• With Some Work on the Front End, You Can Almost Always Get What You Want (At Least with Respect to Arbitration Clauses)
  • July 6, 2010 | Author: Thomas H. Peebles
  • Law Firm: Waller Lansden Dortch & Davis, LLP - Nashville Office
  • Legal documents commonly contain arbitration clauses that prohibit the filing of lawsuits and provide for alternative dispute resolution through mediation and/or arbitration. Such clauses, however, often prompt subsequent disputes between the parties in the event of an alleged breach of contract. The limits and parameters of arbitration clauses are an evolving area of Tennessee law. The case in Elliott, et al. v. Icon in the Gulch, LLC (Tennessee Court of Appeals No. M2009-01554-COA-R3-CV-filed May 19, 2010) is yet another chapter in this saga. In Elliott, the purchasers of condominium units filed suit in court and demanded a jury, despite an arbitration clause in the purchase contract that specifically provided that the parties waived all rights to a jury. The purchasers argued that they had been fraudulently induced to enter into their contracts and, as such, they were not bound by the arbitration clause. More specifically, the contracts in question all contained a “choice of law” clause that provided for the application of Tennessee law (which happens to provide that the arbitration of fraudulent inducement claims is inappropriate). The trial court agreed that the “choice of law” clause created an ambiguity in the contract and denied the defendant’s motion to stay the case and require arbitration.
    On appeal, the middle section of the Tennessee Court of Appeals reversed, holding that the existence of both an arbitration clause and a “choice of law” clause does not create an ambiguity in the contract. Since the arbitration clause itself provided for the arbitration of any claims of fraudulent inducement, the Court cited the United States Supreme Court for the proposition that “parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate, so too may they specify by contract the rules under which that arbitration will be specified.” The case was reversed and remanded to allow for the arbitration to which the parties had specifically agreed in the arbitration clause.
    As a takeaway, what steps can be followed to avoid litigation, or to lessen the amount of litigation if a lawsuit is filed despite an arbitration clause to the contrary? The following list provides a few key points:

    1. Many states have enacted versions of the Uniform Arbitration Act. However, there are sometimes provisions in state laws which make it easier to escape from an agreement to arbitrate. Tennessee, for example, has a statute (T.C.A. §29-5-302(a)) which requires that arbitration clauses be separately signed or initialed in order to be binding. Be aware of any quirks in your state’s arbitration laws when drafting agreements containing an arbitration clause.
    2. If interstate commerce is involved, the Federal Arbitration Act (FAA) will apply. Additionally, the parties can always provide for the application of the FAA in their contracts. The application of the FAA provides more certainty that an agreement for arbitration will be enforced, although it is not a guarantee under all circumstances. The FAA preempts state statutes (such as Tennessee’s §29-5-302(a)) which provide escape valves from arbitration agreements.
    3. The language of the arbitration clause itself should be drawn so that it is clear that all disputes, even those involving fraudulent inducement or contract formation issues, must be arbitrated. There should be a clear waiver of the right to a jury and a specific provision providing for the application of the FAA, if so desired.

    As specified by the United States Supreme Court, as well as the Tennessee Court of Appeals, the ultimate question in deciding whether arbitration is required or not is “what the contract has to say about the arbitrability of petitioner’s claim . . . .” Clear language in the arbitration clause may not prevent a lawsuit in all instances, but it can help persuade the trial judge that the case must be stayed so that arbitration can proceed.