Two Recent Arbitration Cases Address the Impact of Underlying Contract Provisions
As demonstrated by two recent cases, the trends of delegating arbitrability questions to the arbitrator, and precluding parties from contractually modifying appellate rights, are here to stay.
Brennan v. Opus Bank, 796 F.3d 1125 (9th Cir. 2015) arose from a dispute under an employment agreement between Brennan, an executive level employee and his employer, Opus Bank. For reasons related to his assigned job duties, Brennan claimed that he was entitled to terminate his employment for “Good Reason” and collect a severance benefit. After the bank investigated the claim and determined that Brennan did not have “Good Reason” to terminate his employment, the Bank treated Brennan’s termination as a voluntary resignation which did not trigger an entitlement to severance. Brennan filed suit, alleging breach of the agreement and that the termination violated state laws. Brennan’s complaint acknowledged that the agreement included an arbitration provision, but argued that his claims must be resolved by litigation because the arbitration provision “was both procedurally and substantively unconscionable, and therefore unenforceable.”
The bank moved to compel arbitration, asserting that the unconscionability issue had to be decided by the arbitrator because the agreement incorporated arbitration rules of the American Arbitration Association, which vested in the arbitrator “the power to rule on his or her jurisdiction, including any objections with respect to the …validity of the arbitration agreement.” The bank pointed to this as “clear and unmistakable evidence that the parties intended to have the unconscionability question decided by an arbitrator.”
The federal district court dismissed the action in favor of arbitration, and the Ninth Circuit affirmed. The court applied the Federal Arbitration Act, rejecting an argument that California law applied because the agreement reserved certain rights under California law. The court cited numerous cases constituting the “vast majority” of courts which consider incorporation of AAA rules to be “clear and unmistakable evidence that contracting parties agreed to arbitrate arbitrability.” Although the holding was limited to its facts, the court suggested that the ruling could also apply to disputes between unsophisticated parties or to consumer contracts.
A different issue was presented by Atlanta Flooring Design Centers, Inc. v. R.G. Williams Construction, Inc., 333 Ga. App. 528, 773 S.E.2d 868 (Ga. Ct. App. 2015). In this construction case, a general contractor and subcontractor arbitrated a dispute. The subcontractor then filed a motion seeking to vacate the award on statutory grounds under Georgia law. The general contractor moved to dismiss based on a contract provision which stated: “The award rendered by the arbitrator(s) shall be final and binding on the parties and judgment upon the award may be entered in any court of competent jurisdiction. Contractor and Subcontractor hereby expressly agree not to challenge the validity of the arbitration or the award.” The trial court applied the provision and dismissed the challenge to the award. The court of appeals reversed, applying federal case law for guidance in construing the state statutes relied upon by the subcontractor. The court determined that the contractual waiver frustrates public policy and is not enforceable. Accordingly, the subcontractor will be able to seek vacation of the award based on the limited statutory grounds available. Under Georgia law, an arbitration award shall be vacated if a court finds that the rights of a party were prejudiced by 1) corruption, fraud, or misconduct in procuring the award, 2) partiality of a neutral arbitrator, 3) an overstepping by the arbitrators of their authority or such imperfect execution of it that a final and definite award upon the subject matter submitted was not made, 4) a failure to follow statutory arbitration procedure, or 5) the arbitrator’s manifest disregard of the law.
These cases underscore the importance of crafting an arbitration provision which is given attention comparable to other provisions of a contract at the time of drafting. Incorporation of the rules of an arbitral forum binds the parties to those rules unless otherwise stated in the contract, which may or may not be consistent with the actual intent of the parties. By contrast, parties should avoid overreaching such as by seeking to deny a statutory right to appeal or seek to vacate an arbitration award. The grounds for appealing such awards are limited, but cannot be eliminated by private contracts.