What is an Arbitration Clause? It’s the Fine Print You Need to Understand.
A restaurant owner may sign any number of contracts in order to keep the doors open, a roof overhead and obtain supplies that are the lifeblood of the business. If the contract you are signing contains a forced or mandatory arbitration clause, and you fail to read the contract closely and fully understand its meaning, you could lose out on a number of legal rights without knowing it. One of those rights is the ability to go to court to protect your interests in the case that the contract is breached or the other party breaks the law and causes you harm.
Arbitration is an alternate dispute resolution method, which, in and of itself, it not necessarily a bad thing. Instead of going to court to possibly litigate the dispute, it goes to arbitration, which is like a private court process. Instead of a judge, an arbitrator (normally an attorney or retired judge) or panel of arbitrators decides your case. Proceedings are normally kept confidential and usually cannot be appealed to the court system. While this process is normally faster than the court system, it can have some drawbacks.
Often these clauses not only foreclose your ability to go to court, but also prevent your business from being part of a class action lawsuit, where a representative plaintiff can represent thousands of others dealing with the same situation. These cases can be especially potent when a large company breaks the law affecting many people or businesses, but costs each one a relatively small amount of money. With so little at issue for the individual or business, litigating such a case does not make financial sense.
There have been a number of U.S. Supreme Court decisions supporting these clauses. In one recent case coming out of Oakland, California a restaurant owner challenged the fees charged by a credit card company. Italian Colors restaurant, which had about $1.8 million in annual revenue, took on American Express in a class action claim over higher fees connected to a bank issued version of its credit card, which the restaurant was forced to accept (if it wanted customers to use other Amex cards). The restaurant owners signed a contract with an arbitration clause, which included a waiver of the right to bring a class action. The case was filed in state court in violation of the clause and the plaintiff was successful.
American Express appealed the decision all the way to the Supreme Court. The court, whose majority has a reputation for being pro-business, ruled in favor of the big business and against the small businesses. It ruled that the state court lacked jurisdiction over the matter because the dispute should have gone to arbitration, not to a trial in the court system as a class action. As a result of this case, a precedent has been set that arbitration clauses will be enforced in situations such as these.
Do not sign a contract you do not understand. If you are in the New York City restaurant business and have been asked to sign a contract (or would like to draft a contract of your own), contact the restaurant law attorneys at the DiPasquale Law Group by calling (646) 383-4607.