Arbitration is an alternative to litigation and is the preferred dispute resolution method of a growing number of individuals and entities doing business and entering into contracts in Nevada.
Arbitration is similar to litigation in many respects, though it is its differences that make it attractive. Litigation is a method through which a fact-finder (either a judge or a jury) makes a decision that is binding on the plaintiff and defendant. Prior to trial, where the decision is made, the parties have an opportunity to conduct discovery aimed at supporting their claims or defenses. Discovery consists of information gathering, including through subpoenas, written discovery requests, inspections, and depositions. Discovery in a civil case usually lasts at least six months, and it is not unusual for a case to take between two and five years to go to trial—during which time both parties are paying their attorneys.
Arbitration, similarly, is a method through which a fact-finder (an arbitrator or panel of arbitrators) makes a decision that is binding on the plaintiff and defendant. Prior to arbitration, where the decision is made, the parties have an opportunity to conduct discovery aimed at supporting their claims or defenses. Discovery in the arbitration process is usually much more limited than litigation-related discovery and takes much less time. In fact, it is the savings of time, and therefore money, that makes arbitration so desirable.
Although parties must pay an arbitrator directly, which costs more than using a judge (whose salary is paid by the taxpayers, not the litigants), because the arbitration process is so much more streamlined than litigation, arbitration almost always results in savings both in terms of time and attorney’s fees.
Because arbitration can often result in quicker results at less cost, many contracts include an arbitration provision, wherein the parties agree that any dispute that arises from the contract (or in some cases, any dispute even tangentially related to the contract), will be decided not by a court, but by an arbitrator or panel of arbitrators.
If a disagreement over the contract does arise, and one party wants to enforce their contractual rights, presumably that party will bring the issue before an arbitrator, not a judge. However sometimes the aggrieved party wishes to forego the arbitration process and bring the case in court, irrespective of the requirements of the arbitration clause.
A party may not want to arbitrate for any of a number of reasons, including complexity of issues requiring more lengthy discovery, perceived inexperience of the arbitrator, or general apprehension about the arbitration process.
If a party to an arbitration clause challenges the validity of the clause, there are questions that arise. For example, should an arbitrator or the court decide whether the arbitration clause is valid? If a party files in district court when there is an arbitration provision, is the other party entitled to a dismissal, or must the case be heard where it is brought?
Much will depend on the language of the specific arbitration clause in question. Until recently in Nevada, arbitration clauses, like any other contract clause that is not in violation of public policy, was generally enforced as written.
However, the legislature recently enacted a new statute, NRS 597.995 that places limits on the enforceability of arbitration clauses and declares null and void the provisions that do not meet the requirements set forth in the statute.
The statute makes all arbitration clauses “void and unenforceable” unless they contain “specific authorization for the provision which indicates that the person has affirmatively agreed to the provision.”
The legislature does not define “specific authorization,” but presumably it would be enough for the parties to initial just below the arbitration provision indicating that they have read and understand the arbitration provision.
Thus, the first question to ask when a dispute arises regarding a contract that contains an arbitration provision is whether the provision is even enforceable. If it does not include anything that might qualify as “specific authorization,” and the contract was signed or renewed after Nevada’s law came into effect, October 1, 2013, then the arbitration provision is not enforceable.
If the contract predated the statute, or there is “specific authorization,” then the provision would be valid assuming there is not some other independent reason to invalidate it, including arguing that the provision itself is unconscionable or the agreement as a whole is not valid.
Nevada statute also addresses how such disputes are to be decided. NRS 38.219 sets forth that if a party is not challenging the validity of the contract as a whole, but is challenging specifically the validity of an arbitration agreement, then the court, not an arbitrator, will decide the issue.
On the other hand, if the entire agreement is challenged, or if the applicability rather than the validity of the arbitration agreement is disputed, then an arbitrator, not the courts, will decide the issue.
If you have questions about whether an agreement you signed is enforceable, including the applicability of an arbitration provision, speak to an experienced attorney.