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Arbitration Agreement Enforceability

Generally Arbitration Agreements Are Enforceable

When faced with the question of whether or not to enforce an agreement to arbitrate, American courts routinely uphold the vast majority of arbitration clauses.  The legal basis for upholding contractual arbitration clauses is the Federal Arbitration Act, which mandates that arbitration agreements “shall be valid, irrevocable, and enforceable.”  In Southland Corp. v. Keating, the Supreme Court of the United States held that if the agreement involves any element of interstate commerce, the Federal Arbitration Act applies to both federal and state courts.

If an arbitration agreement deals purely with an issue of intrastate (that is, within one state) activities, the law of that particular state regarding the enforceability of arbitration agreements will govern.  Arbitration agreements are generally enforceable in all 50 states; particularly in commercial settings between sophisticated parties.  However, courts in many states are hostile to “fine print” arbitration agreements, particularly between employers and employees.

How Arbitration Agreements are Enforced

In many cases, the presence of an arbitration agreement will be uncontested and parties will simply submit their dispute to arbitration in accordance with the terms of the agreement.  Conflicts over the enforceability of arbitration agreements arise at two points during a dispute.  The first is when a party attempts to bring a claim under the agreement in court rather than through the contractually agreed on arbitral forum.   The second is when the prevailing party seeks to enforce the judgment in court.

Enforcing Arbitration Agreements After a Party Has Brought Suit in Court

Under the Federal Arbitration Act, if a party that has previously signed an agreement containing an arbitration clause attempts to bring a lawsuit in court rather than seeking arbitration, the other party can enforce the arbitration agreement by filing a motion to stay the court proceedings until the arbitration has been completed in accordance with the terms of the arbitration agreement.  In order to stay an action pending arbitration, courts must find three elements:

  1. There is an agreement to arbitrate.
  2. The dispute of the parties is one they have agreed to arbitrate under the terms of the agreement.
  3. The arbitration process called for in the agreement is fundamentally fair.

The first element is the most important.   In challenging arbitration agreements prior to arbitration, plaintiffs are forbidden from challenging the enforceability of the contract as a whole.   Such a claim must first be brought in the arbitration proceeding.  Instead, plaintiffs must demonstrate that the arbitration clause specifically is void.  Plaintiffs typically attempt to attack arbitration clauses as contracts of adhesion.  A contract of adhesion is a one-sided agreement (in either its terms or the parties’ bargaining power) that so offends the normal standards of commerce that it is unconscionable.   This attempt rarely succeeds.  As a general rule, only strong evidence of duress or fraud are sufficient to invalidate an arbitration clause.  It is worth noting that many state courts will to set aside arbitration agreements where the parties have vastly disparate bargaining power (such as between employers and employees).

In evaluating the second element, where a court is unsure as to whether a claim falls within a contractual arbitration agreement, courts generally order arbitration.

Under the third element, courts will stay the court proceedings and order arbitration as long as the nature of the arbitration proceeding provided for in the agreement is fundamentally fair.  Absent a biased arbitration process, courts will order arbitration in a manner that is consistent with the terms of the agreement.

In a few, very limited circumstances, courts have held that disputes in certain areas of law cannot be arbitrated as a matter of public policy.  However, these areas are isolated and the number of areas to which this public policy exception applies has been shrinking over time.

Enforcing Arbitration Awards

After an arbitrator decides a case, the Federal Arbitration Act requires any award to be judicially “confirmed” within one year of the completion date of the arbitration.  After the prevailing party seeks to confirm its award, the losing party has three months to dispute the judgment.  The process of confirming an award transforms it from an arbitral award into a legally enforceable judgment on par with any judgment rendered in court.   Courts can set aside arbitral awards for any of the following reasons:

  • The award was the result of corruption or fraud.
  • The arbitrators demonstrated clear partiality.
  • The arbitrators committed misconduct by refusing to delay the hearing if a delay was necessary or refusing to hear relevant evidence.
  • Arbitrator misconduct prejudiced the rights of a party to the arbitration.
  • The arbitrator exceeded or abused his powers.
  • The arbitrator failed to make a “final and definite award” on the subject of the dispute.

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This website provides information addressing legal topics of interest to the general reader.  You should not consider this information designed or adequate to meet any of your particular legal needs, concerns or inquiries.  You should consult with a lawyer licensed to practice law in the jurisdiction appropriate to your legal situation to assess your situation and provide you with appropriate legal advice.  A good starting point for finding a lawyer is to contact your state’s bar association.

This article is copyrighted by Knowledge Website, LLC – 2010