Outsourcing Justice

Fourth Circuit Issues Opinion Creating Good Policy For Arbitration Law

In Goodwin v. Branch Banking & Trust Co, No. 17-1412 (4th Cir. Oct. 31, 2017) (click here for a copy of the decision), the Fourth Circuit issued a brief opinion discussing an inappropriate tactic sometimes used in litigating the enforceability of an arbitration clause.

Suppose a hypothetical arbitration clause with a consumer or employee contains 2 unconscionable, harsh, one-sided terms (e.g., all arbitration must take place in a distant state on the opposite side of the country; and the consumer or employee bears all costs of the arbitration).  To avoid the invalidation of the entire arbitration clause, some corporate parties will stipulate to waive the harsh terms when a consumer or employee challenges the validity of the agreement in court.  However, the Fourth Circuit appropriately recognized that courts should not accept such waivers or stipulations: “a party’s offer to waive certain limitations in arbitration provisions should be rejected because one party cannot unilaterally alter the terms of a contract after it is formed and courts are not authorized to remake a contract.”

The Fourth Circuit’s holding creates good policy for courts when reviewing the fairness of arbitration clauses involving vulnerable parties.  If courts willingly or easily accept such stipulations to waive harsh terms, courts create perverse incentives for drafting parties to continue overreaching with harsh terms.  If the only penalty for including a harsh provision is simply to sever the provision pursuant to the unilateral stipulation of one party, why should a party stop drafting harsh, unfair provisions in an arbitration agreement?

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