Arbitration: Past, Precedents, and Future

By Scott G. Hawkins | Grasford W. Smith | Jacob Z. Coates

Is it wise to pursue arbitration as a form of alternative dispute resolution?

This is an important consideration for both practitioners and clients. For many types of practitioners — from the transactional attorney considering including an arbitration clause in an agreement to the litigation attorney deciding whether to compel arbitration — it is important to have an understanding of the current policies and judicial perspectives, as well as the practical advantages and disadvantages arbitration may offer for clients. For years, arbitration has maintained the reputation of being a quicker, cheaper, and more flexible alternative to litigation, making it an attractive option for clients. Making an informed decision about whether to pursue arbitration requires practitioners and clients alike to be up-to-date on this continuously evolving method of dispute resolution. 

This article is intended to provide an introduction as well as explore the current trends in arbitration. Future installments will include discussions regarding 1) practical advantages and disadvantages of arbitration; 2) defenses to arbitration; 3) appealing an arbitral award; and 4) designing arbitration clauses for particular practice areas.

What is Arbitration?

Arbitration is a private process that provides disputing parties the opportunity to resolve disputes before one or several individuals who are empowered to render a binding decision after receiving evidence and hearing arguments. Arbitration differs from mediation in that the neutral arbitrator has the authority to make a decision about the dispute. The arbitrator’s decision is final and can be enforced by a court. A mediator, by contrast, does not decide who is right or wrong. If the mediation does not result in the parties resolving their differences, the parties can go back to court and the judge or jury will resolve the issue. 

In many ways, arbitration is similar to a trial during which parties make opening statements and present evidence to the arbitrator, then the arbitrator issues a decision. One key difference is that arbitration is generally less formal and more flexible than traditional trials. For example, the parties are often not required to follow state or federal rules of evidence and, in some cases, the arbitrator is not required to apply the governing law. Furthermore, once an arbitrator has rendered a decision, the available grounds for challenging that decision are limited.

Contractual Arbitration Provisions

Arbitration issues often arise when parties have entered into an agreement containing an arbitration clause. Arbitration clauses can range from simple to complex, and may be as broad or narrow as the drafter chooses to make them. For example, the American Arbitration Association suggests the following standard clause for use in contracts:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial [or other] Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

Arbitration clauses come in many forms and can be customized to provide for the use of certain rules or for application to specific types of disputes. The language of the arbitration clause determines both the scope of the issues subject to arbitration and the scope of the arbitrator’s corresponding authority. Accordingly, it is important to pay close attention to the language of the arbitration clause before entering into an agreement containing such a provision.

The Rise of Arbitration

A complete understanding of the policies and attitudes towards arbitration today requires some knowledge of the history of arbitration. Before 1925, English and American common law courts routinely refused to enforce agreements to arbitrate disputes. During this time period, there was judicial antagonism towards arbitration which “manifested itself in a great variety of devices and formulas declaring arbitration against public policy.” However, this changed in 1925 when Congress adopted the Arbitration Act in response to the perception that courts were unduly hostile towards arbitration. In Congress’s judgment, arbitration offered the promise of quicker, more informal, and often cheaper resolutions for everyone involved. Accordingly, Congress directed courts to abandon their hostility and treat arbitration agreements as “valid, irrevocable, and enforceable.”

The Federal Arbitration Act: When Does It Apply?

The Federal Arbitration Act (FAA) states that it covers “any written provision in any contract evidencing a transaction involving commerce.” The FAA has been held to control whenever a transaction involves interstate commerce. A court making this determination will look to whether the transaction in fact involved interstate commerce, even if the parties did not contemplate an interstate commerce connection. The interstate commerce standard operates to give the FAA an expansive reach.

In cases which do not implicate interstate commerce, it is important to look to the applicable state law regarding arbitration clauses. For example, in Florida, an arbitration clause in a contract not involving interstate commerce is subject to the Florida Arbitration Code (FAC). Even if the contract does involve interstate commerce, the FAC still applies to the extent that it does not conflict with the FAA. Accordingly, the Florida practitioner should be aware that there are instances in which both the FAC and the FAA will apply.

Federal and State Judicial Attitudes Toward Arbitration

The U.S. Supreme Court has repeatedly held that the FAA establishes “a liberal federal policy favoring arbitration agreements.” In Moses H. Cone Memorial Hospital v. Mercury Construction Corp., the Court found that the FAA establishes that, as a matter of federal law, any 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 of waiver, delay, or a defense to arbitrability.

Florida courtshave similarly endorsed arbitration clauses as being “generally favored by the courts.” In MV Insurance Consultants v. NAFH National Bank, the Third District Court of Appeal noted that “[i]t is well-established that Florida law and public policy strongly favors arbitration and courts are encouraged to resolve all doubts in favor of arbitration.” The Florida Supreme Court has stated that “arbitration is a favored means of dispute resolution and courts indulge every reasonable presumption in upholding proceedings resulting in a binding arbitration.”

One illustrative example of Florida courts favoring arbitration is the line of cases which hold that even where the contract as a whole may have been procured by fraud, the arbitration clause is still valid unless the fraud was directed at the clause itself. In Simpson v. Cohen, the Florida Fourth District Court of Appeal held that “it is well-established that a dispute must be arbitrated where a complaint alleges fraud seeking to avoid or invalidate an entire agreement, rather than just the arbitration clause contained within the agreement.” The court found that “[i]t is only where the complaint specifically challenges the arbitration clause that a trial court is permitted to determine the validity of the arbitration clause before submitting the remainder of the dispute to arbitration.” Similarly, in Beaver Coaches, Inc. v. Revels Nationwide R.V. Sales, Inc., the court made clear that “arbitration clauses are ‘separable’ from the contracts in which they are imbedded, and that where no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud.” The court noted that where there is a broad arbitration clause “only the most forceful evidence of a purpose to exclude the claim from arbitration can prevail.”

Although this language may sound daunting to a practitioner seeking to avoid arbitration, both Florida and federal courts have made clear in recent years that the presumption in favor of arbitration is not absolute. As the U.S. Supreme Court made clear in AT&T Mobility LLC v. Concepcion, arbitration is a matter of contract. Courts, therefore, are instructed to place arbitration agreements on equal footing with other contracts and enforce them according to their terms.

In a recent U.S. Supreme Court case, Lamps Plus, Inc. v. Varela, the Court emphasized the fact that arbitration is, first and foremost, a matter of consent. In Lamps Plus, the Court wrangled with the question of when a party can compel class action arbitration pursuant to an arbitration provision. Writing for the majority, Justice Roberts noted that the first principle that underscores all of the Court’s arbitration decisions is that arbitration is strictly a matter of consent. The Court emphasized that the task for courts and arbitrators is to give effect to the intent of the parties. The Court further explained that parties are free to authorize arbitrators to resolve certain questions, such as whether the parties have a valid arbitration agreement or whether an arbitration clause applies to a certain type of controversy, but the Court will not presume that such authorization has been given based on silence or ambiguity. Therefore, the Court would not infer consent to participate in classwide arbitration without an “affirmative contractual basis for concluding the parties agreed to class arbitration.”[1]To hold otherwise invites the risk of forcing unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide.

Recent federal district court cases also reflect this emphasis on the importance of analyzing arbitration agreements the same way as any other contract. In Rightnour v. Tiffany and Company, the Southern District Court of New York found that “a party to an agreement may not be compelled to arbitrate its dispute with another unless the evidence establishes a clear, explicit and unequivocal agreement to arbitrate.” The court went on to state that “the presumption in favor of arbitrability should only be applied where a validly formed and enforceable arbitration agreement is ambiguous about whether it covers the dispute at hand. In other words, while doubts concerning the scope of an arbitration clause should be resolved in favor of arbitration, the presumption does not apply to disputes concerning whether an agreement to arbitrate has been made.” Cases like Rightnourdemonstrate one way in which courts can resist arbitration, even despite the strong language of the FAA.

Arbitration is “a matter of consent, not coercion,” and parties can challenge the formation and validity of a contract containing an arbitration clause.

While recognizing the policy in favor of arbitration, the Florida Supreme Court has also cautioned that neither the statutes validating arbitration clauses nor the policy favoring such provisions should be used as a shield to block a party’s access to a judicial forum in every case. Courts applying Florida law have held that although doubts concerning the scope of the arbitration agreement should be resolved in favor of arbitration, arbitration is favored only as to issues the parties have actually agreed to arbitrate.  Arbitration is “a matter of consent, not coercion” and parties can challengethe formation and validity of a contract containing an arbitration clause.[1]In determining whether an agreement to arbitrate exists, the courts should apply ordinary state-law principles that govern the formation of contracts.

For example, in Cuevas v. Verizon Wireless Personal Communications, LLP, the court considered whether to enforce what it determined to be ambiguous language regarding arbitration in the parties’ contractual agreements. The court noted that it was “mindful that when it interprets provisions in agreements covered by the FAA, it must give regard to the federal policy favoring arbitration, and ambiguities as to the scope of arbitration clause itself must be resolved in favor of arbitration.” However, the court found that it “must also construe ambiguous language against the drafter and no party may be forced to arbitrate a dispute that the party did not agree to arbitrate.” The court stated that the reason for this rule is to protect the party who did not choose the language from an unintended or unfair result. Accordingly, the court denied the request to compel arbitration.

Such cases illustrate just one way in which courts have pushed back against the strong language of the FAA. Although the presumption in favor of arbitration continues to be recognized, it is important for the practitioner to note that traditional contract rules still apply. This means that there must ultimately be consent between the parties for an arbitration clause to be binding.