the arbitrator’s decision is regularly upheld by the courts because arbitration is viewed as a reliable method of resolving disputes without straining public resources.

So why would a company want to arbitrate a dispute? There are several reasons why mandatory arbitration can be a desired alternative to resolve a dispute.  One of the primary reasons that legal professionals recommend arbitration is that it eliminates many of the costs and formalities of litigating in the courts.   It allows for a relaxed discovery process (the process whereby each party learns about the other party’s case and position), as well as relaxed rules of evidence.

This potentially means less intrusive and burdensome demands on each party for document production, depositions and general investigative demands that occur in litigation.  Generally, it allows for a more streamlined dispute resolution process, which necessitates less of an attorney’s time and less billing of legal fees to your company.  There is actually no requirement that you hire an attorney for the arbitration.  Some practitioners believe that arbitration can take the decision process out of the hands of a juror that may have no experience with the law or lack the proper judgment to make a decision with respect to the dispute.   Also, it is not uncommon for injury cases that are decided by juries in larger metropolitan areas to experience larger and more volatile verdicts in favor of a plaintiff.  For companies located in those cities, arbitration is often a favorable alternative.

So, why shouldn’t every business use an arbitration clause in their agreements? For businesses that have a high frequency of disputes, which involve smaller sums of money, the arbitration process is great. For example, a public utility or cellular phone carrier with thousands of customers and small amounts in controversy, doesn’t have to hire a lawyer every time there is a dispute. In fact, a company employee may be much better suited to represent the company in front of an arbitrator, saving them legal fees.  

However, if your business model does not follow this high frequency, low-value dispute scenario, there are some compelling reasons you should consider before offering arbitration in your Terms and Conditions.

As an initial matter, the arbitration process is binding.  This means there is no true and unfettered right of appeal. While an arbitrator has a duty to uphold and follow the law, if he makes a mistake, personally favors one of the attorneys or parties, or does a less than thorough analysis of the dispute, the controlling law or factual evidence, you are generally stuck with the decision.  In order to reverse an arbitrator’s decision, in most jurisdictions, it must be shown that there was an egregiously unreasonable decision, fraud or collusion on the part of an arbitrator. The reported cases where an arbitrator’s decision or award has been vacated for reasons other than fraud or collusion are few and far between.

You may think it doesn’t seem so horrible that a decision or award cannot be appealed. After all, an arbitrator is a practicing attorney or retired judge and is much more likely to be fair and impartial than members of the public picked to serve on a jury. Those individuals come from all different socio-economic backgrounds and may know very little about commercial dealings. So, based on the potential expertise of an arbitrator, what can be so bad about an arbitrator making the decision instead of leaving it in the hands of a court and a jury?

For starters, being an arbitrator or referee is a business, which makes the arbitrator a “businessman” or “businesswoman.”  A businessman or businesswoman’s main objective is to make money and grow his/her business. With arbitration, attorneys on both sides agree to select a particular arbitrator based on their confidence in his/her credentials and his/her reputation in the legal industry, believing that he/she is capable of doing a good job in resolving the dispute.

If both attorneys are ultimately content with his/her decision or award and the service the arbitrator provided, they will utilize his/her services again for future disputes and will likely recommend the arbitrator to their colleagues. As a result of that equation, any arbitrator that has a viable arbitration practice is not going to want to hurt one side or the other, with an all-or-nothing decision that favors one of the parties.  

Therefore, it’s not uncommon for an arbitrator to live and practice by a “split-the-baby” philosophy. While neither party is left jumping up and down about the award granted by the arbitrator, neither party is left crying or devastated either.  So, what’s so terrible about that outcome? Nothing, really! There is no true winner and there’s no true loser, unless you’re a travel agent or tour operator domiciled in the U.S., where the law supports insulating your company from liability for the negligent acts of independent suppliers of services.

Generally, when your company exercised reasonable due diligence in vetting a potential vendor, and there was no attributable negligence on your company’s part, a court should dismiss the case against you.  Often, this happens. But, even if a court does not dismiss the case against your company, you have the coveted right of appeal, which is not available when you’re unhappy with an arbitrator’s decision.

So as a travel agent or tour operator, do you want to leave your company’s fate in one “businessman” or “businesswoman’s” hands?  Usually, the mistakes of an arbitrator can’t be corrected.   Humans make mistakes, and arbitrators are human.

Another major problem with arbitration for the tour operator or travel agent is that the fulfillment of obligations in the tour and travel industry always involves multiple parties.  So, in cases where a dispute arises from an independent supplier of services’ negligence, there is no mechanism in arbitration to bring that entity into the arbitration proceeding, as a party, and hold them responsible.

Without the supplier as a party, there may be an award against the tour operator or travel agency that will be unreimbursed by the actual responsible party. The only way to secure that reimbursement is if, and when, the tour operator or travel agent subsequently files a separate lawsuit against a supplier to recover the sums an injured claimant was awarded in an arbitration.

“BUT OUR ATTORNEY instructed us to include an arbitration provision in our Terms and Conditions.” What should you do now? Have a discussion with your attorney about the pros and cons of arbitration.  While arbitration is a viable method of removing a case from an emotional and volatile jury, the benefit of doing so, may not outweigh the near-absolute finality of an arbitration award, nor the inability to pursue responsible vendors or suppliers in that arbitration proceeding.

While it may be beneficial to completely remove the arbitration provisions from your Terms and Conditions, a compromise can be had if a majority of your disputes are of lower value. A travel company can designate a mandatory initial non-binding arbitration or mediation provision. However, it should be cognizant of the fact that this has the potential to increase the ultimate costs of resolving the dispute.  It ultimately becomes more expensive because after the initial costs of arbitration or mediation, the dispute can still end up in court.

A travel company may also exclude any claims of bodily injury or property damage from the arbitration provisions, which potentially limits arbitration to lower value disputes. You should still question whether the arbitrator will, nonetheless, “split the baby”, and whether the arbitration provision provides a better opportunity or incentive for a contingency fee-based attorney to harass your company without having to lay out too much money. With the notion of having to hire an attorney and/or having an arbitrator “split the baby”, it may force you to settle, when you normally would not have settled.

Today is as good a time as any to review your Terms and Conditions and decide whether you wish to continue to allow a businessman or businesswoman to decide the fate of your company.
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Kenneth F. Whitman, Esq., is a senior program manager Aon Affinity Travel Practice.    

This article is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. You should discuss your individual circumstances thoroughly with your legal and other advisors before taking any action with regard to the subject matter of this article.