Binding Arbitration for the Hobbit’s Central Contract

by Thomas Wagner on January 23, 2013

Wired magazine recently ran a nice legal analysis of the Hobbit’s central contract. Here’s the section on Arbitration, for the benefit of my present and future students of Arbitration Law at CSU/Marshall School of Law.

Mandatory Binding Arbitration in the Dwarvish Tongue

There are also a group of clauses dealing with disputes arising under the contract. This is an important part of many contracts. If you’re going to the trouble of creating a formal legal agreement, then you might as well contemplate what might happen if the deal goes bad. Somewhat anachronistically, the contract contains an arbitration clause:

Disputes arising between the Contract Parties shall be heard and judged by an arbitrator of the Company’s choosing

I say “somewhat anachronistically” because although arbitration has a long history in the common law — going back at least as far as 1609 — it was for centuries frowned upon by the courts. One early case, Vynior’s Case, held that mandatory arbitration clauses (i.e. requiring a party to a contract to submit to arbitration) were revocable.  In other words, parties could submit to arbitration but only by ongoing, mutual agreement. It was not until the 1800s that mandatory arbitration really became acceptable in either England or the US.  See, e.g., Burchell v. Marsh, 58 U.S. 344 (1854).

The other issue is that the clause allows the Company to choose the arbitrator.  This is highly unusual and may actually invalidate the arbitration clause.  In order  to comport with due process, a mandatory arbitration agreement must, among other things, provide a neutral, impartial decision maker.  Typically this is done by allowing the parties to jointly select an arbitrator or to have an impartial third party (such as an arbitration agency) select one.

The next part of the arbitration paragraph is a rarity for an American lawyer:

… and all pleas shall be pleaded, shrewed [sic], defended, answered, debated and judged in the Dwarvish Tongue

Obviously this is a significant disadvantage for Bilbo, as he evidently cannot read (and presumably cannot speak) Dwarvish. Choice of language clauses like this one are much more common in international contracts than in contracts between parties in the United States. They are also much more common in contracts that contain arbitration agreements rather than forum selection clauses (e.g. “any disputes arising under this contract will be heard in the courts of Capital City, State X”) because in most countries the courts only deal in one official language, making a choice of language clause redundant. But when the case will go to arbitration, the chosen arbitrator could potentially speak multiple languages.

However, the most common reason for a choice of language clause is when the contract itself is translated into multiple languages for the benefit of the parties. In that case it is common for the contract to specify that one version is the “authoritative” version.