A new case involving Uber highlights that arbitration agreements may not be as bulletproof as many would like to believe. According to the Los Angeles Times, a California judge ruled that Uber's arbitration clause in its drivers' contracts is unenforceable. That's because…
- The contracts' wording is too vague.
- The drivers couldn't easily opt of the 2013 arbitration agreement.
- Under California law, the clause is considered oppressive.
The report notes that Uber's arbitration opt-out option was squirrelled away near the end of the contract. To complete the opt-out option, drivers were required to hand-deliver a note to Uber's San Francisco headquarters or send a note via an overnight delivery service. That's a lot of legwork to avoid a supposedly voluntary clause.
Though this case may be more bad news for Uber – a company that's no stranger to litigation these days – it emphasizes that contracts are useful risk management tools, but they can't be your only line of defense.
Sign Here: Why Contracts Alone Aren't Enough
This should come as no surprise to anyone: litigation is expensive. It can take months or years before a case even goes to court, and all the while, attorney fees keep ticking like a meter in a cab zipping circles around the city. That's why big companies, startups, and small businesses often hang their hats on arbitration clauses in their contracts.
Here's how it works:
- When an employee or a client signs a contract that contains an arbitration clause, they agree to settle disputes out of court.
- If a conflict arises, an arbitrator (i.e., a neutral third party) will be called in to hear arguments from both parties, assess the evidence, and decide on the dispute.
- It's a much cheaper and quicker alternative to litigation.
For many businesses, these clauses may seem like a concrete risk management move. After all, once the party signs the dotted line, they can't "go back" on their word, right?
But the Uber case clearly demonstrates that even when you have arbitration agreements in place, you may still have to go to court, especially if those clauses are overbearing. Even tame clauses can be challenged. So the big takeaway here is that even when you anticipate risks and try to manage disputes with contracts, you can still get hit with lawsuits.
That's why it's essential to have insurance policies that can help you handle legal expenses in case you're accused of wrongdoing.
Insurance as a Safety Net for Challenged Contracts
Obviously, the goal for any business owner is to avoid lawsuits. They are hard on both your wallet and your reputation. Small business insurance – especially liability insurance – is a necessary fortification for your business contracts.
If your arbitration clause is challenged and a judge agrees it's too far-reaching to be enforceable, at least you have the peace of mind that you won't have to pay all your legal expenses out of pocket. Instead, you simply pay your insurance premiums and meet your deductible, and hopefully, your coverage can handle the rest.
Here are a couple small business insurance policies that might come in handy if an arbitration clause can't keep you out of court:
- Errors and Omissions Insurance. If a client sues your business over the quality of its work or failing to fulfill its side of the contract, this policy can help pay for legal expenses. More on that here: "Don't Forget the Professional Liability Insurance!"
- Employment Practices Liability Insurance. You'll want this policy around if an employee sues your business over mismanaging benefits, discriminatory hiring or firing practices, or breaching an employment contract.
To learn more about how business insurance and contracts work together to form a comprehensive risk management strategy, read "Case Study: How Good Contracts Can Protect You From Legal Trouble."