State intervention removes arbitration clauses

This blog post was written by Stuart Robertson, one of the partners in Kensington Swan’s construction team.

A right to arbitrate a dispute arises from an agreement to arbitrate within the contract entered into by the parties. It reflects the fundamental freedom of choice at the heart of contract law. But are all contracts suitable for arbitration? Many commentators would say yes. Two recent moves by state departments in the US may change that view.

The federal agency that controls $1 trillion in medical spend (the Health and Human Services Department) has introduced a rule to the recipients of its funding to prevent nursing homes from requiring claims of elder abuse and sexual harassment to go to arbitration. The rule bars nursing homes and assisted living facilities that receive federal funding from requiring its residents to resolve any dispute in arbitration instead of court. Affecting 1.5 million residents, the rule is aimed at providing added protection.

The anecdotal evidence is that the current arbitration clauses in all standard form nursing home contracts have significantly reduced legal costs for nursing homes, but at the expense of its residents. It is said that too often residents do not pursue claims in arbitration for fear of being unable to obtain ongoing adequate medical care. For the nursing home industry, they say the Department has exceeded its statutory authority, while the Departments states that this rule will restore a fundamental right of millions of elderly Americans to have their day in court.

The second example was announced in May by the Consumer Financial Protection Bureau, the US’s consumer watchdog. It issued a rule preventing credit card companies and other financial institutions from using arbitration clauses to prevent class actions.

With the ability in New Zealand to consolidate separate arbitrations, it is unlikely the CFPB’s rule would be necessary. However, with the rising numbers of New Zealanders entering retirement/nursing home facilities, will similar Government intervention be required in New Zealand?


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