The Traits that Turn an Arbitration Agreement Invalid

Core Components of an Arbitration Agreement

The essential elements of a valid arbitration agreement are mutual consent to arbitrate, a clear mandate to arbitrate, and identification of the parties to the arbitration. While some of these elements may seem like an afterthought, the intricacies of contractual and agency law in connection with consent become very important when the arbitration clause is challenged as not binding. Without these basic elements, it could be very difficult to have an enforceable arbitration agreement.
Mutual consent to arbitrate is an essential element. Even if the parties do not expressly state, "the parties consent to arbitrate any claims that arise under this agreement (the "Contract")" an enforceable agreement is still present if the parties 1) agree to arbitrate as signified by their assent to the Contract containing the arbitration provision; and 2) evidence mutual consent to arbitrate exists by a course of conduct . A clear mandate to arbitrate is the second element. Without an arbitration clause referencing arbitration, agreeing to arbitrate claims, or stating that it is to be arbitrated, no duty to arbitrate exists and a court is likely to find that an arbitration agreement does not exist. Sometimes, however, the reference to arbitration is so unclear that a court may be required to determine whether the parties have assented to an arbitration proceeding before a proper panel. An effective arbitration clause includes certain information. To be effective, the clause must identify the parties and the arbitral body (the panel of arbitrators) that is to decide the case. For example, if an owner enters into an AIA Contract Documents 2007, the owner will usually be identified first before the contractor is identified. The clause should further identify the mediation and arbitration process.

Frequently Cited Reasons for an Invalid Arbitration Agreement

Several common legal principles can render an agreement to arbitrate invalid. First, where an individual or entity has not given meaningful consent to an arbitration provision, the agreement will generally not be enforced. Where standard forms containing arbitration provisions (such as a lease, credit card agreement, or health care provider’s standard form) are involved, courts focus on the circumstances under which the transaction is entered into and the relative stature of the parties. In cases where an arbitration clause has affected a litigant’s claims against an attorney, courts have found such clauses unenforceable if the client was not able to benefit meaningfully from the arbitration provision because of the attorney-client relationship.
Second, where a contract cannot be enforced according to its terms because the terms are unconscionable, the arbitration provision will not be enforced. Unconscionability is a contract defense that holds that a provision in an agreement cannot be enforced because it is fundamentally unfair. Several states have put teeth into this doctrine by adding a requirement that consumer contracts must meet minimum standards of fairness to ensure their enforceability. For example, Florida law provides that an arbitration provision in a consumer contract where the creditor of one of the parties is also the drafter of the arbitration provision is presumptively invalid.
Finally, a contract cannot be enforced where it is so vague and indefinite as to render enforcement impossible. The doctrine of vagueness is generally considered a matter of state contract law. An example of this can be illustrated in an airline passenger case, where the contract of adhesion fails the vagueness standard if the extent of the airline’s ability to amend the governing agreement is left open-ended.

Fraud and Duress in Arbitration Agreements

The Role of Fraud and the Use of Duress
Just because an arbitration agreement is not expressed to limit the scope of the claims submitted to arbitration does not eliminate the possibility it may be rendered invalid if it was a product of fraud or the other party’s undue influence. For example, a dispute that arose out of a purchase of stock in a private company was held to be outside the scope of the parties’ agreement to arbitrate claims "in any way related" to the agreement. McCausland v. RSB Gagliano & Assocs., Inc., 1998 WL 291046 (E.D. Pa. May 22, 1998). The purchase agreement requiring the signing party’s acceptance of any dilution of its stock was signed under duress. See also, Young v. Crozer-Chester Medical Center, 2016 WL 5342661 (E.D. Pa. Sept. 26, 2016) (Under duress, a loan agreement was signed to secure a 200,000 loan to fund medical treatments for an employee and the employee subsequently refused to treat the employee for psychosomatic symptoms after the loan was paid.).

“Ambiguities” in Arbitration Clauses

Sometimes it is the ambiguity of the agreement that renders it invalid. The arbitration clause must be clear and must give the parties notice that any dispute will be resolved in arbitration. In other words, the clause "must be sufficiently clear" to inform the parties of what claims must be arbitrated. Where the "language of the agreement is unclear or ambiguous, courts are to apply common law principles of contract interpretation . . . ." If the interpretation of the agreement is ambiguous – it is for the court to construe the ambiguity against the drafting party, or those from whose drafting source the clause was taken.

Competency and Capacity Issues

One of the fundamental doctrines in all contract law, including Arbitration Agreements, is that no contract may be formed by a person or persons who lack legal capacity and competency to understand the import of the agreement. Again, this is universal concept and applies to most contracts. However, an Arbitration Agreement is a contract and as the one and only way parties may enforce a contract against one and other (provided there are no signed waivers of the parties’ right to sue in a Court of Law) is by filing a request for an order to Compel Arbitration in a Court of Law, before the appropriate Court of Law, which is generally established by statute or if no statute exists according to general principles of law, the Substantive Law of California and the Statutory Rules of the California Code of Civil Procedure must be followed.
Under the California Arbitration Act, the Court of Appeal has stated that a contract requires that parties "must have intended to create a legally binding obligation" in order to form a contract. The presence or absence of "contractual intent" is a question of fact. In California, Courts have determined that a party cannot establish contractual intent "solely because the other party manifestly failed to recognize" the legal effect of the contract. More particularly, the Court has stated that "evidence that the parties have objectively manifested an intent to be legally bound will support an enforcement of the contract, notwithstanding evidence that a party subjectively intended to create no legal obligations."
In the case of Hughes v. Epstein, the Court held that the parties’ signed statement "that the parties do not intend this instrument to be legally enforceable" is conclusive, "even if the parties subsequently conduct themselves in a manner contrary to such statement." (Even though in that case, the Court found that statement was inconsistent and was subject at best to a reasonable inference of doubt as to the parties’ intent.) Other courts, have concluded that the moot point is not whether the parties are in agreement that they do not intend a written instrument to be legally enforceable. Rather, it is whether the parties’ objective manifestations of intent are inconsistent with, or subject to a reasonable doubt as to , their subjective intent. In Hughes v. Epstein, the court indicating that the parties did not intend to be legally bound by the written statement "we do not intend to bind ourselves… into a legally enforceable contract" in the agreement.
In Hughes v. Epstein, the parties were involved in custody and property disputes prior to the entry of their divorce judgment. The parties’ differences prompted them to attempt to negotiate a settlement of all of their disputes, including a custodial agreement, in a corded arbitration proceeding.
The terms finally arrived at by the parties were typewritten on a standard form contract, and signed by both of them. In handwriting, the parties’ stated: "This is just an agreement to arbitrate the issues between us – mediation or otherwise. We do not intend this instrument to be legally enforceable." The "agreement" included all of the parameters of the parental and property settlement agreements, but contained no provision that it was subject to further approval by a judicial officer. The parties executed the agreement, paid the arbitrator’s fees, and he set dates and time for hearings, which were attended by both parties. Shortly thereafter, the parties executed their official divorce judgment and submitted the "agreement" of the Arbitrator that they had entered into. The Court adopted only that portion of the Arbitrator’s award which specifically stated that the parties would share joint physical and legal custody of their two children. It deleted all references in the award to the property settlement.
The Court of Appeal affirmed the lower Court’s decision that the agreement was not binding. The Court found that the parties had specifically stated that they did not intend the document to be enforceable. Furthermore, the agreement called into question the agreement’s legality by even including a provision subjecting the agreement to Court approval.
As you can see this is a critical factor for parties to consider prior to entering into entering into any type of Arbitration Agreement, whether it is consumer related, contractual or personal. Essentially, the parties must expressly state in writing that the Arbitration Agreement "is a contract" and that the intent is to be legally bound.

Public Policy and Illegality Considerations

Arbitration agreements that contravene public policy or are illegal are invalid. There are jurisdictional differences in the extent to which arbitration agreements contrary to public policy or that are illegal are enforced. For example, in Nigeria, non-arbitrability of disputes relating to the capacity of a person to sue is one of the relevant public policy concerns that attracts the invalidation of an arbitration agreement. However, in the United Kingdom, the restriction on the category of arbitrable disputes to those with a commercial character was considered a rigid doctrine which has been watered down to admit wider categories of disputes. Thus, agreements in which a party unlawfully excludes itself from liability for a tortious act will not be recognised. The courts have determined that the scope of non-arbitrable disputes has gradually expanded to include other than strictly commercial disputes.

Judicial Tests and Case Law

Once potentially unconscionable provisions have been identified, the arbitration agreement can then be challenged in court. There are three ways that agreements become challenged in court or court precedent becomes established. The first way is through a private entity, usually an employee, providing a "test case" example or a "strawman" arbitration agreement to court. The court will then review the arbitration agreement to decide whether or not it will become invalidated.
Another method by which courts challenge arbitration agreements is through a "class certification," which is when a class of aggrieved employees or consumers approach the court and collectively attempt to invalidate an arbitration agreement. Courts may also review agreements through a "dispositive motion . " This occurs when one party in a case attempts to remove a dispute or certain claims within a dispute from litigation (the judicial process) into arbitration itself. The court will then review whether that specific claim should remain in court. If so, the claim will be removed from arbitration back into court.
Sometimes courts will decide to take on the challenge themselves, either because the private entity fails to file a suit or if a party fails to make a motion to move the dispute to arbitration. Although courts maintain the discretion to review the arbitration agreements upon their own accord, this is rarely how an agreement becomes invalid. The majority of the time an agreement becomes overturned through a private entity and the "court precedent" that follows.