Is My Arbitration Clause Valid and Tailored to My Business?

Levy, Jason WEBThere are many issues to consider in deciding whether to include an arbitration clause in your standard contracts.  However, if arbitration is right for resolving your business disputes, it is important that the arbitration clause is drafted properly to ensure it is enforceable and covers only claims appropriate for arbitration.  Under both federal statutory provisions and Florida’s arbitration code, there are several factors courts look at when determining if an arbitration clause is valid and covers a given dispute.

Unconscionability

A party to a contract seeking to invalidate an arbitration clause may argue there is no valid written agreement because the arbitration clause is unconscionable.  Unconscionability concerns the manner in which the contract was entered. It involves consideration of facts such as the relative bargaining power of the parties or their ability to understand the contract terms. For example, a court could find a contract unconscionable if important terms were “hidden in a maze of fine print.”  Unconscionability also concerns the actual fairness of the contract terms.  Florida courts are hesitant to enforce arbitration agreements that severely limit plaintiffs’ statutory remedies or include provisions that eliminate the right to seek punitive damages.  Arbitration clauses that use standard boilerplate language are often too restrictive and can be invalidated on these grounds.

Scope of the arbitration clause

Many arbitration clauses fail to articulate the types of claims the parties wish to submit to arbitration. If your arbitration clause is drafted too narrowly, you may not be able to compel arbitration of important claims.  However, in drafting the clause, a balance must be reached.  If the arbitration provision is drafted too broadly, you may be forced to arbitrate claims that are more easily handled in conventional litigation.

Consistency

Courts have also invalidated arbitration clauses in situations where the contract language used by a business was inconsistent, as was the case in Basulto v. Hialeah Auto.  In the Basulto case, the court noted that there were several inconsistencies between the various agreements drafted by the dealership and signed by the Basultos when they purchased a car. For example, one agreement called for arbitration by a single arbitrator while another required arbitration by a panel of three arbitrators. Additionally, the agreements contained jury waiver clauses, which implied a right to litigate all disputes in court.

Understanding your arbitration provision

The court in the Basulto case also noted that the sales representatives did not understand the arbitration process and therefore could not have been able to adequately explain to the Basultos the rights that they were waiving by signing the agreements, such as their waiver of the right to seek a class action status.

Speaking with an attorney to develop an arbitration provision tailored to your specific business will ensure the right balance is reached to be considered a valid written agreement, cover the appropriate claims, and will help you understand the nature of the agreement so you can explain it if asked.

For more information, please contact our Business and Corporate department at 941.748.0100 and one of our experienced attorneys will help with your business needs.