Common Mistakes in Arbitration Clauses

Whether you want to have an arbitration clause on your business contracts or not is up to you, and there are a number of pros or cons to having them. But if you do think that they can help you limit liability, or obtain some other kind of advantage, you certainly want to make sure that they are enforceable.

Wording Errors

Many people just slap a broad general arbitration clause in their contracts, and assume that will do the trick. But that’s not true. In many cases, even slight, seemingly semantic alterations in the wording of an arbitration clause, can make the difference between whether it is enforceable or not.

Imagine an arbitration clause that says something like “Employees will be paid $60,000 yearly. Any dispute over employment status or employment payment, will be subject to arbitration” (note that a real arbitration clause would be much more in depth than this).

Six months later, the employee feels that he or she is being retaliated against, and sues. You want to send it to arbitration. The problem is that your arbitration clause only requires arbitration for “employment status” or “employment payment.” It does not require arbitration in lawsuits that are separate from those things, like a retaliation lawsuit.

Imagine an arbitration agreement that requires that any dispute over a shareholder agreement goes to arbitration. The shareholder later sues for a derivative shareholder action and an accounting, or for fraud in the inducement. Are those claims related to the shareholder agreement, thus compelling arbitration? Maybe not.

This is why it is important to have all encompassing, carefully drafted arbitration agreements—if challenged, courts will interpret your arbitration clause narrowly (that is, in favor of the party challenging the requirement to go to arbitration).

Waiving Substantive Legal Rights

Another common mistake in arbitration clauses is forcing parties to waive claims.

Arbitration is supposed to say how the claim is resolved, procedurally—through arbitration. It is not intended to force a party to waive or limit statutory or common law remedies at law. Avoid arbitration clause wording that takes away any legal rights a party has, including any ability to recover anything that he or she would have otherwise been entitled to, other than the right to actually go to court and be heard by a jury.

Rescission and Fraud in the Inducement

Fraud in the inducement is a claim that says that there was fraud before the contract was ever entered into. When parties sue for fraud in the inducement, they usually sue for rescission—a complete undoing of the contract. When that happens, courts usually will not enforce arbitration agreements.

Make Them Clear

Remember to always make sure arbitration clauses are set out from the rest of the agreement—on a different page, or in a different font, or initiated separately—something to avoid the signer from saying that he or she didn’t see it. You don’t want to look like you were hiding an arbitration clause, or making it difficult for the other side to know it was there.

Call the West Palm Beach business litigation lawyers at Pike & Lustig today to help you draft business contracts that work for you.

Source:

epi.org/publication/the-arbitration-epidemic/