Jared Ihrig, CUNA’s chief compliance officer, and Alexander Monterrubio, CUNA’s senior director, advocacy and counsel, will also take part in the webinar, which is offered free to CUNA members.
Kawski, partner with Husch Blackwell LLP in Madison, Wis., along with Helfand, a partner with the firm in Chicago, Ill., and Natalia Kruse, an associate in the firm’s Madison office, offer these insights into arbitration agreements.
CUNA News: What’s an arbitration agreement, and why should credit unions include this in contracts with members?
Husch Blackwell: Arbitration is a nonjudicial process for resolving a dispute between parties. Thus, an arbitration agreement is a provision in a contract that allows the parties to resolve covered claims through arbitration rather than in court.
The arbitration agreement may cover all disputes, or it may be limited to specific types of disputes. Additionally, arbitration agreements often include a class action waiver pursuant to which the parties agree to resolve disputes on an individual basis and agree to not bring any class or collective actions in arbitration.
Accordingly, credit unions should include arbitration agreements in their contracts with members to avoid expensive class action lawsuits.
Q: What are the basic components of an arbitration agreement?
A: There is no standard arbitration agreement, and an arbitration agreement may contain provisions specific to the particular credit union. That said, there are some basic components that are seen in most arbitration agreements, including:
Scope. Arbitration agreements include a provision that defines the scope of the agreement. That is, the agreement should define the types of “disputes” that are covered by the agreement.
Right to opt out. Arbitration agreements often include the right to opt out within a defined period. For instance, an arbitration agreement may provide that a member may opt out of the agreement by notifying the credit union within 30 days of entering into the underlying contract.
Arbitration procedure. Arbitration agreements typically set forth procedural guidance for the arbitration process. For instance, the agreement will often indicate how the arbitration is initiated, which arbitral institution will govern the arbitration, how an arbitrator will be appointed, which rules and procedures govern the arbitration, and whether the arbitration decision is binding.
Class action waiver. In a class action, the named plaintiff brings an action on behalf of a group of similarly situated individuals. Therefore, class actions provide a forum for individuals who, on their own and but for the class action, may not have brought their own claims.
The class action waiver provision prevents the parties from bringing a class or collection action in arbitration.
Q: What are the benefits of these agreements?
A: There are significant benefits to having arbitration agreements in contracts with members.
First, arbitration is private, so unlike litigating a dispute in court, the information disclosed during the proceeding and the ultimate decision are not disclosed to the public.
Second, arbitration is often quicker and more efficient than litigating a matter in court. There are typically more limitations on available discovery in arbitration, which in many cases leads to a quicker resolution. As a result, arbitration is usually less costly than proceeding through litigation.
Third, depending on the arbitration forum, the parties may have control over the selection of the arbitrator.
Finally, arbitration agreements allow businesses to limit class and collective actions that would otherwise be available in the judicial forum.
Q: What can happen if a credit union doesn’t use these agreements?
A: If a credit union does not have an arbitration agreement governing disputes with its members, it is at risk of being stuck in protracted and expensive litigation. Moreover, without an arbitration agreement and class action waiver, a credit union is at risk of being named in an expensive class action or multi-party lawsuit.
For example, if a credit union does not have an arbitration agreement and is named in a class action lawsuit, it will be forced to litigate or settle the claims even if they are frivolous. Litigating these claims through trial would likely take years.
On the other hand, if the credit union that is named in a class action lawsuit has an arbitration agreement and class action waiver, it could move to compel arbitration. If the motion is granted, the credit union will avoid the class-wide claims and resolve the dispute with the individual claimant(s). The arbitration could be resolved within a year.
Thus, an appropriately drafted arbitration agreement with a class action waiver allows a credit union to defend against expensive and costly litigation, especially class action lawsuits.
Q: What are some potential drawbacks of these agreements?
A: Arbitration agreements are generally beneficial to include in contracts with members. However, if a credit union receives a favorable decision in arbitration, because arbitration is private the credit union is limited in relying upon that decision as precedent with other members.
That is, resolution of a dispute in arbitration with one member does not bind the resolution of the same type of dispute with another member. Accordingly, in certain situations a credit union may want to have a court decide a dispute to have precedent for similar disputes that may arise in the future.
On the other hand, if the credit union receives an unfavorable decision in arbitration, there are very limited grounds on which to appeal the decision under the Federal Arbitration Act (FAA).
Under the FAA, a party may only petition a court to vacate an arbitration award if the award was procured by corruption, fraud, or undue means; the arbitrator was evidently partial or corrupt; the arbitrator engaged in misconduct regarding evidence or scheduling; or the arbitrator exceeded his or her powers (9 U.S.C.A. § 10).
Courts are limited by Section 10 of the FAA and by the policy favoring resolution through arbitration when the parties have agreed to be bound by the decision.
Another criticism of arbitration and potential drawback is that arbitrators have a reputation of “splitting the baby” rather than making a definite decision in favor of only one party. Under that mindset, arbitrators may be less willing than courts to consider dispositive motions that would have the effect of resolving the case early and without a hearing.
Q: What’s a good starting point for introducing these agreements into member contracts?
A: If a credit union decides to introduce an arbitration agreement into its member contracts, a good starting point is to incorporate the agreement into its membership account agreement. From there, we suggest adding the agreement to credit agreements.
Q: Is there anything else you’d like to add?
A: A credit union should ensure that the arbitration agreement is clear and conspicuous in the contract. For instance, the arbitration agreement and any class action waiver should be in bold or in all capital letters to draw attention to it within the contract.
Additionally, arbitration agreements and class action waivers are generally more likely to be enforced if the member signs or initials the arbitration agreement, in addition to signing the contract in its entirety.
The credit union should, of course, consult with its attorney before introducing an arbitration agreement into any of its contracts.
Credit Union Magazine’s Fall 2023 issue examines how artificial intelligence is shaping marketing, strategies to improve cyber hygiene and overall cybersecurity, the need to employ risk management to address inflation and its impacts, new approaches to board recruiting, and NCUA’s top supervisory priorities.
