"litigation-avoidance" provisions do not necessarily void appeal rights

By Micah S. Echols, Esq.

I. INTRODUCTION
Because of the high cost of litigation, we are all familiar with “litigation-avoidance” provisions in contracts—provisions that aim to avoid or minimize the exposure and cost of litigation. However, when an appeal is taken, sometimes the purposes of such litigation-avoidance provisions are undermined. This article will discuss: (1) the policies in Nevada favoring provisions for binding arbitration and provisions for an award of attorney’s fees; (2) the effect that an appeal can have on these two types of litigation-avoidance provisions; and (3) preventative methods to maintain the integrity of these two types of litigation-avoidance provisions, even when an appeal is involved.

II. PROVISIONS FOR BINDING ARBITRATION

A. POLICY IN NEVADA UPHOLDING PROVISIONS FOR BINDING ARBITRATION.
In Nevada, there is a strong public policy in favor of upholding the terms of contracts, including a provision requiring binding arbitration. This policy is reflected in NRS Chapter 38, which is also known as the Uniform Arbitration Act. The Supreme Court of Nevada has also recognized that public policy favors arbitration because it “generally avoids the higher costs and longer time periods associated with traditional litigation.” D.R. Horton, Inc. v. Green, 120 Nev. 549, 96 P.3d 1159 (2004). However, the Supreme Court has allowed the district courts to exercise discretion to refuse to enforce a binding arbitration clause as unconscionable when both substantive and procedural unconscionability are present in the contract. Id. The Court defined substantive unconscionability as a lack of bargaining opportunity due to the one-sidedness of the contract terms. Id. Procedural unconscionability deals with the confusing language or fine print used in the binding arbitration provision which prevents an unsophisticated party from having a meaningful opportunity to agree to the terms of the provision. Id.

B. EFFECT OF AN APPEAL ON PROVISIONS FOR BINDING ARBITRATION.
As long as the district court upholds a provision for binding arbitration, an appeal will usually not affect the binding nature of the provision itself, unless that is an issue on appeal. But, even if a binding arbitration provision is upheld in the district court, the non-prevailing party can appeal to the Supreme Court of Nevada based upon both statutory and common law grounds. See NRS 38.247; see also Health Plan of Nev., Inc. v. Rainbow Med., LLC, 100 P.3d 172 (Nev. 2004). While there are certainly some meritorious appeals from arbitration awards, courts have criticized the majority of appeals from arbitration awards as “an additional layer in a protracted contest” that do not reduce the congestion in the judicial system, make the dispute resolution slower instead of faster, and cause a final decision to cost more instead of less. See, e.g., B.L. Harbert Int’l, LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006). As such, because an appeal can be taken from an arbitration award, provisions for binding arbitration standing alone do not avoid the litigation process in all cases.

C. METHOD FOR MAINTAINING INTEGRITY OF PROVISIONS FOR BINDING ARBITRATION.
In order to effectively operate to avoid litigation, a provision for binding arbitration must be combined with a provision for the waiver of appeal rights. The Supreme Court of Nevada has not yet published an opinion its position on the waiver of appeal rights. However, the Court has a very strong policy upholding the waiver of the right to a trial by jury unless the party attacking the waiver provision can demonstrate that the waiver was not entered into knowingly, voluntarily, or intentionally which is determined by (1) the parties’ negotiations concerning the waiver provision, if any, (2) the conspicuousness of the provision, (3) the relative bargaining power of the parties, and (4) whether the waiving party’s counsel had an opportunity to review the agreement. Lowe Enters. Residential Partners, L.P. v. Eighth Judicial Dist. Ct., 118 Nev. 92, 40 P.3d 405 (Nev. 2002).

Accordingly, a provision for the waiver of appeal rights should closely track the Supreme Court’s analysis for the waiver of the right to a trial by jury until the Court provides further guidance. Courts from other jurisdictions deciding the issue of waiver of appeal rights have generally upheld the waivers, relying upon legal principles favoring the enforcement of written agreements. See, e.g., McCall v. U.S. Postal Serv., 839 F.2d 664 (Fed. Cir. 1988); Madigan v. Hobin Lumber Co., 986 F.2d 1401 (Fed. Cir. 1993); U.S. v. Arevalo-Jimenez, 372 F.3d 1204 (2004). However, some courts have refused to enforce the waiver of appeal rights because the waiver language was too broad, ambiguous, or limited to a waiver of only arbitration appeal rights and not judicial appeal rights. See Guseinov v. Burns, 145 Cal. App. 4th 944, 51 Cal. Rptr. 3d 903 (2006); Reisman v. Shahverdian, 153 Cal. App. 3d 1074, 201 Cal. Rptr. 194 (1984). Cf. Pratt v. Gursey, Snider & Co., 80 Cal. App. 4th 1105, 95 Cal. Rptr. 2d 695 (2000). Additionally, some courts have stricken provisions waiving appeal rights when they were entered into unknowingly or involved the waiver of substantive rights in violation of public policy. See, e.g., Callicotte v. Carluccii, 698 F.Supp. 944 (D.D.C. 1988). In the end, the inclusion of a provision for the waiver of appeal rights is perhaps the only way to completely maintain the integrity of a provision for binding arbitration and to serve the underlying purpose of the provision to avoid litigation.

III. PROVISIONS FOR AN AWARD OF ATTORNEY’S FEES

A. POLICY IN NEVADA UPHOLDING PROVISIONS FOR AN AWARD OF ATTORNEY’S FEES.
Nevada also has a very strong policy upholding provisions for an award of attorney’s fees. In fact, even when the district court orders the rescission of a contract, the provision for an award of attorney’s fees survives. Mackintosh v. Cal. Fed. Sav. & Loan Ass’n, 113 Nev. 393, 935 P.2d 1154 (1997). This policy is grounded in the reasoning that the contract did exist and recovering attorney’s fees was contemplated by the agreement. Id. As such, it is very difficult to overcome the contractual provision for an award of attorney’s fees.

B. EFFECT OF AN APPEAL ON PROVISIONS FOR AN AWARD OF ATTORNEY’S FEES.
In line with the Supreme Court’s strong policy favoring provisions for an award of attorney’s fees, the Supreme Court has also held that general provisions for an award of attorney’s fees will also include attorney’s fees incurred on appeal. See Musso v. Binick, 104 Nev. 613, 764 P.2d 477 (1988). The Court’s holding is based on the policy that a party’s contract rights would otherwise be diminished if it were forced to defend its rights on appeal at its own expense. Id. The Court’s ruling implies that to qualify for a recovery of attorney’s fees incurred on appeal, the authorizing provision must be general.

C. METHOD FOR MAINTAINING INTEGRITY OF PROVISIONS FOR AN AWARD OF ATTORNEY’S FEES.
Although the Court strongly favors provisions for an award of attorney’s fees on appeal, including attorney’s fees that are incurred on appeal, careless drafting could possibly prevent a party from recovering attorney’s fees since the right to recover is based upon the language of the contract. Id. The provision upheld in Musso v. Binick stated as follows: “[I]n the event any parties shall prevail in any legal action commenced to enforce the agreement, they shall be entitled to all costs incurred in such action including attorney's fees.” Id. Although a prevailing party can usually be determined as a matter of law, in some equitable actions it is difficult to determine. Additionally, some provisions for an award of attorney’s fees place limits on the forum where attorney’s fees can be recovered, such as only in arbitration. On the other hand, some provisions attempt to include every possible scenario but may fail to include an appeal. It is even possible that when recovery of attorney’s fees on appeal is specifically mentioned in the provision, a distinction may be made that the recovery is limited to the exercise of arbitration appeal rights and not judicial appeal rights. See Guseinov v. Burns, 145 Cal. App. 4th 944, 51 Cal. Rptr. 3d 903 (2006). Therefore, to avoid potential problems of “gilding the lily,” a provision should be used that contains broad language and otherwise complies with the Supreme Court’s guidelines for recovery attorney’s fees incurred on appeal.

IV. CONCLUSION
The usefulness and purpose of litigation-avoidance provisions can be effectively defeated if an appeal is involved. A provision for binding arbitration without an accompanying provision for the waiver of appeal rights may at most change the standard of review on appeal, but the provision for binding arbitration standing alone does not shorten the litigation. Therefore, a provision for the waiver of appeal rights should always be combined with a provision for binding arbitration. Additionally, because of the Supreme Court’s strong policy upholding provisions for an award of attorney’s fees, including attorney’s fees that are incurred on appeal, the main consideration is to properly draft the provision so that it does not limit or carelessly describe the forum where attorney’s fees can be recovered.