Arbitration agreements: compelling and enforcing arbitration
By Michael L. Fortney
- Arbitration agreements
- The arbitration agreement must be written
- There must be a knowing and voluntary waiver of the right to sue in court
- Proceeding to compel ADR
- Questions of arbitrability
- Review of denial of a motion to stay
- Substantive and procedural arbitrability
- Factors considered by the courts regarding arbitrability
- Choice of law and forum selection/location of hearing
- Waiving the right to arbitrate
A. Pre-dispute ADR agreement
Most ADR agreements are entered into before the dispute arises – usually in the contract forming the relationship between the parties. ADR agreements are commonly found in construction contracts, sales agreements, service agreements, employment agreements, brokerage agreements, insurance agreements, etc. Pre-dispute agreements, especially agreements with consumers or employees with unequal bargaining power or sophistication, may be subject to attack in court as unenforceable.
B. Post dispute ADR agreement
Where there is no ADR agreement before the dispute arises, the parties are free to agree to an ADR procedure to resolve any outstanding dispute. Such post-dispute agreements will be less likely to be subject to attack, given the parties exercising the option of entering into the agreement knowing the nature and extent of the dispute.
The Federal Arbitration Act provides:
“A written provision in any . . . contract . . . to settle by arbitration a controversy thereafter arising out of such contract or transaction, . . . or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
Arbitration agreements under the Federal Arbitration Act need to be written, but not necessarily signed. Seawright v. Am. Gen. Fin., Inc., 2007 U.S. App. LEXIS 26328 (6th Cir. 2007). Authority from a number of other circuits supports this view. See, e.g., Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 846 (2nd Cir. 1987) ("[W]hile the [FAA] requires a writing, it does not require that the writing be signed by the parties."); Valero Refining, Inc. v. M/T Lauberhorn, 813 F.2d 60, 64 (5th Cir. 1987) ("We note also that section three of the Act does not require that a charter party be signed in order to enforce an arbitration agreement contained within it."); Tinder v. Pinkerton Sec., 305 F.3d 728, 736 (7th Cir. 2002) ("Although § 3 of the FAA requires arbitration agreements to be written, it does not require them to be signed."); Medical Development Corp. v. Industrial Molding Corp., 479 F.2d 345 at 348 (10th Cir. 1973) ("It [is] not necessary that there be a simple integrated writing or that a party sign the writing containing the arbitration clause."); Caley v. Gulfstream Aero. Corp., 428 F.3d 1359, 1369 (11th Cir. 2005) ("We readily conclude that no signature is needed to satisfy the FAA's written agreement requirement.").
The Sixth Circuit discussed the "knowing and voluntary waiver" requirement in Morrison v. Circuit City Stores, Inc., 317 F.3d 646 (6th Cir. 2003) (en banc). In determining whether an employee "knowingly and voluntarily" waived the right to sue in court, the court considers: "(1) plaintiff's experience, background, and education; (2) the amount of time the plaintiff had to consider whether to sign the waiver, including whether the employee had an opportunity to consult with a lawyer; (3) the clarity of the waiver; (4) consideration for the waiver; as well as (5) the totality of the circumstances." In Morrison, the court found that the plaintiff knowingly and voluntarily waived her right to sue based on the fact that she was "a highly educated managerial employee who was capable of understanding the terms of the agreement" and that the "waiver of the right to file suit in federal court was plain.
1. Petition to compel arbitration
In the event that one party wishes to compel another party to arbitrate a dispute, the Ohio Revised Code offers a process to file a petition with the court to compel a party’s participation in an arbitration proceeding. More often, courts are asked to enforce an arbitration agreement with the filing of a motion to stay a lawsuit.
2. The motion to stay
One party to the arbitration agreement may initiate a court action over an arbitrable dispute. The other party to the arbitration agreement must then either:
(1) agree to the court's authority to rule on the controversy (thereby waiving its right to arbitrate the dispute); or
(2) assert the party's right to arbitrate the dispute under the arbitration agreement.
The assertion of the right to arbitrate the dispute is an affirmative defense. It must be stated in the answer. To enforce the right to arbitrate, the party must then file a motion to stay the lawsuit in favor of arbitration. If both parties to the agreement ignore the right to arbitrate, the right is waived.
3. Courts favor and encourage arbitration of disputes
Both Ohio statutory law and public policy favor and encourage dispute resolution through arbitration. Ohio R.C. §2711.02; Kline v. Oak Ridge Builders, Inc. (1995), 102 Ohio App. 3d 63, 65; Gibbons-Grable Co. v. Gilbane Building Co. (1986), 34 Ohio App. 3d 170, 173.
Ohio R.C. §2711.02 provides:
If any action is brought upon any issue referable to arbitration under an agreement in writing for arbitration, the court in which the action is pending, upon being satisfied that the issue involved in the action is referable to arbitration under an agreement in writing for arbitration, shall on application of one of the parties stay the trial of the action until the arbitration of the issue has been had in accordance with the agreement . . . .
As one court has stated, "R.C. §2711.02 requires the trial court to stay an action brought therein, upon application of one of the parties, when it is satisfied that the issue involved in the action is referable to arbitration under a written agreement between the parties to arbitrate." Kline, 102 Ohio App. 3d at 65 (emphasis added).
The determination of whether a controversy is substantively arbitrable under an arbitration provision of a contract is a question of law for the court, not a question for the jury. The court should decide the issue upon an examination of the contract. However, if the parties in the arbitration agreement vests the arbitrator with the authority to decide issues of substantive arbitrablity, court’s will defer to the arbitrator.
Ohio's Arbitration Act provides that a trial court's granting or denial of a party's motion to stay and refer to arbitration is a final order subject to review on appeal. Ohio R.C. §2711.02. If the arbitration agreement is in a commercial construction contract, the denial of a motion to stay is subject to an immediate appeal.
An arbitration clause is not enforceable if it is found to be unconscionable. Unconscionability is generally recognized to include an absence of meaningful choice on the part of one of the parties to a contract, combined with contract terms that are unreasonably favorable to the other party. Collins v. Click Camera & Video, Inc. (1993), 86 Ohio App.3d 826, 834.
Unconscionability involves two separate concepts: 1) unfair and unreasonable contract terms, i.e., 'substantive unconscionability,' and 2) individualized circumstances surrounding each of the parties to a contract such that no voluntary meeting of the minds was possible, i.e., 'procedural unconscionability'. A party must establish a 'quantum' of both prongs in order to establish that a particular contract is unconscionable." White & Summers, Uniform Commercial Code (1988) 219, Section 4-7.
a. Substantive unconscionability
Substantive unconscionability concerns the actual terms of the agreement and whether the terms are unfair and unreasonable. Collins, supra at 834. Arbitration clauses are unconscionable where the "clauses involved are so one-sided as to oppress or unfairly surprise [a] party." Neubrander v. Dean Witter Reynolds, Inc. (1992), 81 Ohio App.3d 308, 311-312. See, also, Orlett v. Suburban Propane (1989), 54 Ohio App.3d 127, 129 (finding that an arbitration clause is unconscionable where "one party has been misled as to the 'basis of the bargain,' where a severe imbalance in bargaining power exists, or where specific contractual terms are outrageous." )
b. Procedural unconscionability
Procedural unconscionability involves the circumstances surrounding the execution of the contract between the two parties and occurs where no voluntary meeting of the minds was possible. Collins, supra at 834. In determining procedural unconscionability, a court should consider factors bearing on the relative bargaining position of the contracting parties-- including age, education, intelligence, business acumen, and experience in similar transactions--whether the terms were explained to the weaker party, and who drafted the contract. Id., citing Johnson v. Mobil Oil Corp. (E.D.Mich. 1976), 415 F.Supp 264, 268. Additionally, the court should consider whether the party who claims that the terms of a contract are unconscionable was represented by counsel at the time the contract was executed. Eagle v. Fred Martin Motor Co., 157 Ohio App.3d 150, 163, 2004-Ohio-829, at ¶31, citing Bushman v. MFC Drilling, Inc. (July 19, 1995), 9th Dist. No. 2403-M. "The crucial question is whether 'each party to the contract, considering his obvious education or lack of it, [had] a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print ***?'" Lake Ridge Academy v. Carney (1993), 66 Ohio St.3d 376, 383, quoting Williams v. Walker-Thomas Furniture Co. (C.A.D.C. 1965), 350 F.2d 445, 449.
a. Assent. Did both parties assent to the arbitration agreement?
In Seawright v. American General Financial Services, a case decided by the Sixth Circuit on November 13, 2007, the court determined that continued employment after the announcement of an arbitration agreement was considered “assent” to the agreement under Tennessee law.
b. Mutuality. Are both parties obligated to arbitrate the dispute?
Some courts have held that the agreement must be mutual – both parties may only bring claims in an arbitration. In Harmon v. Philip Morris, Inc., 120 Ohio App. 3d 187 (1997), the court ruled that an arbitration agreement requiring employees to submit their claims to arbitration without a similar obligation on the employer, and giving the employer the right to amend or terminate the arbitration program "at any time," lacked consideration because it "neither offered a benefit to its employees nor incurred any detriment by modifying the terms of the employment relationship."
c. Excessive filing fees. The Tenth, Eleventh, and D.C. Circuits have suggested that such cost-splitting provisions per se deny litigants an effective forum for the vindication of their statutory rights.
In Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 148 L. Ed. 2d 373, 121 S. Ct. 513 (2000), the Supreme Court adopted a case-by-case approach to determining whether a cost-splitting provision in an arbitration agreement denies potential litigants the opportunity to vindicate their statutory rights. On this point, the Court commented:
“It may well be that the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum. . . .
Where, as here, a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs.”
Green Tree, 531 U.S. at 91-92 (footnotes omitted).
In Morrison v. Circuit City Stores, 317 F.3d 646 (2003, the Sixth Circuit determined that:
“We hold that potential litigants must be given an opportunity, prior to arbitration on the merits, to demonstrate that the potential costs of arbitration are great enough to deter them and similarly situated individuals from seeking to vindicate their federal statutory rights in the arbitral forum.” Therefore, the court invalidated a provision requiring the plaintiff to pay an amount equal to $500 or 3% of the plaintiff’s annual salary as the arbitration costs.
d. Limitations of remedies: Does the arbitration agreement limit remedies that the parties would otherwise be entitled under statute so as to undermine the rights afforded by the statute?
In Yost v. Procare Automotive Services, the Cuyahoga County Court of Appeals determined in 2007 that an arbitration agreement was substantively unconscionable where it limited an employee’s right to obtain attorneys fees in connection with a potential punitive damage award under section 4112.99.
Courts have invalidated arbitration agreements that impose a statute of limitations on the employee that is more restrictive than the statute.
Ohio Revised Code section 4113.62(D) limits the parties ability to apply another state’s law or forum where the real property is located in Ohio:
(1) Any provision of a construction contract, agreement, understanding, or specification or other document or documentation that is made a part of a construction contract, subcontract, agreement, or understanding for an improvement, or portion thereof, to real estate in this state that makes the construction contract or subcontract, agreement, or other understanding subject to the laws of another state is void and unenforceable as against public policy.
(2) Any provision of a construction contract, agreement, understanding, specification, or other document or documentation that is made a part of a construction contract, subcontract, agreement, or understanding for an improvement, or portion thereof, to real estate in this state that requires any litigation, arbitration, or other dispute resolution process provided for in the construction contract, subcontract, agreement, or understanding to occur in another state is void and unenforceable as against public policy. Any litigation, arbitration, or other dispute resolution process provided for in the construction contract, subcontract, agreement, or understanding shall take place in the county or counties in which the improvement to real estate is located or at another location within this state mutually agreed upon by the parties.
Several other states have similar statutory provisions.
The AAA rules provide that the AAA decides issues of the location of the hearing. The construction and commercial rules provide:
The parties may mutually agree on the locale where the arbitration is to be held. If any party requests that the hearing be held in a specific locale and the other party files no objection thereto within fifteen calendar days after notice of the request has been sent to it by the AAA, the locale shall be the one requested. If a party objects to the locale requested by the other party, the AAA shall have the power to determine the locale, and its decision shall be final and binding.
The AAA employment rules provide:
If the parties disagree as to the locale, the AAA may initially determine the place of arbitration, subject to the power of the arbitrator(s), after their appointment to make a final determination on the locale. All such determinations shall be made having regard for the contentions of the parties and the circumstances of the arbitration.
Parties to an arbitration agreement can waive the arbitration requirements, but only if both parties waive arbitration. Waiver most often occurs where one party files an action in court, and the other party actively participates in the litigation, through the filing of a counterclaim, the filing of discovery requests, etc., without first asserting that the claim is subject to mandatory and binding arbitration.