The purpose of this article is to address in some depth, the enforceability of arbitration provisions in a contract. Deciding whether to include an arbitration provision in a contract is addressed in a separate article. Here, we talk about how Courts have traditionally and frequently enforced arbitration provisions and the rare situations where an arbitration provision in a contract may not be enforceable.
How do Courts interpret arbitration provisions?
Both the United States Arbitration Act (9 U.S.C. § 1 et seq.) (“the FAA”), and New York law, CPLR 7503 [a], require enforcement of a valid and binding arbitration agreement. In fact the FAA requires courts to “rigorously enforce agreements to arbitrate.” See Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 [1987] (quoting Dean Witter Reynolds v. Byrd, 470 U.S. 213, 221 [1985]).
Under New York law. CPLR 7501 provides that “[a] written agreement to submit any controversy thereafter arising or any existing controversy to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award.” To put it simply, under both the FAA and New York law arbitration clauses are construed as broadly as possible. See S.A. Mineracao Da Trindade–Samitri v. Utah Int’l, Inc., 745 F2d 190, 194 [2d Cir 1984]; See Genesco, Inc. v. T. Kakiuchi & Co., 815 F2d 840, 844 [2d Cir 1987].
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.” See State of New York v. Philip Morris Inc., 30 AD3d 26, 31 [1st Dept 2006], aff’d, 8 NY3d 574, 581 [2007]. Under New York law doubts as to whether an issue is arbitrable will be resolved in favor of arbitration.
The “long-standing rule” in New York, is that “an arbitration clause in a written agreement is enforceable . . . when it is evident that the parties intended to be bound by the contract.” See Fiveco, Inc. v. Haber, 11 NY3d 140, 144 [2008] ; see also Days Impex Ltd. v. Solomon Blum Heymann & Stich LLP, 73 AD3d 615, 2010 NY Slip Op 04441, *1 [1st Dept 2010]. If the Court finds that a valid agreement to arbitrate exists, and covers the subject matter of the underlying dispute, the court’s role ends. Id.
What if you have a claim that the contract is invalid because of fraud?
But what if It is your position that a contract is invalid because it was fraudulently induced? Well, under both New York and federal law, the courts are required to treat an agreement containing an arbitration clause as if there were two separate agreements—the substantive agreement between the parties, and the agreement to arbitrate (Matter of Weinrott [Carp], 32 N.Y.2d 190, 344 N.Y.S.2d 848, 298 N.E.2d 42 [1973]; see also Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 [1967] ). So an agreement to arbitrate will still be enforced even if the substantive provisions of the contract were induced by fraud.” See Markowits v. Friedman, 144 AD3d 993, 996-997 [2d Dept. 2016] ; see also Zafar v. Fast Track Leasing, LLC, 162 AD3d 1100, 1102 [2d Dept 2018] . In plain english this means that in New York, a broadly worded arbitration provision will be deemed separate from the substantive contractual provisions, and the agreement to arbitrate may be valid despite the underlying allegation of fraud.
What if arbitration is optional?
Under New York Law, Courts will interpret a contract as written, even if the wording of the dispute resolution provision is uncommon, non-mutually binding, unilateral, or optional. See Graham v. Command Sec. Corp., 13 N.Y.S.3d 850, (N.Y. Sup. Ct. 2014). In Graham v. Command Sec. Corp. the Court upheld an arbitration provision that was optional to just one party in the agreement. The Court concluded that the plaintiff was bound by what he signed. The Court, enforced the arbitration provision as written.
What if you have a claim that the contract is invalid because of forgery?
Courts have even upheld arbitration clauses where forgery has been alleged. In O’Neill v Krebs Communications Corp., 16 AD3d 144 [1st Dept 2005] the plaintiff claimed that a forgery took place and that agreement was altered after it was signed. However, the Court still enforced the arbitration clause because the plaintiff admitted that he signed an agreement containing an arbitration clause and the plaintiff did not claim that the arbitration clause was changed. The point is, Courts will go through great lengths to enforce an agreement to arbitrate.
Do you need to “consent” to arbitration?
What if you have an agreement to arbitrate but you change your mind and you don’t want to “consent” to arbitration? Well, let’s be clear, you already “consented” to arbitration by including an arbitration provision in your contract. Courts will enforce that. There is no requirement that you later “consent” after being served with a demand to arbitrate. If you really want to contest the enforceability of an arbitration agreement/provision/clause then you can file a motion in Court for that purpose. However, based on all of the reasons discussed above, that motion will almost certainly fail.
When will an arbitration agreement not be enforced?
There are limited circumstances in which an arbitration agreement will not be enforced. They are: (1) the agreement violates public policy or (2) the agreement violates the law of contracts (ex. fraud, duress, unconscionability that relates specifically to that arbitration clause).
