Top Tips about Binding Arbitration Clauses

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[author:: Valerie Marciano, Esq.]

When faced with a contract dispute, parties frequently hire attorneys and use the court system to resolve their dispute.  However, there is an alternative dispute mechanism – Binding Arbitration – which is available to resolve disputes if the parties have already agreed to use that method of dispute resolution.  In boilerplate contract language, binding arbitration provisions may exist.  Such provisions can often be found in a pre-printed contract forms or could have been included in a negotiated agreement by a business lawyer when the contract or agreement was written.

What is Binding Arbitration?

Binding arbitration is a process that includes the use of an outside third-party known as an arbitrator (or a group of third-parties) to hear, consider, and decide the dispute.  The agreement to use binding arbitration must be in writing and signed by both or all parties.  It cannot be forced upon a party without having a written binding arbitration agreement already in place. Many people sign documents that contain the binding arbitration provisions without really knowing what the provisions mean or how they will be enforced if parties end up in a contract dispute.

How Does Binding Arbitration Work?

Unlike the judicial system, there are no set standard rules to follow in the arbitration process, and typically, unless built into the arbitration provision itself, there is no right to appeal the decision of the arbitrator or group of arbitrators.  The arbitration process is intended to be less expensive and faster than the traditional court system used through court litigation. However, the parties may still spend tens of thousands of dollars in arbitrator fees as well as wait an extended period of time before the dispute is presented to the arbitrators.  In light of the back log of cases pending before the Arizona courts, it is likely that the arbitration process is still faster that the court system, that is if both parties actively pursue the arbitration process.  Notably, while the parties may have previously agreed to arbitration, they can later decide to forgo the arbitration process and instead use the courts to have their case heard.  In that instance, however, both parties would need to agree to waive, or forego the arbitration process and proceed to litigate the dispute through the court system.

Should I Use Binding Arbitration for Debt Resolution?

A bank seeking judgment against a borrower on a secured or unsecured loan can use arbitration proceedings if specified in the underlying loan documents.  An unsecured loan could be a credit card. A loan that is secured by collateral is a home mortgage, auto loan or it could be a personal loan.  Thus, assuming the parties have agreed to use binding arbitration, the lender may use the arbitration process to collect the balance owed on the unsecured loan.  Where the loan is a secured loan, such as a home mortgage – and an arbitration agreement was made between the borrower and the lender – the lender may use the arbitration process to obtain what is called a “deficiency judgment” following a trustee sale or foreclosure of real property.  Otherwise, the lender will initiate a court action to obtain a deficiency judgment against the borrower following a trustee sale where the parties have not previously agreed to use arbitration.  In either circumstance, the lender will seek a judgment against the borrower for a “deficiency”, or in other words, for the amount owed to the lender once the collateral pledged for the loan has been seized, sold and credited against the loan amount. 

Where the loan documents contain an arbitration clause, a borrower who has defaulted on the loan may choose to go to binding arbitration instead of having the debt collection action determined by the courts.  The lender who forecloses on the real property and then pursues a deficiency judgment for the balance of the loan, in that case, will not be going to court to get a deficiency judgment against the borrower.  Instead, assuming the borrower insists on enforcing the arbitration provision, the lender will be presenting the matter to the arbitrator(s) to obtain a deficiency judgment against the borrower.

Recent Changes to Arizona Law

Recently, in National Bank of Arizona v. Schwartz, 637 Ariz. Adv. Rep. 12 (Ariz.App.Div.1, June 26, 2012), an Arizona Court confirmed that a deficiency action will be presented to an arbitrator (and not a court) pursuant to an arbitration provision if the borrower enforces the arbitration clause, even in the case where the lender seeks a deficiency judgment from the courts following a trustee sale of real property.  The lesson learned from this case – from the borrower’s perspective – is that when faced with an action filed before a court, the borrower should consult the loan documents to determine if they contain an arbitration provision, and if there is an arbitration provision, the borrower should decide whether the matter should be heard by arbitrators rather than a judge.  On the other hand, a lender may want to evaluate the benefits of including an arbitration provision in the loan documents, realizing that an arbitrator, rather than a judge, may be deciding the merits – and amount – of a deficiency judgment.    

About the author: Valerie L. Marciano is an attorney at the Phoenix law firm of Jaburg Wilk. She assists clients with real estate, foreclosure, bankruptcy and litigation issues. Val frequently writes on Arizona's foreclosure and anti-deficiency statues and is a board member of AZCREW - Arizona's premier commercial real estate professional association for women. Val can be reached at 602-248-1025 or vlm@jaburgwilk.com.


This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.

Published In: Alternative Dispute Resolution (ADR) Updates, General Business Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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