Arbitration: A Double-Edged Sword

I sold my boat last summer, but it apparently developed an engine problem after the sale. The buyer is trying to hold me responsible for the problem and attempting to force me to participate in a binding arbitration procedure. The purchase contract did have a paragraph that discussed the arbitration of disputes, but there was no provision for me to initial the paragraph. Also, the arbitration paragraph said nothing about who would be conducting the arbitration and I have heard some bad things about the outfit selected by the buyer. Can they force me to participate in the arbitration? If I do participate, what are the advantages and disadvantages of arbitration?

In this case, they can compel you to arbitrate the dispute, but they cannot force you to submit to an arbitration forum that you disagree with.

In California, the resolution of a dispute through binding arbitration cannot be compelled unless the parties have agreed to do so in writing. The written agreement may be set forth as a paragraph within a contract, and in some cases, California law will require the parties to initial the paragraph and require the paragraph to be formatted in a particular font or typeface.

Agreements that many consumers are familiar with, such as an agreement to arbitrate a medical malpractice claim or a real estate dispute, are subject to these formatting requirements. Under most circumstances, however, an agreement to arbitrate a dispute is treated like any other term in the contract, and there are no particular formatting or initialing requirements. An agreement to arbitrate a dispute that arises from a boat purchase agreement must therefore be in writing, but there is no requirement for the parties to initial the paragraph.

Most yacht brokers in California include an arbitration clause within their form purchase contract. However, many different form contracts are used in California, and the language of the arbitration provision can vary widely from broker to broker. The provision described in the reader’s question above is, frankly, an example of a poorly drafted contract. The contract called for the arbitration of disputes, but it did not require any particular arbitration forum, such as the American Arbitration Association, JAMS or the California Yacht Brokers Association.

The parties in that case must either agree to a particular forum on their own or file a lawsuit and ask a judge to sort it out. A party cannot be compelled to submit to the jurisdiction of an arbitration forum that he or she did not agree to in writing.

As a dispute resolution tool, arbitration probably has an equal number of critics and supporters. The value of the process relies almost entirely on the skill, knowledge and dedication of the arbitrator. The most significant advantages to arbitration are speed and cost. Arbitration is much faster than traditional litigation, and a dispute will usually be resolved in a fraction of the time that would have been required in litigation. The filing fees in arbitration are much higher, and the arbitrator is paid a very nice fee by the parties. However, the overall cost of the process is usually less than litigation because of the abbreviated schedule and the elimination of many of the rules and procedures used in litigation.

The most significant drawback of arbitration is that, under California law, there is almost no avenue for appeal, even if the ruling by the arbitrator completely ignored the facts or the law. Federal law allows a small avenue for appeal, but as a practical matter, it is not much better. This really highlights the importance of selecting the right arbitrator.

Finally, it is important to note that a party to a yacht purchase agreement is free to strike out any provision in the agreement that is disagreeable, including the arbitration clause. This action should not be taken lightly, since the other party to the agreement (the buyer or seller) may feel strongly about the provision, and a modification to the standard contract language could ’kill’ the deal. But like any other contract, a yacht purchase agreement must reflect the terms and conditions that will work for both parties, and an oversight during the negotiation period may lead to a headache in the future.