Arbitration is being increasingly used by companies, particularly in the United States, to resolve disputes and avoid court litigation, including class actions. A particularly interesting feature of this trend is the use of arbitration clauses in consumer and customer contracts. It is now common to see arbitration clauses in contracts for mobile phones, rental cars and banking services. Arbitration clauses are also being used in employment contracts.

Arbitration clauses have been common in cross-border contracts for a long time. Arbitration provides a neutral forum to resolve disputes, with neither party having a “home-ground” advantage by litigating in its own country’s courts. Also, arbitration awards in cross-border contracts are enforceable almost everywhere under the New York Convention, unlike court judgments which are very difficult to enforce against assets located in other countries.

The use of arbitration clauses in domestic consumer contracts is driven by other factors. In the US, arbitration clauses protect against a company having to defend claims brought in different state courts and jurisdictions. Arbitration can provide a relatively standard process and often cases are decided on the papers, saving the costs associated with court hearings. In the American context, arbitration also avoids civil jury trials.

Increasingly, arbitration clauses in contracts are being drafted to expressly prohibit class action arbitrations. These so-called “class action waivers” have been challenged on various grounds. The United States Supreme Court, in a series of recent decisions, has upheld their validity and effectiveness.

The recent decisions highlight the tantalising possibility that arbitration clauses in contracts may, in effect, eliminate or greatly reduce the risk of class actions brought by consumers, customers, employees or other groups with which a company has contracted.

Arbitration is usually provided for by including arbitration clauses in contracts. Less common but just as effective is entry into a separate arbitration agreement. Arbitration clauses are nearly always drafted to require arbitration of “all disputes” relating to the contract, including its formation and entry. They therefore cover not just claims for breach of contract, but also claims that arise under consumer protection and competition statutes, as well as claims in tort. They have been held to cover claims for misleading and deceptive conduct before a contracted is entered under s 52 of the Trade Practices Act 1974 (now section 18 of the Australian Consumer Law found in the Competition and Consumer Act 2010).

In Australia, the International Arbitration Act 1974 (Cwlth) governs arbitration agreements between entities of different countries and the enforcement of international arbitration awards. Arbitration clauses and agreements between two Australian entities where the arbitration is held in Australia, so-called “domestic arbitrations”, are governed by the various Commercial Arbitration Acts enacted in each State. Although the Acts’ titles refer to “Commercial Arbitration”, they cover any agreement providing for domestic arbitration including contracts between a company and consumers. A claim which is governed by an arbitration clause which requires disputes to be arbitrated cannot, where these Acts apply, be litigated before a court. The court will stay or dismiss the claim, and direct the parties to arbitration in accordance with their agreement.

Whether an arbitration clause allows for class action arbitrations will depend on the particular clause and the particular procedural rules it applies. Arbitration clauses will usually stipulate the procedures that will govern any arbitration. This is often done by using an arbitration institution and that institution’s procedural rules. The most popular institution for Australian domestic arbitrations is IAMA (Institute of Arbitrators & Mediators Australia). For international arbitrations in cross-border transactions, parties often use the ICC (International Chamber of Commerce), ACICA (the Australian Centre for International Commercial Arbitration), HKIAC (the Hong Kong International Arbitration Centre) or SIAC (the Singapore International Arbitration Centre).

Arbitrations which are not administered by an arbitral institution are referred to as “ad-hoc arbitrations”. In those cases, the procedure to be followed is either expressly stated in the arbitration clause (the most common being the UNCITRAL Rules) or will be determined by the arbitrators once appointed.

The procedural rules of the various arbitration institutions are increasingly providing for class action arbitrations by allowing different arbitrations to be consolidated, even in the absence of all parties consenting to consolidation. Parties are, however, free to agree to whatever procedures they wish. Parties wishing to prohibit class action arbitrations can use a set of procedural rules which do not provide for consolidation of arbitrations. Or they can use an institution and procedural rules which do allow for consolidation, but modify those rules by expressly prohibiting consolidation. Alternatively, parties can draft their own procedures.

By having a broad arbitration clause which covers all types of claims which might arise, and by choosing procedures which do not allow for consolidation or class action arbitration, a party can theoretically immunise itself from class actions. All claims, falling under the arbitration clause, would have to be individually arbitrated.

The recent cases before the Supreme Court reflect the sorts of class actions prevented by class action waivers. In AT&T Mobility LLC v Concepcion 563 U.S. ___ (2011), the Concepcions purchased a mobile phone which was advertised as being “free”. While they did not pay for the handset, they were required to pay US$30.22 in sales tax based on its retail value. The Court of Appeals for the Ninth Circuit held that the arbitration clause, which contained a class action waiver, was unconscionable and violated the Californian statute governing contracts. It was therefore invalid and of no effect, and did not bar a class action of such claim being heard by a court. The Supreme Court overruled on the basis that the Federal Arbitration Act allows parties to agree whatever arbitration clause they wish and, being a federal law, prevailed over the Californian law which would otherwise have made the clause invalid.

In American Express Company v Italian Colours Restaurant 570 U.S. ___ (2013), a restaurant merchant brought a class action alleging that American Express breached section 1 of the Sherman Act by unlawfully using its monopoly power to charge merchants excessively high fees. The contract between American Express and merchants contained an arbitration clause with a class action waiver. The plaintiff’s claim, even after trebling its damages under the Sherman Act, was for US$38,549. By comparison, the expert evidence from an economist required to prove its case would cost at least several hundred thousand dollars if not more than US$1 million.

Unlike AT&T v Concepcion, the plaintiff in Italian Colors did not rely on state law to invalidate the arbitration clause. Rather, it challenged the arbitration clause based on previous Supreme Court decisions suggesting that arbitration agreements would only be upheld where parties could still effectively vindicate their statutory rights.

A majority of the Supreme Court held that the arbitration clause did not eliminate the plaintiff’s statutory rights, stating, “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy”. The dissenting opinion pointed out that not only did the arbitration clause contain a class action waiver, it also contained confidentiality provisions which prevented the plaintiff from sharing the cost of preparing its case with other merchants by jointly engaging the expert economist and did not allow the winning party to recover its costs. The arbitration clause “cuts off not just class arbitration, but any avenue for sharing, shifting or shrinking necessary costs”.

A class action waiver was also upheld by the Federal Court of Appeal of Canada in Murphy v Amway Canada Corporation 2013 FCA 38. The Court rejected the plaintiff’s argument that the class action waiver was incompatible with the legislative objectives of Canada’s Competition Act.

While the position in the United States seems to have been settled, it is not clear whether class action waivers will be upheld in Australia, especially where, as in Italian Colors, a particular clause effectively means that no such claim will ever be brought.

One factor which might alleviate concerns in Australia over class action waivers is that nearly all arbitration agreements give the arbitrator discretion over whether costs are awarded. The practice in Australia is for winning parties in arbitrations to recover their costs. This follows the UK approach to costs, which is opposite to the American rule on costs.

Concerns over arbitration clauses being considered unconscionable can also be addressed in various ways. In AT&T v Concepcion, the clause that was held unconscionable under Californian law, but not under federal law which prevailed, provided the following:

  • consumers would fill out a notice of dispute and notice of arbitration using forms on AT&T’s website;
  • AT&T paid the cost of the arbitration regardless of the outcome;
  • for claims of less than $10,000, the consumer would choose whether the hearing was in person, by telephone or on the papers;
  • hearings in person had to take place in the consumer’s county of residence;
  • AT&T could not recover its legal costs; and
  • if the consumer was awarded more than AT&T’s last settlement offer, AT&T had to pay $7,500 minimum recovery and twice the claimant’s legal costs.

In Australia, there are also specific laws prohibiting arbitration clauses in certain contracts, most notably insurance contracts and shipping-by-sea contracts.

It would be no surprise to see the American trend of using class action waivers move to Australia. The American experience shows that arbitration clauses can protect against the risk of class actions whenever there is a contractual relationship between the potential plaintiffs and the possible defendant. Arguments that such clauses are invalid and unconscionable have been rejected in the US and elsewhere. They will no doubt be subject to similar scrutiny in Australia. Assuming Australian courts uphold arbitration clauses with class action waivers, such clauses will likely be used in Australia in contracts of employment, between franchisors/franchisees and in consumer/customer contracts relating to the provision of goods or services.