Expert: Timmy Chou - 2/27/2008

Question
QUESTION: My wife was a contractor providing landscape designs for a small (single person) landscape installation company. She signed an arbitration agreement with the owner to mediate any disputes that arose from their contracting work. The agreement was not drawn up by an attorney, my wife found it on the Internet.

She has since severed her relationship and is attempting to recover money owed to her under this agreement. The owner has been paid in full from two clients and my wife is owed an installation bonus - approximately $2500.

The owner does not dispute the amount in question, but she is demanding a refund for a document that my wife prepared prior to severing her relationship (and which the owner purchased for $285) This document was not covered under the arbitration agreement. The owner is demanding that my wife agree to accept $2215 (but she has not even paid this reduced amount).

I believe small claims court is better venue for us to decide this issue, but the owner refuses and is attempting to force us to accept the lower amount because it would cost less than arbitration. The agreement stipulates that a court can declare the binding arbitration agreement of the contract void.

Does arbitration cover simply refusal to pay an agreed upon amount, an amount neither party disputes? It seems to me the owner is attempting to impose an arbitration agreement on  a non-covered item - and yet she refused to pay anything and conflates the two together. Can't this be viewed as a breach of the arbitration agreement and therefore void it?  


ANSWER: Thank you for your question!

Mediators act as neutral third parties to disputes and never "get involved" in judging the merits of conflict, but merely use special techniques to help the parties decide how to negotiate their own settlement.

I am not a lawyer and cannot mediate this with you alone but I can respond to your question from my business consulting and mediation experience.

Note that this issue may have legal factors and you may wish to consult an attorney.

Your reliance on an arbitration agreement is OK, but you are now in a situation where you may have to pay the entire disputed amount in order to arbitrate the dispute.  This is a problem for you.  

Arbitration does not prevent you from seeking a remedy through the courts -- you can ALWAYS file a lawsuit in this country.  Your argument seems to me to be compelling -- that the owner ALSO had an interest in confining any dispute to an arbitration (and actually paid for the agreement) so it seems a stretch to now say that the cost should be borne by you alone.  My suggestion would be to split the baby, and accept half of the cost of the agreement ($142.50) as a settlement.  Any other course may be more "right" but you will end up spending more to enforce your agreements than you would ever get back (since the costs of the arbitrations and lawsuits will not be recoverable by either side).

You can, if you wish, file a small claims suit.  I doubt the court would throw it out because of the arbitration agreement (but they might).  You likely have a good argument that the cost of the documents was not contested at the time, and a credit was not part of any agreement for compensation.  Of course, this will take time, money and the outcome is not sure.  

These are some ideas.  Feel free to follow up with additional questions.

For your information, the pros and cons of the types of dispute resolution methods follows.

GOOD LUCK!

Arbitration, Mediation, and Litigation

Arbitration: the referral of a dispute to one or more impartial persons for final and binding determination outside of the judicial system

Benefits of Arbitration:

    Confidential, no public record
    Limited exchange of documentation, information
    Quick, don't have to wait for a court date
    Arbitrators have expertise in the subject matter and are trained in conflict resolution
    Cheaper than litigation
    Preserves business relationships

Negatives of Arbitration

    It's a compromise, no %100 winner
    Complex arbitration can be costly
    If not satisfied, may litigate the arbitration procedure
    Poor results with an unskilled arbitrator
    Both parties must agree to cooperate in the process

Mediation: the process by which parties submit their dispute to a neutral third party (the mediator) who works with the parties to reach a settlement of their dispute.

Benefits of Mediation:

    Neutral mediator can objectively suggest alternatives not considered
before
    Parties are directly engaged in negotiating the settlement
    Can be quicker than litigation
    Less costly than litigation
    Preserves business relationships
    85 of American Arbitration Association cases mediated find successful solutions

Negatives of Mediation

    may not reach a binding decision
    unskilled mediator

Litigation: using the judicial system to resolve disputes

Benefits of litigation:

    a clear winner and loser
    uses a prescribed set of procedures
    more predictable outcomes
    is final

Negatives of Litigation:

    waiting for court dates can do more harm
    usually more expensive than mediation and arbitration
    part of the public record

---------- FOLLOW-UP ----------

QUESTION: Contractor has now paid the two bonuses (covered under the arbitration agreement), but deducted $280 which is the amount she previously paid for a document she had previously paid for and later claimed she never received after we severed our relationship.  The document in question was clearly not covered by the arbitration agreement.  Adding to this, I provided her with a second copy of the document, sent by certified mail, which she signed for but said in an e-mail that she was refusing to open the package.   This should be covered in small claims court, right?  At this point, it seems like she's stealing money from me by taking this money out of money owed to me for a completely unrelated job.  Have you dealt with similar occurrences?  What was the outcome?

Answer
You are right.  She is unilaterally "deciding" to backcharge you.  If you go to small claims you will have a strong case.  I would get the forms from the court and fill them out and fax a copy to her with a copy of HER signature page and make sure she is clear that you will not be bulldozed on the matter.  If she loses SHE will have to pay all your court costs which could be nearly double.  Give her a deadline and stick to it.  Good Luck!