Arbitration agreements are becoming more and more prevalent in a wide range of contracts. For example, depending on the breadth of the arbitration clause governing the parties’ relationship, arbitration may be compelled in real estate litigation, business litigation, breach of contract actions, and business fraud actions. As such, it is important to understand what arbitration is and how to compel arbitration.
It is helpful to understand what arbitration is and how to draft a valid arbitration agreement. This post explains what arbitration is, the advantages and disadvantages of arbitration, and how to compel an opposing party to enter into arbitration. Given the complexities of this area of law, it would be fruitful to obtain advice from skilled California business attorneys.
Arbitration agreements are generally enforceable under both federal and California law.
A written provision … to settle by arbitration a controversy thereafter arising … or … to submit to arbitration an existing controversy … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
9 U.S.C. Section 2 (“Federal Arbitration Act” or “FAA”). ”
A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.
California Code of Civil Procedure Section 1281. The California Supreme Court has reinforced the viability of arbitration agreements with a recent holding that: “pre-dispute arbitration agreements are specifically authorized by statute.” Grafton Partners L.P. v. Sup. Ct. (PriceWaterhouseCoopers L.L.P.) (2005) 36 Cal.4th 944, 955.
The general favoring of arbitration agreements has created a public policy in favor of arbitration at both the federal and California levels.
Section 2 [of the FAA] is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.
California law, like federal law, favors enforcement of valid arbitration agreements. … As we have observed: “Two years after the FAA was enacted, [California] adopted its first modern arbitration statute…, declaring arbitration agreements to be irrevocable and enforceable in terms identical to those used in Section 2 of the federal act, and since that time California courts and its Legislature have ‘consistently reflected a friendly policy toward the arbitration process.'”
Given the liberal policy at both the federal and California levels of enforcing valid arbitration agreements, it is necessary to understand what an arbitration agreement is and the pros and cons of such an agreement.
Arbitration is a form of alternative dispute resolution whereby a neutral third-party renders a final and binding decision upon the parties to the dispute. Arbitration agreements are becoming more and more common in private contracts. Further, despite the presence of an arbitration agreement, some disputes (i.e. “core” disputes in bankruptcy such as preference and fraudulent transfer actions) are not subject to the liberal policy favoring arbitration.
Arbitration presents certain advantages as a dispute resolution procedure. Arbitration is generally understood to be less time-consuming than typical litigation proceedings. Arbitration is also typically less costly than typical court proceedings because rules of evidence and procedure are often relaxed, unless the arbitration agreement provides otherwise. See Bowles Fin’l Group, Inc. v. Stifel, Nicolaus & Co., Inc., 22 F.3d 1010, 1013 (10th Cir. 1994) (holding that a court has no power to impose judicial rules of evidence on arbitration proceeding (disclosure of settlement offers no ground to vacate award)).
Further, the choice of fact-finders is up to the contracting parties may lead to selection of someone more qualified to hear a given dispute. The privacy of arbitration also allows for greater confidentiality of disputes. Further, the burden on the courts is alleviated by the increasing commonality of arbitration clauses in contracts.
Arbitration has shortcomings as well. First, absent an agreement to the contrary, there is no generally no right to discovery in arbitration. See McRae v. Sup.Ct. (Hale) (1963) 221 CA2d 166, 172. Plaintiffs may be sad to give up their right to a jury in an arbitration proceeding. This is especially problematic given that an arbitration may hand down a ruling based on broad principles of fairness and justice, rather than rules of law that would apply in court. Courts will have limited ability for judicial review of an arbitrator’s decision because “it is the general rule that parties to a private arbitration impliedly agree that the arbitrator’s decision will be both binding and final.” Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9.
It is important to note that while these disadvantages may be present in arbitration, the arbitration agreement between the parties will govern the proceedings and is therefore able to be manipulated in the drafting of the clause and modified by the stipulation of the parties in the arbitration proceedings.
“[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed to submit.” AT&T Technologies, Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986). “The scope of arbitration … is a matter of agreement between the parties.” Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3rd 312, 323. Thus, the first question that a party must answer when deciding whether an arbitration agreement is enforceable is whether the dispute at hand is covered by the arbitration agreement between the parties. If so, there are multiple ways a party to an arbitration agreement may compel arbitration.
There is always an easy solution to the problem of compelling arbitration that the parties simply comply with the agreement and enter the arbitration pursuant to the terms of the contract. Further, a crafty arbitration clause draftsmen may make the arbitration clause self-executing which allow an arbitrator to render a valid award despite one party’s failure to appear. See Nat’l Marble Co. v. Bricklayers & Allied Craftsmen (1986) 184 Cal.3rd 1057, 1063 (holding that no court order compelling arbitration is required in the presence of a self-executing arbitration agreement.) Given the discussion of the public policy in favor of enforcing arbitration agreements, if the dispute at hand is covered by the agreement, it is generally easy to compel arbitration in both federal and California courts if the agreement is not self-executing and one party refuses to enter arbitration.
A party to an arbitration agreement may seek a court order to compel arbitration of the dispute covered by the parties’ agreement in both California courts (CCP Section 1281.2) and federal courts (9 U.S.C. Section 4). “A proceeding to compel arbitration is in essence a suit in equity to compel specific performance of a contract.” Freeman v. State Farm Mut. Auto Ins. Co. (1975) 14 Cal.3d 473, 479.
Another option is for a party to file a motion to stay the pending litigation pending the outcome of the arbitration. A stay must be granted where a court of competent jurisdiction compels arbitration in California under CCP Section 1281.4.
Finally, a party may file a petition for the appointment of an arbitrator. The existence of an arbitration agreement is a pre-requisite for the filing of this petition under both federal (9 U.S.C. Section 5) and California (CCP Section 1281.6) law.
Generally, any doubts as to the enforceability of an arbitration agreement will be resolved against the party asserting the defense “whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460, U.S. 1, 24 (1983); Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3rd 312, 320. Thus, no matter which of the three one chooses, arbitration will likely be compelled by the court.
There are certain instances where hiring an attorney, or at least consulting with an attorney, can be very helpful for arbitration. If you are currently in litigation and want to understand if your dispute is enforceable by arbitration, contact an experienced business attorney who can help you understand your rights. A lawyer can help you create strong pleadings for your case and find an arbitrator who is fair. Because an arbitrator’s decision is final, we highly recommend speaking with an attorney who can help draft the strongest case possible for you going into arbitration.
