Arbitration News Blog by Herbert Smith Freehills
Class arbitrations have primarily been viewed as an instrument of the US legal system. However, given the international capability and procedural flexibility of arbitration, the scope that they offer for collective redress by consumers is attracting increasing interest.
The appeal of class arbitration
Consumer product disputes, by the nature of the claimants and the subjects of the disputes, can vary dramatically in their scale and take place across the full spectrum of value, from an individual claiming a breach of warranty on their iPhone to the consequences of the mass recall of Toyota cars.
Class action litigation is well established in many jurisdictions as a means of resolving grievances of a large number of claimants. It allows a group of claimants who have suffered the same or similar loss to join their claims in court together against a common defendant or defendants. This mechanism is particularly well suited to consumer products disputes, as the defendant is likely to have provided the same service or product to a large number of consumers who may all suffer a small, but similar, loss.
Collective or class arbitration, by contrast, is a relatively new development. Arbitration sits outside the national court system, offering a neutral forum for dispute resolution around international transactions and an opportunity to address large scale claims through a single mechanism and without a jury. From the perspective of the claimants, class arbitration offers the ability to seek satisfaction of claims that may be too expensive to pursue individually, as well as awards that are potentially enforceable in a broad range of jurisdictions. Arbitration clauses are being included as a dispute resolution mechanism of choice in a wide variety of consumer products contracts.
While at present class arbitration is largely confined to the United States, the spectre of its spread to other jurisdictions makes it worth monitoring elsewhere; both in the development of class arbitration and the availability of class arbitration waiver clauses to limit its use.
The conceptual challenge
The concept of class arbitration has sat uneasily with the fundamental requirement in the arbitral process for contractual consent by the parties. The notion of mass proceedings has been accepted in some arbitrations brought under investment treaties, notably Abaclat v Argentina, which involved 60,000 bondholders as claimants. But it has been more of a challenge to make the class action model fit around commercial arbitration claims based on an arbitration clause in a contract.
An agreement to arbitrate excludes the recourse to the courts to which the parties would otherwise be entitled. The extent to which arbitration can be used is limited by the scope of the consent given by the parties to the arbitration. The arbitration clause should be interpreted in a way that gives effect to the parties’ intention. Arbitration clauses which do not expressly provide for class actions have, in certain circumstances, been interpreted as lacking the consent required to compel the defendant to submit to class arbitration. For example, in Stolt-Nielsen SA v Animal Feeds Int’l Corp (April 2010)., the US Supreme Court held that a class arbitration could not be run because it was of a fundamentally different nature to the bilateral arbitration to which the parties had consented. Notwithstanding this, the concept of class arbitration has been upheld as legitimate in other instances as a means of resolving large scale disputes, with several hundred class arbitrations having been administered in recent years by the American Arbitration Association (both domestic and international). Consequently, claimants in several jurisdictions have started considering the potential of class arbitration.
The United States is the jurisdiction most readily associated with the development of class arbitration. However, judicial opinion in the United States has been somewhat unsettled on the issue of whether class arbitration should be allowed to proceed where the contract does not explicitly provide for it. While the Stolt-Nielsen case (mentioned above) placed strict limits on the use of class arbitrations on policy grounds, in the recent case of Oxford Health Plans v Sutter (July 2013), the United States Supreme Court affirmed an arbitrator’s decision to accept an arbitration brought by 20,000 doctors against an insurance company, even in the absence of clear language indicating consent to class arbitration.
Nevertheless, there remains a deep-seated scepticism among the US judiciary about whether class actions are compatible with the mechanism of arbitration and the position is not yet settled.
Outside the United States, case law in Canada and Colombia has indicated that class arbitrations may be possible in principle, while the German Federal Court of Justice’s finding that shareholder disputes are arbitrable has provoked discussion about the development of class or collective arbitration (along with the publication of specialised rules for large-scale arbitration by a major German arbitral institution). There was also consideration of the suitability of class arbitration in Luxembourg for investors harmed by the Madoff scheme. In Hong Kong, the concept of a class action in any form is a recent development; however, mechanisms for bringing class action litigation have been developed for consumer goods cases and there is speculation that the recent changes may have unlocked the door to collective arbitration.
Enforcement of awards
The difference in approach between jurisdictions has important consequences for the enforcement of awards made in class arbitrations. Jurisdictions which do not recognise the legitimacy of class arbitrations may decline to enforce an award resulting from such an arbitration on the grounds of public policy or a lack of due process. Some of these due process concerns include the difficulty of giving notice of arbitration to members of the relevant class and addressing whether individuals will opt in or out of the arbitration, the confidentiality of proceedings and consent to the appointment of arbitrators. The size of the classes involved sits uneasily with many of the assumptions upon which arbitrations have traditionally been based.
The response of arbitration institutions to the development of class arbitration has been mixed. The American Arbitration Association (AAA) and the Deutsche Institution für Schiedsgerichtsbarkeit (DIS) have specialised rules to cover class or collective arbitration, but they are in the minority. The procedural rules of many arbitral institutions make tacit provision for class arbitrations by allowing the joinder and/or consolidation of multi-party claims even in the absence of consent from all the parties, including the rules of the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA) and the Hong Kong International Arbitration Centre (HKIAC). The Permanent Court of Arbitration (PCA) in The Hague has also resolved a number of private claims using its long-standing mass dispute mechanisms, which may provide a template for future collective arbitrations.
Avoiding class arbitration
Companies often wish to preclude the possibility of class arbitration, due to a perception that class actions increase the cost, frequency and complexity of legal actions brought by consumers. This is generally attempted either by choosing an institution whose rules do not provide for class arbitration or consolidation of claims, or by a waiver clause in the arbitration agreement expressly excluding the use of class arbitrations.
Judicial opinion in the United States on the validity of class action waiver clauses has been widely varied, with many close majority decisions being accompanied by strident and resolutely conflicting dissents. Some courts have given effect to the parties’ freedom to contract. Others, citing strong policy concerns, view the clauses as unenforceable on the basis that they are an unconscionable bar on consumer redress options. The most recent statement of principle on this issue was the June 2013 Supreme Court case of American Express Co. v Italian Colours Restaurant, where a group of merchants brought an arbitration against American Express in relation to certain card charges. The court upheld the class action waiver clause in the arbitration agreement, concluding that American Express could not be compelled to participate in class arbitration where it had been specifically excluded. However, the court observed that where claimants are forced to undertake individual arbitrations, the costs can be so prohibitive as to prevent the suits being brought at all. While those concerns were not sufficient to prevent the waiver being effective here, they have led to a wider debate (particularly, relevant to consumer product disputes) around consumer access to justice and the ability of companies to effectively remove themselves from judicial redress. However, there has been no congressional response to clarify how consumer rights should interact with United States courts’ largely pro-arbitration stance, although some courts have applied this case with reluctance. It is yet to be seen how this matter will be dealt with in other jurisdictions.
The view ahead
Whilst there is currently a lack of uniformity of approach to class arbitration across jurisdictions, arbitration increasingly has the potential to play a role in the landscape of collective redress. Those with an interest in the consumer goods industry should monitor developments in other jurisdictions, in particular the treatment of class action waivers in the United States, to consider the potential impact of collective arbitration in the industry in the coming years.
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