Monday, February 4, 2019

Why Do So Many Companies Require Arbitration in their Contracts?

Why do so many companies include arbitration clauses in their contracts? The one word answer is: juries. Or more precisely, fear of juries (but that’s three words).

In the American legal system, civil lawsuits (meaning private claims for damages) are decided by juries. A jury consists of a group of citizens chosen (mostly) at random from the local community. Juries are considered a bulwark of liberty because they allow ordinary citizens rather than government functionaries to decide the outcome disputes.

So why would a company fear juries? Several reasons.

First, juries have no expertise. If you were sick and you wanted a diagnosis, you probably wouldn’t gather twelve random people, have a group of experts try to train them over the course of a few days, and then ask them to render an opinion. If it were your life on the line, you would want an expert.

Second, juries might be more inclined toward the “little guy.” Since jurors are chosen at random, it is much more likely that the jury will be filled with regular working people than titans of industry, and in a dispute between an ordinary working person and a faceless company, the worry is that jurors’ natural sympathies will be with the underdog.

Third, juries might not understand just how much money they might be awarding. If a jury finds for the plaintiff in a particular case, the jury must also award damages, that is, a monetary amount that the defendant must pay to the plaintiff. But how much money should a plaintiff get for, say, losing the ability to walk because of an accident or for having their home wrongfully foreclosed? One hundred thousand dollars? One million dollars? Ten million dollars? One hundred million dollars? All the money in the world? Companies are afraid that jurors can’t tell the difference between these vastly different sums of money.

While fear of juries is a primary reason why companies prefer arbitration, there are other reasons as well. Here is a short list:

1. More limited discovery. The most expensive part of litigation is the discovery process (where the parties to the lawsuit exchange information). Many arbitration rules streamline discovery and thereby reduce costs.

2. No class actions. Companies can ban class actions in arbitrations. That limits their exposure in any particular case and is a disincentive for unscrupulous lawyers to bring weak claims with massive potential damages that can force unfair settlements.

3. Faster resolution. Courts in many places are backlogged. Arbitrators are paid by the hour, and so they are generally more available, and so cases can be resolved more quickly.

4. Confidential proceedings. Court trials all take place in public, where reporters can publicize the allegations and the proceedings, which can damage the company’s reputation, even if the company ultimately wins in the end. Arbitrations are more private, so arbitrated disputes attract less attention from the media. Also, the results are often confidential, which limits the risk to the company’s reputation.

5. More sympathetic decision-makers. This one is a bit controversial, but it is possible that companies believe that arbitrators, who are primarily paid by the companies, will have a more business-friendly tilt, at least when compared to judges who are public servants and juries who are ordinary citizens and who might even have an ax to grind against business.

That said, I believe that the primary driver behind consumer arbitration clauses is fear of the jury system. I should note that it is not entirely clear that juries are more likely to make decisions based on sympathy or to award inflated damages, but companies clearly think so.

Wednesday, January 9, 2019

Why Are Contracts Not Written in Plain English?

Why are contracts not written in plain English? The short answer: to reduce misunderstandings. The one word answer: ambiguity. Let me explain.

Ordinary, everyday language is rife with ambiguity, but often we don’t notice. Here's an example. Take the words “day” and “night.”  Those words seem simple enough, but when does a “day” end and when does a “night” begin (and vice versa)?

It’s very likely you can come up with an answer for yourself for what is the difference between night and day, but how sure are you that other people would have the exact same definitions? And are you sure that *everyone* would have the exact same definitions?

Let me offer some possibilities:

  • End of day is the end of the standard work day (as in, “Get me that report by the end of the day!”), so 5:00 p.m. (but is this really the end of the “standard” work day? What is the “standard” work day anyway? You see how ambiguity multiplies??)
  • End of day is the moment the sun fully sets, but even after sunset, it is still light out because of the twilight, so…
  • End of day is the moment when darkness completely falls.
  • End of day is when the clock strikes midnight and the next “day” begins.

There may be even more possibilities, but the point is that “plain” language, when scrutinized, often is not as plain as it seems.

Why don’t we notice the ambiguity of ordinary speech more often? Mostly, because ambiguities are routinely cleared up through conversation.

For example, I might say, “See you at the end of the day.” And you might say, “Great. Um…do you mean 5 o’clock?” And I might say, “Sorry, I meant 5:30.” And through the conversation we would understand each other.

Conversations, however, are not very useful for understanding legal documents for a simple reason: when legal documents come into play, there is usually a dispute, and if there is a dispute, both parties have an incentive to interpret words in the way that is most favorable to that person’s personal interests. So, just asking someone what they “meant” is unlikely to elicit a fully truthful answer.

What’s the solution? Be specific. Very specific. That means use technical terms with well understood meanings. That means use verbose descriptions. That means try to cover all conceivable contingencies.

Once you start writing defensively like this, you get unwieldy, hard-to-read documents, or what is sometimes called “legalese.”

It’s not pretty. It’s not easy to read. But when done correctly, these legal documents avoid disputes by having a clarity that our ordinary speech usually lacks.

By the way, if you’re interested in this topic and others like it, I discuss this at length in my book The Legal Mind: How the Law Thinks, which you can check out on Amazon by clicking here.

Note: This post first appeared in response to a question posed on Quora.