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Craft Your Arbitration Clauses Carefully – Under A Recent Maryland Decision, Parties Have Only One “All or Nothing” Opportunity To Enforce Them

Companies and individuals who are weighing the “pros” and “cons” of entering into arbitration agreements consider a whole host of factors in making this complex, and significant decision. Arbitration is often a good choice for parties who have a strong desire to keep their disputes confidential. An arbitration is also typically resolved faster than a civil lawsuit, usually with streamlined discovery and motions practice, resulting in the added benefit of lower litigation costs. Parties who choose arbitration typically prioritize these anticipated benefits over what is typically more exhaustive collection of information and presentation of issues in a civil lawsuit.
When a party chooses arbitration, however, it is critical that counsel express that choice with absolute clarity in a written agreement. A new decision from Maryland’s top court holds that after a civil lawsuit is filed, and a responding party is unsuccessful in moving to compel the arbitration it thought was agreed to, there is no immediate appeal of the denial of the motion to compel arbitration. Instead, the party must add the denial of the motion to compel arbitration to issues raised on appeal after trial.

This decision is a turning of the tide in Maryland’s judiciary regarding arbitration clauses, and a retreat from prior pro-arbitration decisions. This retreat may stem, at least in part, from the growing chatter in legal circles about the perceived overuse of arbitration clauses, particularly in cases where one side imposes the clause on another who has lesser bargaining power.
In Am. Bank Holdings, Inc. v. Kavanagh, No. 21, Sept. Term 2013, two former employees of a mortgage company sued the company to recover sums they claimed they claimed to be owed after ending their employment. American Bank petitioned the Court to compel arbitration pursuant to clauses in their ex-employees’ employment agreements. When the motion to force arbitration was denied, the company appealed the ruling. The Court of Special Appeals refused to even consider the lower court’s refusal to order arbitration, finding that denial of a motion to force arbitration is not a final judgment that is ripe for appeal. Md. Code, Cts. & Jud. Proc. § 12-301.
Maryland’s highest court agreed to take a fresh look at the issue. The Court of Appeals notes that Maryland’s version of the Uniform Arbitration Act, as enacted in 1965, states that an appeal can be taken from the denial of a motion to compel arbitration “in the same manner and to the same extent as from orders or judgments in a civil action.” The American Bank Court interpreted this language as simply reaffirming the status quo that denials of motions to compel arbitration were not immediately appealable because they were not final judgments. As such, American Bank was required to incur the cost, expense and delay of litigating the underlying suit to a final judgment before it would even have the opportunity to argue for enforcement of its arbitration in the appellate Court – at which time, the efficiencies and cost saving benefits of arbitration would have been lost.
The practical effect of this decision is that a party who loses a motion to enforce arbitration typically loses the primary benefits, if not the legal right, to arbitrate. Parties who choose arbitration thus must be absolutely certain that their arbitration provisions are as ironclad as possible. For assistance with these issues, contact Bill Sinclair, head of STSW’s commercial litigation group, at 410-385-9116 or bsinclair@mdattorney.com.

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