Binding Arbitration Agreements That Work

What Can Void an Arbitration Agreement?

“Failure of employees to have easy access to the “Rules of Procedure” can void the agreement.”

Introduction to Binding Arbitration Agreements That Work
Special Application for Christian Schools and ACSI Educators
by Burt Carney, ACSI Director, Legal/Legislative Issues

This article originally appeared as an internal document for Association of Christian Schools International and is reprinted by permission

Burt Carney, ACSI’s Director of Legal/Legislative Issues, visited with Attorney John L. Cooley of WootenHart PLC, Roanoke, Virginia; and Attorney Gary Friesen, Executive Vice-President, Peacemaker Ministries, Billings, Montana, for the latest updates regarding the use of mediation/arbitration agreements. If your school uses such agreements, please read this article carefully. You will gain insights from these attorneys and from a recent court case.

For almost a decade, ACSI has recommended that Christian schools consider using Christian conciliation and binding arbitration agreements in their employee materials and even parent agreements. Utilizing such agreements provides benefits such as fulfillment of the scriptural mandate in 1 Corinthians 6 of Christians not going before secular courts, attempted reconciliation of all parties, resolution of the problem in a shorter period of time, and frequently resolution for less expense. Recent court decisions have upheld the validity of such an approach and have more clearly defined the parameters that must be followed for such agreements to be enforceable.

Arbitration Agreements Must Be Fair

“Circuit City has devised an arbitration agreement that functions as a thumb on Circuit City’s side of the scale should an employment dispute ever arise between the company and one of its employees.”

ICC Rules are Impartial

“Every arbitration process must be conducted according to an established set of rules…The arbitration is not necessarily conducted directly under the auspices of ICC, nor does the Institute necessarily advise schools or employees on the merits of a claim…”

Binding Arbitration Agreements That Work (ACSI)
Circuit City Stores v. Adams Case No. 99-1379 Link to Case

In recent years, a number of federal appeals courts have ruled that employers could require arbitration of workplace disputes. But a San Francisco–based federal appeals court disagreed in 1999 and refused to enforce an arbitration agreement that a former employee of Circuit City had signed. The employee had tried to bypass the arbitration agreement and sue Circuit City in court for alleged sexual harassment in the workplace. Circuit City asked the court to rule that the 1925 Federal Arbitration Act (FAA) required the plaintiff to go to arbitration instead. However, the law contains an exception that was at the center of the case. The arbitration law does not apply to employment contracts for “seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Circuit City contended that the exception from the law was limited to workers actually involved in moving goods from one state to another.

In March 2001, the U.S. Supreme Court essentially agreed and reversed the earlier unanimous decision by the Ninth U.S. Circuit Court of Appeals. The high court agreed 5–4 that the FAA not only placed arbitration agreements on equal footing with other contracts but also established a federal policy in favor of both arbitration and a federal common law of arbitrability that preempts state law disfavoring arbitration. In making the ruling, the justices limited review to whether the FAA applies to employment contracts, and whether the state retains its right to regulate arbitration agreements. The five-justice majority ultimately rejected the argument from 22 state attorneys general that said states should be free to forbid workers from bargaining away their legal rights under state law. While deciding the state issue, the Court did not resolve the related issue of whether federal job discrimination laws trump those arbitration clauses and the 1925 federal arbitration law. The Court then sent the case back for further action by the Ninth U.S. Circuit Court of Appeals.

Splitting Costs May Void Agreement

“Several courts around the country have ruled that requiring the costs to be split between parties voids the agreement.”

Arbitration Agreements Must Be Legal

“The DRA was also ruled invalid because it did not allow full recovery of damages for which the employees would be eligible under California’s Fair Employment and Housing Act (FEHA).”

Circuit City Stores v. Adams
9th Cir., No. 98-15992

Circuit City “lost” after the case was sent back to the Ninth U.S. Circuit Court of Appeals. In a ruling announced in February 2002, the appeals court indicated that the arbitration agreement was flawed as written and unconscionable under California contract law.

The Court Teaches Some Lessons

What specifically voided Circuit City’s dispute resolution agreement (DRA)?

ACSI members choosing to use arbitration agreements can learn from and avoid the mistakes that Circuit City made when it drew up its DRA policies. The DRA was one-sided in that it only applied to employee disputes against Circuit City. According to the judges, “Circuit City has devised an arbitration agreement that functions as a thumb on Circuit City’s side of the scale should an employment dispute ever arise between the company and one of its employees.” Circuit City was not required to arbitrate any claims against the employee. The judges wrote, “Circuit City has offered no justification for this asymmetry, nor is there any indication that ‘business realities’ warrant the one-sided obligation. This unjustified one-sidedness deprives the DRA of the ‘modicum of bilaterality’ that the California Supreme Court requires for contracts to be enforceable under California law.”Bottom line: DRAs must be binding on the actions of both parties.

Under the DRA’s rules, an employee was required to split the costs of the arbitration, including the daily fees of the arbitrator, the cost of a reporter to transcribe the proceedings, and the expense of renting the room in which the arbitration was held, unless the arbitrator ordered Circuit City to pay the costs. Several courts around the country have ruled that requiring the costs to be split between parties voids the agreement. The expense to the employee should be no more than the cost of filing a complaint with the EEOC or with a local court—costs that are usually minimal. Several arbitration experts recommend that employees be obligated to pay only a $100 fee when asking for a dispute to be arbitrated under an employment agreement. The $100 would cover the person’s cost of invoking the arbitration agreement unless the arbitrator later decided otherwise. Basically, by covering the additional arbitration expenses, the school would be saying, “If you have a claim, we’ll cover the cost to support our biblical belief.” (Circuit City has since removed the fee-splitting clause from its DRA.) Bottom line: If an employer is forcing employees to leave the judicial system, it can’t charge the employee higher fees to use the “company” system.

The DRA was also ruled invalid because it did not allow full recovery of damages for which the employees would be eligible under California’s Fair Employment and Housing Act (FEHA). The exclusive remedy was back pay from the date of discharge until the date of the arbitration award, whereas plaintiffs in FEHA suits would be entitled to punitive damages, injunctive relief, front pay, emotional distress damages, and attorneys’ fees.Bottom line: DRAs cannot so limit recovery for an employee that it becomes an unconscionable contract.

For these enumerated reasons, the Ninth U.S. Circuit Court of Appeals found the entire arbitration agreement unenforceable, thus allowing Circuit City’s former employee to bypass arbitration and sue for damages.

Additional Factors to Consider

Determine the right reason to use the agreement. If a school utilizes a Christian mediation/arbitration agreement, the board and administration should be committed to its purpose and make every effort to resolve disputes in a Christlike manner. This includes working with the disgruntled employee (or parent, if you use such an agreement in your enrollment contract) on a reasonably quick time schedule to resolve differences.

As Gary Friesen said regarding timeliness: “A quick response by a school to a request for mediation/arbitration can make all the difference, because it communicates to the disgruntled party the school’s commitment to resolve conflict in a biblically faithful manner. The Institute for Christian Conciliation has documented several Christian school cases recently in which there was little or no effort by the schools to help facilitate the mediation process, and weeks/months passed without resolution. Because of their frustration, the disgruntled parties then started asking for monetary damages for the first time. Had there been a quick and sincere Christian effort to resolve the issues, there would have been a greater chance for reconciliation, and there would not have been the later demands for monetary damages.”

Understand the process. When an employee of a Christian school is disgruntled because of discipline, discharge, or non-renewal of a contract, there is often a lack of understanding as to how the whole mediation/arbitration process operates. As a result of this lack of understanding, former employees and schools make inappropriate assumptions or attempt to resolve the dispute in an inappropriate manner. For example, the typical wording in agreements requires the parties to initially undertake mediation. The offended party begins the process by filing a letter with the other party, broadly defining the problem and requesting that the process begin.

The mediation process can be scheduled locally with a mature, neutral person acting as the mediator, or it can be conducted under the auspices of a Christian conflict resolution organization. However, unless the employee and school agree otherwise, mandatory mediation must occur before the parties can enter the arbitration phase. Of course, the language agreed to or policy in effect controls how the process works.

If arbitration becomes necessary, the mutually agreed-upon arbitrator will work with both sides to determine the approximate length of the case. This is usually accomplished through a preliminary telephone conference call to both parties. The arbitrator has the ability to limit discovery and to determine what is appropriate and expeditious for a fair determination of the issues. An arbitrator can also conduct a preliminary hearing to determine whether the case may be decided on “technical” grounds, such as the timeliness of an issue. For instance, did the complaining party seek arbitration within a reasonable amount of time after the incident took place? Under most federal employment laws, a complaint must be filed within six months to a year. Claims aren’t considered after the “statute of limitations” runs out. Failure by an employer to allow a complaint within a reasonable time can void an arbitration agreement.

The suggested language in the mandatory Christian mediation/arbitration clause also specifically refers to the Rules of Procedure from the Institute for Christian Conciliation (ICC), a division of Ambassadors of Reconciliation*. Every arbitration process must be conducted according to an established set of rules. Schools should fully explain to their employees the reason for the rules. The arbitration is not necessarily conducted directly under the auspices of ICC, nor does the Institute necessarily advise schools or employees on the merits of a claim. Rather, it publishes “Rules of Procedure for Christian Conciliation” in its booklet entitled Guidelines for Christian Conciliation…. Copies of the booklet should be available for employees to read. Many schools provide each employee with an individual copy. Some schools display a copy on the faculty bulletin board and have additional copies available upon request in the school office. Failure of employees to have easy access to the “Rules of Procedure” can void the agreement.

Gary Friesen said, “As you indicated, the ‘Rules of Procedure for Christian Conciliation’ are a necessary companion to this clause and should be accessible to every teacher for review before he or she signs a contract.”

Check with local counsel. Schools using arbitration agreements should have the contract language reviewed by a local attorney to make sure that it satisfies the specific statutory notice requirements of that state. For instance, Montana requires that contracts subject to arbitration must include a statement, as shown below, on the first page of the contract:

This contract is subject to arbitration pursuant to the Montana Arbitration Act, Title 27, Chapter 5, Montana Code annotated.

Schools in other states may also need to have some type of wording in a specific place on the contract for the mediation/arbitration clause to be valid.

Do not change the wording. According to John Cooley: “Over the last several years, I have reviewed a number of contracts that contain the mandatory agreement. Most of these clauses have utilized the suggested wording published by ACSI. However, schools on occasion have changed the wording without consulting legal counsel. The result has been several instances in which the revised wording has changed the enforceability of the clause in question. Leaving out portions or materially changing the language can have significant adverse effects on the practical application of the agreement or, if challenged in court, jeopardize its legality.”

At the arbitration stage, retain competent legal counsel. Schools should select counsel in whom they have confidence. Schools may choose local counsel or counsel outside the area. However, Christian schools should consider using counsel familiar with employment law issues and the philosophy of Christian school education. In many cases, biblical issues and doctrine are involved. Thus, counsel should be able to understand scriptural principles as well. Regardless of who is selected, a Christian school is unwise and the school board arguably is not meeting its fiduciary duty when they proceed to arbitration without appropriate legal advice.

John Cooley said, “Anytime a Christian school faces a claim of wrongful discharge, breach of contract, or violation of federal or state antidiscrimination statutes, major legal concerns are present. In my opinion, schools should not attempt to conduct binding arbitration without competent legal counsel who represents the interests of the school but does not act as arbitrator. Rather, counsel will present the case to the arbitrator or arbitration panel. This procedure will generally involve the presentation of evidence by witnesses as well as the presentation of legal theory and argument. On occasion, depositions or other discovery may need to be taken prior to the arbitration hearing.”

Conclusion

John Cooley concluded, “The primary goal of Christian school education should be to so inculcate biblical values and principles in students that they will, as adults, be mature Christians, reflecting the life of Christ. To accomplish this goal, Christian schools must also reflect biblical principles. This includes to “do justice.” Utilizing Christian mediation/arbitration clauses allows the Christian community to deal in a Christlike fashion with issues raised within the employment setting. I am convinced that these agreements are fair to both parties. However, to carry out that fairness, Christian school administrators and board members need to analyze their rationale for the mediation/arbitration clauses, deal with situations appropriately as they arise, and understand the attendant implications and procedures.”

Authored and edited by Burt Carney, ACSI Director, Legal/Legislative Issues.

ACSI’s Proposed Wording for School Employees
2002-2003

[The following wording can be used in employment contracts or employee handbooks, or formatted as a separate document that all employees are required to sign as a precondition of employment or continued employment.]

I agree to attempt to resolve differences with others (parents, fellow workers, administration) by following the biblical pattern of Matthew 18:15-17. Should I have unresolved issues with my employer after utilizing the Matthew 18 principle, the parties agree to be bound by the following mediation and binding arbitration agreement in an attempt to resolve issues and bring reconciliation:

Mediation and Binding Arbitration Agreement

The parties to this agreement are Christians and believe that the Bible commands them to make every effort to live at peace and to resolve disputes with each other in private or within the Christian community in conformity with the biblical injunctions of 1 Corinthians 6:1-8, Matthew 5:23-24, and Matthew 18:15-20. Therefore, the parties agree that any claim or dispute arising out of, or related to, this agreement or any aspect of the employment relationship, including claims under federal, state, and local statutory or common law, the law of contract, and law of tort, shall be settled by biblically based mediation.

If resolution of the dispute and reconciliation do not result from mediation, the matter shall then be submitted to an independent and objective arbitrator for binding arbitration. The parties agree that the mediation and arbitration process will be conducted in accordance with the “Rules of Procedure for Christian Conciliation” (“Rules”)*. Consistent with these “Rules,” each party to the agreement shall agree to the selection of the arbitrator. The parties agree that if there is an impasse in the selection of the arbitrator, the Institute for Christian Conciliation* shall be asked to provide the name of a qualified person who will serve in that capacity. Consistent with the “Rules,” the arbitrator shall issue a written opinion within a reasonable time.

The parties to this contract agree that these methods shall be the sole remedy for any controversy or claim arising out of the employment relationship or this agreement, and they expressly waive their right to file a lawsuit against one another in any civil court for such disputes, except to enforce a legally binding arbitration decision. The parties to this agreement have had an opportunity to consult legal counsel before signing this agreement.

*Update to reflect the transfer of Institute for Christian Conciliation to Ambassadors of Reconciliation in 2022