Using Arbitration Agreements Wisely

Arbitration is an increasingly popular way for many businesses to resolve their disputes, with arbitration agreements appearing in ever more forums; from supply agreements and other business contracts, to employment contracts, to consumer contracts. The advantages of arbitration, when compared to litigation in court, are often numerous. These include greater predictability of litigation costs, reduced litigation costs, and faster resolution of disputes.

Both federal and state law strongly favor the enforcement of agreements to arbitrate. The Federal Arbitration Act, 9 U.S.C. § 1, et seq., creates “a body of federal substantive law of arbitrability” and represents “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S. Ct. 927, 941 (1983). “[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation or waiver, delay, or a like defense to arbitrability.” Id. “[A court] may not deny a party’s request to arbitrate an issue ‘unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.’” Mehler v. Terminex Int’l Co. L.P., 205 F.3d 44, 49 (2d Cir. 2000).

Though many states have similar laws, even those that do not generally must enforce arbitration agreements since the federal act preempts contrary state law. The preemption is broad; any state arbitration act that treats contracts to arbitrate specially or differently from contracts generally is pre-empted if, as applied, such law is inconsistent with the federal law. Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996).

However, while arbitration agreements generally will be enforced, they are not necessarily appropriate in all types of cases. Cases that raise difficult or complex questions of law, for example, may be better suited to the courts, where the possibility of appeal exists if legal errors are made. Generally, an arbitrator’s decision is not appealable, even if the arbitrator applies the wrong legal standard to a case. Conversely, where the law unambiguously favors one party, for example where a company obtained a release of liability from a consumer as a condition of the provision of a good or service, the courts may be preferable to arbitration since the company may be able to obtain a quick dismissal of a claim against it through a motion to dismiss or for summary judgment.

Given the potential benefits, an agreement to arbitrate will often be a smart choice when entering into a contract. However, such an agreement should not be automatic, and you should always consider the circumstances and the types of disputes that may arise with respect to a contract before demanding or agreeing to arbitrate future disputes.

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