Morris Manning & Martin, LLP

Effective Drafting of Arbitration Agreements: What Every Lawyer Needs to Know

04.28.2016

Arbitration clauses are commonly included in many different contracts, including corporate governance documents such as LLC operating agreements and shareholder agreements for closely-held corporations.  The Federal Arbitration Act (FAA), the Georgia Arbitration Code and court decisions interpreting those statutes create a strong presumption in favor of arbitration. 

Issues often arise, however, when a party that did not sign the arbitration clause (a “non-signatory”) seeks to compel arbitration or is sought to be compelled to arbitration by a signatory party.  Likewise, disputes can arise regarding whether certain types of tort claims are within the scope of an arbitration clause.  Finally, whether the court or arbitrator should resolve such issues may become a dispute in and of itself. This article will explore these issues and provide practical advice for drafting arbitration clauses.

Compelling, or Being Compelled

Arbitration is a matter of contract.  Thus, the general rule is that a party who did not sign a contract with an arbitration clause cannot be required to arbitrate. The inverse is equally true: a non-signatory cannot normally compel signatories to arbitrate.  Nevertheless, Georgia state and federal courts recognize three limited exceptions where non-signatory participation is allowed:  (1) equitable estoppel, (2) agency, and (3) third-party liability.

Equitable estoppel permits a non-signatory defendant to compel a signatory plaintiff to arbitrate claims that “presume the existence of” and “arise out of or relate to” a written agreement which includes an arbitration clause. For example, in LaSonde v. CitiFinancial Mortgage Co., 614 S.E.2d 224, 226 (Ga. Ct. App. 2005), the court recognized that a non-signatory defendant may compel arbitration if a co-defendant and the plaintiff are signatories to a contract with an arbitration clause and the claims arise out of that contract.

Alternatively, in A.L. Williams & Assoc., Inc. v. McMahon, 697 F. Supp. 488, 495 (N.D. Ga. 1988), the court held that a non-signatory plaintiff may be compelled to arbitrate if a co-plaintiff and the defendant are parties to a contract with an arbitration clause and all the claims relate to that contract. Courts rationalize that a party cannot have it both ways and rely on the contract when it when it works to their advantage but repute it when it does not.

The second default exception is grounded in agency law.  This exception will bind non-signatory principles to an arbitration clause agreed to by an agent so long as such acts were “necessary, requisite or proper,” or the principle thereafter ratified.  For example, in Employers Ins. of Wausau v. Bright Metal Specialties, Inc., 251 F.3d 1316, 1323 (11th Cir. 2001), a contract surety took over performance of a contract.  In doing so, the court found that the surety intended to be bound by the underlying contract, which including the arbitration clause.

The final exception deals with successors in interest or third-party beneficiaries assuming liability. For instance, in Lankford v. Orkin Exterminating Co., 597 S.E.2d 470, 473 (Ga. Ct. App. 2004), the court allowed an exterminator to compel a homeowner to arbitrate, even though the homeowner never signed the extermination contract that included an arbitration clause, because the homeowner had accepted and paid for the benefits of the exterminator’s services.

Determining Scope 

Assuming there is a valid agreement to arbitrate, a court next must determine if the dispute is arbitrable, i.e., whether it is covered by the terms of the agreement.  Litigants sometimes try to avoid arbitration by framing their claims as torts as opposed to claims for breach of the contract that contains an arbitration clause.  They argue that, because they are not seeking to enforce the contract with an arbitration clause, they are not obligated to arbitrate their claims.  Courts have consistently rejected this argument where the contract includes a broad arbitration clause that provides for arbitration of “any claims arising out of or related to the contract.”  See Order Homes, LLC v. Iverson, 685 S.E.2d 304, 308 (Ga. Ct. App. 2009).

It is also important to note that, under Georgia law, agreements to arbitrate certain types of claims – such as wrongful death, personal injury, medical malpractice, insurance contracts, and employment contracts – may not be enforceable.  See O.C.G.A. § 9-9-2(c).

Who Decides – Court or Arbitrator?

Generally, the question of whether an agreement creates a duty to arbitrate a particular grievance is decided by the courts.  This “gatekeeping” duty includes deciding whether the parties agreed to arbitrate, and if so, whether their dispute falls within the scope of the arbitration clause.  There is, however, an important exception to this rule when the contracting parties agree that issues of arbitrability should be decided by an arbitrator. 

Many lawyers who draft contracts with arbitration clauses may not be aware that the rules of the AAA and JAMS both designate the arbitrator to decide issues of arbitrability.  In U.S. Nutraceuticals, LLC v. Cyanotech Corp., 769 F.3d 1308 (11th Cir. 2014), the court held that an arbitration clause incorporating the AAA rules is evidence of a “clear and unmistakable” agreement by the parties to submit issues of arbitrability to the arbitrator.  Thus, by incorporating the arbitration rules of these organizations, the contracting parties give up their right to have a judge decide issues of arbitrability a result they may not intend.

Practical Advice

      When drafting arbitration clauses or handling litigation involving a contract that includes an arbitration clause, lawyers should remember the following:

  • Under certain circumstances, non-signatories can compel arbitration or be compelled to arbitrate.

  • Arbitration clauses that include broad language will cover both tort and contract claims arising from or related to the contractual relationship.

  • By incorporating the rules of AAA and JAMS without any reservations, the parties are agreeing that issues of arbitrability will be decided by the arbitrator, not a judge.

Simon R. Malko is partner in Morris, Manning & Martin, LLP’sLitigation Practice and a member of firm’s Executive Committee.  Hillary Kinsey is an associate in the Litigation Practice.

 

This article first appeared in the Daily Report and on http://www.DailyReportOnline.com.

The opinions express are those of the authors and do not necessarily reflect the views of the firm or its clients.  This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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