The sport, recreation, and fitness provider has long made use of liability waivers for protection from liability for provider negligence. There is a growing trend toward the inclusion of an arbitration agreement within the waiver; however, there is considerable controversy regarding the wisdom of this inclusion. Here, the authors address some of the pros and cons of the arbitration agreement that the provider and his or her counsel should consider in deciding the issue. It may well be that the choice will vary somewhat depending upon the nature of the business entity and the state in which the business is located. And it should be noted that a poorly worded arbitration provision in a waiver agreement can cause more problems for a provider than it solves.
By Doyice J. Cotten and Mary B. Cotten
The authors appreciate the contributions of two special friends who read and made many suggestions regarding the manuscript. Special thanks go to Alexander T. Pendleton, J.D., Pendleton Legal S.C., Milwaukee, WI and to Julie I. Fershtman, Esq., Foster, Swift, Collins & Smith, PC, Farmington Hills, MI. Their input greatly improved the readability and accuracy of this material.
Virtually all sport, recreation, and fitness providers today require that their clients sign a waiver of liability intended to release the provider of liability for provider negligence. This is true of both commercial entities and non-profit entities. It is becoming very common for such waivers (and sometimes membership contracts) to include an arbitration clause that mandates that any disputes arising from the activity (such as claims alleging negligence as the cause of an injury to a participant) be settled by arbitration rather than in a court of law.
Arbitration is a way to resolve disputes between two parties (for instance, between a health club and an injured club member) without litigating the issue in a court of law. It is one of several forms of alternative dispute resolution; mediation being another. Mediation involves a neutral third party who attempts to help the disputing parties resolve their dispute through settlement discussions; mediation, however, is voluntary and no solution is forced upon a party. When mediation fails, arbitration is sometimes the next step.
In arbitration, the dispute is decided by one (or in some cases more than one) person – the arbitrator(s). An arbitrator is sometimes referred to as a “judge for hire” or “private judge” (and many persons who serve as arbitrators are retired judges). The arbitrator’s primary job is to conduct a hearing at which the arbitrator presides, and at which he (or she) receives evidence and hears the arguments of the parties to the dispute. At the conclusion of the hearing, the arbitrator issues a decision on the dispute (just like a judge would do at the end of a trial to the court). For example, in a dispute arising out of a recreational injury, an arbitrator might rule in favor of the provider (finding no negligence, or finding that a waiver agreement bars the claim), or might rule in favor of the participant (finding negligence on the part of the provider, and awarding the participant damages). Arbitration decisions are legally binding on the parties, in that each party has the right to take the arbitrator’s decision to a court, and have that decision or award reduced to a judgment, which can then be enforced like any other legal judgment that might be obtained in court. Usually (but not always) all parties comply with the arbitrator’s decision, and having the decision reduced to a judgment is not necessary.
Compared to traditional “courtroom” litigation, the arbitration process is designed and intended (but not guaranteed) to be informal, faster, and cheaper, while still providing the parties a fair opportunity to present their evidence and arguments to a disinterested and unbiased decision maker.
While courts give arbitrators broad discretion as to how they apply the law, arbitrators cannot arbitrary ignore the applicable law. If the party that loses an arbitration can show the arbitrator’s decision was the result of a “manifest disregard” of the law (as discussed below, a difficult standard to show), the party can have a court “vacate” (nullify), or modify, the arbitration decision/award. If an arbitration decision/award is vacated, that may necessitate the whole dispute having to be arbitrated a second time. An arbitration agreement can be a stand-alone contract for the sole purpose of ensuring that disputes will be settled by arbitration rather than through litigation. More often arbitration agreements used by sports, recreation, or fitness entities are included as a part of another contract such as a health club membership contract or part of a liability waiver.
There are two types of arbitration – voluntary or mandatory. As to the first type, parties to a dispute can always jointly and voluntarily agree to forgo litigation, and arbitrate the dispute instead. As to the second type, a right to mandatory arbitration arises from a contract voluntarily agreed upon by both parties before a dispute arises.
Federal Arbitration Law and State Law
Although many people are not really familiar with arbitration, the arbitration process is not a new idea or fad. It is a well-established method for dealing with disputes. In fact, federal law explicitly favors the enforcement of arbitration clauses in written contracts. Congress passed the United States Arbitration Act (Pub.L. 68–401, 43 Stat. 883, enacted February 12, 1925, codified at 9 U.S.C. ch. 1) establishing a public policy in favor of arbitration. The Act, commonly called the Federal Arbitration Act (FAA), provides for the settlement of private disputes through the process of contractually-based compulsory and binding arbitration.
In addition to the FAA, each state has state law relating to arbitration agreements. But most agreements are controlled by the FAA, because the FAA applies to all contracts involving “interstate commerce,” and the courts have given a very broad interpretation to what commerce is “interstate” in nature. (To avoid a dispute over whether a contract is or is not controlled by the FAA, in most states it is good practice to have a sentence in an arbitration clause that expressly indicates the FAA controls.)
The FAA makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contact.” In 2011, the United States Supreme Court explained that this provision reflects both a “liberal federal policy favoring arbitration,” and the “fundamental principle that arbitration is a matter of contract.”[1] Further Court instructions regarding arbitration agreements include: 1) courts must place arbitration agreements on an equal footing with other contracts; 2) general contract principles of state law still apply to assess whether those agreements to arbitrate are valid and enforceable; 3) ordinary state-law principles that govern the formation of contracts are applied when deciding whether the parties agreed to arbitration; and 4) courts are not allowed to invalidate an arbitration agreement under a state law applicable only to arbitration provisions.
What the above means is that if there is a fight between the parties as to whether an arbitration provision is enforceable, or whether an arbitration decision/award should be enforced, those fights may end up in court. When a court has such disputes before it, it is likely going to be applying and interpreting the FAA, but the court may also be looking to state contract law (or other state law), to determine whether the parties entered into a valid and enforceable agreement, and to determine the scope of the parties’ agreement. Well-drafted arbitration clauses decrease the chances that a party will find itself embroiled in such “ancillary” litigation (which can be time consuming and expensive).
Examples of Cases Applying State Law to Determine Whether an Arbitration Clause Will Be Enforced
Just because an agreement contains an arbitration provision, does not automatically mean the dispute will be arbitrated, or that (if arbitrated) the arbitration award will be enforced.
For example, in Atalese v. U.S. Legal Services Group, L.P. (2014), the New Jersey Supreme Court stated that having favored status does not mean every arbitration clause will be enforceable. It added that the preference for arbitration is not without limits; an arbitration agreement may be invalidated by generally applicable state-law contract defenses. Applying such defenses, the court proceeds to find the provision unenforceable: “The absence of any language in the arbitration provision that plaintiff was waiving her statutory right to seek relief in a court of law renders the provision unenforceable.”
It explained that an agreement to arbitrate, just as with any contract, “must be the product of mutual assent, as determined under customary principles of contract law.” The court made it clear that a party is not required to arbitrate an issue when it has not agreed to do so. The court went on to state that for mutual assent, the party must have an understanding of the terms to which they have agreed. It observed that an average member of the public may not realize that arbitration is a substitute to one’s right to have a claim addressed in a court of law. Hence, it is necessary that the contract language be sufficient to place the signer on notice that he or she is waiving a constitutional or statutory right to trial. The Atalese court noted that the arbitration agreement at issue was located on page nine of a twenty-three page contract. Further, the clause did not explain what arbitration was, how it differs from a trial by jury, or that the right to a trial was being waived. The court ruled the agreement violated a basic principle of contract law and was therefore unenforceable.
While the Atalese case arose in the context of a debt relief contract, there are state court decisions regarding arbitration clauses in recreation-related agreements. For example, in Hojnowski v. Vans Skate Park (2005), the New Jersey Supreme Court enforced an agreement by a parent to arbitrate claims of a minor arising from a commercial recreation contract. There was no allegation of fraud, duress, or unconscionability, and the arbitration agreement was written in clear and unambiguous terms. The arbitration agreement stated that the signer was giving up the right to sue the recreational facility in a court of law and the right to a jury trial.
In contrast to the outcome in Hoinowski, the Louisiana Supreme Court denied enforcement of an arbitration agreement in two similar cases relating to the same defendant trampoline park (Duhon v. Activelaf, LLC, 2016; Alicea v. Activelaf, LLC, 2016). Applying state contract law regarding “adhesion contracts,” the court stated that the “real issue in a contract of adhesion analysis is not the standard form of the contract, but rather whether a party truly consented to all the printed terms.” In each case the court ruled the agreement was a contract of adhesion and unenforceable, primarily because the issue of consent was called into question by a number of factors. The court felt the physical characteristics of the agreement (arbitration language was allegedly “camouflaged” by its placement within the contract; no distinguishing features; small print; the fact that it was a standard form contract) indicated the arbitration provision was adhesionary (and therefore unenforceable).
The Louisiana Supreme Court compared the two agreements with an arbitration agreement that was enforced in an earlier decision of that court (Aguillard v. Auction Management Corp., 2005). In Aguillard, the arbitration agreement: 1) was a one single sentence paragraph; 2) was not concealed, but was separated from other language by spaces; 3) did not lack mutuality as the clause severely limited both the defendants’ and the plaintiff’s right to litigate; and 4) was not a bargain between two parties of vastly different bargaining power; the transaction was not so necessary that it could be concluded that the plaintiff was compelled to enter into it.
Finally, in a Pennsylvania Superior Court case (Burns v. Philly Trampoline Park, 2017), the husband suffered an injury during participation and sued for damages. The wife had signed waivers containing an arbitration agreement for both the husband and a minor child. The husband claimed the waiver and arbitration agreement were unenforceable because he did not sign the document. Under state principles of agency law, the defendant could not show that an agency relationship existed (between the wife and the husband), and the contract was therefore determined to be invalid; in the absence of a valid contract, the court ruled the arbitration agreement unenforceable.
Can an Arbitration Ruling be Appealed?
One of the arguments for the arbitration process is the perceived “finality” of the process, compared to a court’s decision (which can be appealed). Once an arbitrator has issued a ruling or award, it is extremely difficult to overturn that ruling or award; this is because both the FAA and the state arbitration acts provide only very limited grounds upon which a court may vacate an arbitration decision. FAA §10(a) allows four “grudgingly narrow”[2] grounds for vacating an arbitration ruling or award. They are:
- the award was procured by corruption, fraud or undue means;
- there was evident partiality or corruption by the arbitrators;
- there was arbitral misconduct, such as refusal to hear material evidence; or
- the arbitrators exceeded their powers, or so imperfectly executed their powers that they failed to render a mutual, final and definite award.
There is a good deal of case law interpreting the above some-what cryptic grounds. Decisions interpreting the above four sections indicate that a court asked to vacate an arbitration award generally only looks to see if there was an enforceable arbitration agreement, was the arbitration conducted in accord with that agreement, was the arbitration “corrupt” (for example, due to some undisclosed conflict of interest that an arbitrator had), and/or did the arbitrator demonstrate a “manifest disregard” of the law. In other words, the court is not supposed to act as an appeals court; its review is supposed to be very limited, and the court is not supposed to “substitute its judgment” for that of the arbitrator, or examine the underlying merits of the case.
As to what constitutes “manifest disregard” of the law such that an award can be vacated, it is not enough to show that the arbitrator erred; as the Seventh Circuit Court of Appeals indicated in Flexible Manufacturing Systems Pty. Ltd. v. Super Products Corp. (1996): ““Factual or legal errors by arbitrators—even clear or gross errors—do not authorize courts to annul awards . . .” . . . The fact that an arbitrator makes a mistake, by erroneously rejecting a valid, or even a dispositive legal defense, does not provide grounds for vacating an award unless the arbitrator deliberately disregarded what she knew to be the law” (quoting Gingiss International, Inc. v. Bormet (7th Cir. 1995)). As such, courts have usually applied “manifest disregard” very narrowly and often with no effect on the “errant” award. Consequently, arbitration decisions are rarely overturned on any of the above grounds. These are the only grounds upon which a party may ask a court to vacate an arbitration decision; they relate to the integrity of the process – not to the merits of the decision.[3]
When an arbitration provision is being drafted, it is important it be drafted in such a way so that later, if a provider obtains a favorable arbitration award, that favorable award cannot be undone on one of the above four grounds. If careful drafting is not done the intended benefits of arbitration (primarily, less cost and quicker resolution), can be lost. For example, a “camouflaged” arbitration provision can result in a fight in court as to whether the participant actually consented to arbitration when the participant signed a waiver agreement. Or, if the arbitration provision is unclear regarding what disputes will be subject to arbitration (“scope of arbitration”), that can result in a fight in court over whether the arbitrators “exceeded their powers” when they issued a decision addressing all disputes between the parties. A poorly worded arbitration provision can make it unclear how the parties are going to select the arbitrator, or which arbitration service (such as the American Arbitration Association, or JAMS) will administer the arbitration, or how the costs of the arbitration will be split; again, such ambiguities can result in courtroom litigation over the issue.
Designating in an arbitration provision that arbitration will be administered by one of the established national arbitration services (like AAA or JAMS), can decrease the risk that an arbitration clause or award will be challenged in court. This is because those services have generally well drafted procedural rules, and rigorous arbitrator selection and conflict-of-interest screening processes. But as discussed below, there are some downsides to designating one of the established services.
Should Activity Providers Include an Arbitration Agreement in the Waiver?
The rationale for including an arbitration clause in a liability waiver agreement is that in the event of a dispute, the provider can usually force resolution of the dispute by arbitration instead of the court system. The most common arguments for arbitration agreements are that the process is more quickly resolved and less expensive than the trial process. These, indeed, were the original reasons justifying the process. Today, however, the process is not always quicker – in fact, the length of the arbitration process depends in part upon the rules of procedure used in the process. Consider that in the court system, a case can be thrown out as early as the pleading stage. Then the case can end quickly in the granting of summary judgment based on any number of legal grounds such as the statute of limitations, no duty, legally insufficient evidence of liability, or a valid waiver of liability. Generally, such early or “summary” resolutions may not be available to a provider under the procedural rules of the arbitration provider. When the applicable procedural rules do not allow for early or summary resolutions, which means the parties will have to go through the time and expense of an arbitration hearing (calling witnesses, presenting evidence and argument, etc.).
With regard to costs, the arbitrator will be paid by the parties involved. In some cases the arbitrator may tend to let the process drag on unnecessarily. Of course, as the process continues, the cost is increased. In addition, the organizations that manage the process (e.g., AAA or JAMS) may charge significant fees and their rules may tend to extend the duration and add to the cost. The hourly rates charged by arbitrators with the established services can be substantial (hundreds of dollars per hour). In contrast, when a dispute is resolved in court, the plaintiff has to pay a filing fee, and the losing party may have to pay some usually limited “court costs,” but neither party has to pay for the judge’s time at some hourly rate. So while arbitration is traditionally less expensive than an entire trial, it may be more costly than a summary judgment decision.
It is generally thought that the arbitrator will focus on the merits of the case and will yield a decision that is “fair” to both parties; hence, there is less chance of an unreasonable award or a result based on a technicality. That is possibly true; however, it might be argued that a decision based on the law might in many instances better serve the interests of the provider – a basis that is more likely in the court system. A common complaint amongst litigators is that arbitrators are less likely to “apply the law” (because they generally don’t have to worry about being overturned “on appeal”), and instead view their role as encouraging settlement, and/or issuing awards that have providers paying out a compromised amount (sometimes 50% of the damages the participant might otherwise have received in a trial), even if the evidence of liability is weak. Such decisions result in neither party being satisfied with the arbitration.
It may be rightly argued that one advantage of an arbitration proceeding is that the hearing will be more private than a trial, and result in less publicity (which may be something a provider wants). In contrast, generally the public and the press has a right to review court filings, and attend trials. Of course, a provider’s attorney can ask a judge to seal court records (the process of removing from general review the records pertaining to a court case), or hold closed hearings, but those requests may not be granted. Also, if an arbitration award is confirmed in a court of law, there would be a record.
Other arguments for the inclusion of an arbitration provision in a waiver or contract include the ability to establish some of the rules of arbitration and the ability to participate in the selection of the arbitrator. Having the choice of the arbitrator can result in an arbitrator who has experience in the field and/or a special knowledge of the issues involved. Finally, it is argued, correctly, that arbitration has a note of finality about it. This finality can serve in the provider’s favor at times; however, the minuscule likelihood of a successful appeal can work against the business entity in the event of a favorable decision for the injured-participant. Remember, the arbitrator is not required to follow the law or applicable evidentiary standards as closely as a judge is. Also, consider the fact that the arbitrator may turn out to be arbitrary or capricious, or may be subject to outside influences, or may have a bias. In addition, an arbitrator has more discretion in making his decision than does a judge – and the likelihood of overturning the arbitrator’s decision is minute. Any of these might also describe a judge, but with a judge, there is a real chance of an effective appeal.
Waiver Law. Each of these arguments in support of arbitration may be valid. Nevertheless, the fact is that arbitration is not a “one size fits all” instrument. There are times when arbitration might indeed be to the provider’s advantage; however, when developing a waiver for the organization or enterprise, it is often difficult to ascertain whether it would be better to go to arbitration or to trial. A major factor in making a choice between arbitration and a court of law might well be the waiver law in the state.
Although the criteria for enforcement of liability waivers vary from state to state, a well-written liability waiver for adult participants has a good chance of being enforced in most states. In other words, the law in most states supports the enforcement of well-written waivers of liability for negligence by providers under certain circumstances. With that fact in mind, it might be to the advantage of the provider to resolve injury disputes in a court of law, in such states that generally enforce waivers. In contrast, there are states in which waivers of liability will not be enforced (e.g., Louisiana and Virginia) and states in which enforcement is very unlikely (e.g., Connecticut, Hawaii, Wisconsin, and Arizona). In such states, providers should probably utilize waivers, but should not rely upon them or expect them to provide protection against negligence in a court of law; and in such states, it might be to the advantage of the provider to resolve injury disputes through arbitration. In such states, providers should give strong consideration to including a well-drafted arbitration provision in their agreements with participants.
Waiver law related to minor participants is more problematic. When the participant is a minor, a waiver signed only by the minor is not enforceable in any state. For that reason, providers rely on waivers signed by the parent or legal guardian of the minor (parental waivers). Ironically, the parental waiver is unenforceable in courts in nearly half of the states. About 15 states tend to enforce parental waivers and about that many simply have not yet addressed that issue. So, when dealing with minor participants, providers in most states are not nearly as likely to gain protection from liability waivers in a court of law. In states not enforcing parental waivers, providers might be more likely to be protected by arbitration since the arbitrator is allowed to focus on a compromise or a decision “fair” to both parties and is not bound to follow the letter of the law and public policy. But, once again, there is little if any chance of reversing an unfavorable decision.
Another factor to consider is the likelihood of a situation in which the plaintiff has suffered a very appalling injury and a large award is possible or likely. In such a case, the provider might be better off adjudicating in a court of law where an unreasonably high award might be less likely than when dealing with a compassionate arbitrator who, out of sympathy, might grant an unreasonably large award to the plaintiff. The same might occur with a jury, but then the provider would have the opportunity to have the jury’s verdict modified by the judge, or to challenge the verdict on appeal. Another view is that a well-qualified, seasoned arbitrator would be better equipped to handle a catastrophic injury case as he or she might be less inclined to fall prey to sympathies.
It is apparent that the arbitration process has pluses and minuses, just as does the court system. It is impossible to say that either one is best for all situations. Each organization or business entity will need to consult with counsel to decide whether including an arbitration provision within its liability waiver is preferable for its situation.[4]
One More Option. After comparing the arbitration process with adjudication in a court of law, there is one other option available to the provider – an agreement to a bench trial. A bench trial is a trial in a court of law, but there is no jury. It is similar to the arbitration process in that one person (the judge) has the authority to hear the evidence, evaluate the arguments of law, and decide the case. When compared with a jury trial, the bench trial should take less time and involve less expense. It also is the option that most likely promises a decision based on an objective application of the law to the facts. Further, awards are more likely to be based on reason and less likely to be founded on sentiment since juries may be more likely to allow emotion to impact their decision. It is generally accepted that the rhetorical skills of a seasoned personally-injury attorney, can have more impact on a jury, than a judge.
The bench trial ensures that the decider has legal training; however, the parties have no say as to who that individual is. The outcome is more predictable than arbitration because the decision of the judge will be constrained by the law and not equitable principles or “fairness” (and if there is a question about it, each party has the right to appeal).
To ensure a bench trial, a pre-dispute waiver of the right to trial by jury must be included in the waiver of liability where allowed by law. When knowingly and voluntarily entered into, pre-dispute waivers of the right to a trial by jury have usually been upheld by state and federal courts. There have been two notable exceptions – Georgia and California.[5] To be enforceable, the waiver must state that the parties have waived all right to a trial by jury in any legal action challenging the enforcement of the liability waiver. The waiver of trial by jury must be conspicuous, clear and unambiguous, and knowingly and voluntarily signed by the client. To bring a jury-waiver provision to the attention of the signer, it should be made conspicuous (such as by providing a clear subheading at the start of the provision, and/or in the provision using a contrasting/conspicuous font style—such as bold print, italics, underling, or larger sized print). It is also not a bad idea to ask the participant to acknowledge the participant’s consent to the jury waiver, by having a place at the end of the provision where the participant enters the participant’s initials.
In many states the bench trial may be an advantageous compromise between the arbitration process and a trial by jury. It has many of the positive features of the arbitration process – generally less expensive and quicker than a trial by jury. At the same time, the bench trial is more likely to result in a decision that is based on the law regarding the issue (and provides for appeal in the event of an alleged error in the interpretation of the law).
Before deciding among arbitration, trial by jury, and a bench trial, the sport, recreation, and fitness provider should consult legal counsel in regard to the best alternative under applicable law. It is also wise to clear the use of an arbitration agreement through the provider’s insurance company (because some insurance policies indicate that an insured cannot unilaterally waive an insurer’s right to have claims resolved through litigation). If a provider decides that an arbitration provision should be included in their agreement(s) with participants, it is important that the provision be thoughtfully and clearly drafted. Poorly drafted arbitration provisions are not enforced, or can lead to time-consuming-and-expensive ancillary courtroom litigation over ambiguities in the provision.
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Endnotes
[1] Atalese Court citing the U.S. Supreme Court in AT & T Mobility LLC v. Concepcion, 563 U.S. 1740, 131 S.Ct. 1740, 1745–46, 179 L. Ed.2d 742, 751 (2011)
[2] Arbitration Appeals http://www.wiggin.com/4801 citing Eljer Mfg. Inc. v. Kowin Dev. Corp. (14 F.3d 1250, 1253 (7th Cir. 1994)).
[3] It is worthy of note that as of Nov. 1, 2013, the American Arbitration Association has made an important change in its arbitration process rules. AAA now allows the parties the option of appealing a case before an AAA Appeal Tribunal which may review decisions based on allegations of errors of law. Agreement to this option may be included in the arbitration agreement; this option lessens the “finality” of the arbitrator ruling, may extend the arbitration by three months, and will prove significantly more costly than arbitration without this option. The advantage is that state law regarding the matter is more likely to be applied.
[4] It should be noted that in some states (such as Wisconsin), waiver agreements must be “entirely separate” from other agreements a provider may be asking the participant to sign (such as a membership agreement, or a registration agreement). In such states, the arbitration clause should be in an agreement that is separate from the waiver agreement.
[5] Georgia’s jury waiver statute, Georgia Code of Civil Practice § 9-11-39(a), specifies the few situations in which the guaranteed right may be waived (See also the Georgia Supreme Court ruling in Bank South, N.A. v. Howard, 264 Ga. 339, 444 S.E.2d 799 (1994)). California courts have also held pre-dispute contractual jury waivers in civil actions are unenforceable on statutory and public policy grounds (Rincon EV Realty LLC v. CP III Rincon Towers, Inc., 8 Cal. App. 5th 1, 2017).
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