The Difference Between Arbitration by Agreement and Arbitration Under Court Rules

All states recognize private agreements to arbitrate disputes, and federal law also gives court fairly strong direction to enforce valid arbitration agreements related to interstate commerce. As a result, many business disputes go to arbitration, and many services exist to provide arbitrators. A private arbitrator’s award is usually binding unless agreed otherwise, and there are only a few ways to escape the decision, such as proving bias.

In addition, most states now have laws or court rules shunting smaller cases to a mandatory arbitration program conducted by private arbitrators under the supervision of the court. In Oregon, all cases seeking less than $50,000 in damages (and no other relief except costs and attorney fees) are automatically sent to the court arbitration program. In Washington, the amount varies by county. Most court arbitration laws and rules, however, allow either party to ask for a new trial before the court if they are dissatisfied with the result. In both Oregon and Washington, a request for a new trial results in the arbitration award being disregarded. (If the party seeking a new trial does not improve its position, it pays both sides’ attorney fees for the trial.)

A recent case from Oregon, Cintas Corp. No. 3 v. Art Erickson Tire & Auto, 281 Or App 201 (2016), <http://www.publications.ojd.state.or.us/docs/A154995.pdf>, addresses the difference between the two kinds of arbitration.

Cintas had provided rental and cleaning services for Erickson for many years. In 2011, an extension to their contract was signed by a Cintas representative and Erickson’s manager. The agreement included a requirement that all disputes be arbitrated. Shortly thereafter, Erickson asserted the extension was invalid and terminated Cintas. Cintas sued for about $15,500.

Neither side asserted the arbitration clause in the initial pleadings. During negotiations, there was only one reference to it. Cintas’ lawyer stated at one point that Cintas was considering asking for binding arbitration through either the court program or with a private service. There were no further comments on the arbitration clause by either side, and the case was sent to court arbitration.

The arbitrator ruled for Cintas, and Erickson asked for a new trial. Cintas then sought a ruling that the parties had agreed to make the arbitration binding. The trial judge agreed, and Erickson appealed.

The Court of Appeals disagreed, sending the case back for a new trial. It focused on the laws governing the court arbitration program, which expressly give either party the right to ask for the new trial. Although Oregon does allow agreements not to ask for a new trial, there was no indication Erickson had agreed to do so. Cintas did not raise the binding arbitration clause in the contract until after the arbitrator’s ruling. Because Cintas did not invoke the arbitration clause at the beginning, the Court of Appeals ruled that it had not been at issue in the arbitration. Cintas was too late. It essentially tried to game the arbitration agreement by holding it in reserve, expecting to consider asking for a new trial if it lost. The Court of appeals probably was influenced by the apparent unfairness of this strategy.

If you have a binding arbitration agreement and you don’t want to risk having a ruling in your favor thrown out by a request for new trial after a court arbitration, you need to call for arbitration from the beginning. On the other hand, if you would prefer to have the right to a new trial in reserve (and the case is small enough), you need to hold off of asking for arbitration and hope the other side makes a similar strategic decision.

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