Recent Developments in the Case Law of Arbitration

• Publication year: 1996
• Pages: 63
• Citation: Vol. 25 No. 11 Pg. 63

25 Colo.Law. 63 Colorado Lawyer 1996.

1996, November, Pg. 63. Recent Developments in the Case Law of Arbitration

---

63

Vol. 25, No. 11, Pg. 63

Recent Developments in the Case Law of Arbitration

by William J. Baum, Jr

As arbitration has become a more common form of dispute resolution, the courts have begun to focus more attention on arbitration agreements, their enforceability the procedures used to reach decisions, and the nature of consent required to agree to arbitration. It is unusual that the U.S. Supreme Court concentrates so heavily on one subject during a single term, but during the October 1994 term, the Supreme Court decided three cases of major importance dealing with arbitration. One arbitration case was decided in the October 1995 term. These decisions continue to give strong support to arbitration as an alternative to court trials What follows is a review of those cases and a few others of particular interest that were decided during the period from October 1, 1994, through August 1996.

U.S. Supreme Court Cases

The Dobson Case

The most important of the cases decided by the U.S. Supreme Court was Allied-Bruce Terminix Company v. Dobson.(fn1) In that case, the Court reaffirmed that the Federal Arbitration Act ("FAA")(fn2) takes precedence over state laws that may limit or inhibit the use of arbitration as a dispute resolution mechanism.

Alabama has a statute that makes pre-dispute arbitration agreements invalid and unenforceable. When Allied/Terminix agreed to clean out the termite-infested home of the Dobson family in Alabama, the contract they signed included an arbitration provision. Allied/Terminix, which did the inspection and extermination work on the house, was an affiliate of Terminix International, which was headquartered outside of Alabama.

When the Dobsons sued for negligence and breach of contract because of the continued termite infestation, Allied/Terminix moved to have the action stayed while arbitration of the claim was pursued. The Alabama Supreme Court ruled that the parties did not substantially contemplate that the contract for the Terminix services would involve interstate commerce and, as a result, refused to apply the FAA. Instead, it relied on Alabama law, which made the arbitration agreement unenforceable. On appeal, the U.S. Supreme Court reviewed three questions of central importance to a party who uses an arbitration program.

First, the Court was asked to decide whether the FAA applied at all to state courts. The Court decided that the FAA applied to contracts with arbitration clauses whether the enforcement of those contracts was sought in state or federal courts.

The second question addressed by the Court was whether the FAA was applicable to the full extent of the power of the commerce clause of the U.S. Constitution, or whether more limited applications were intended by Congress. The Court concluded that the words "involving commerce" as used in the FAA is the functional equivalent of "affecting commerce," the phrase traditionally viewed as signaling Congress" intent to exercise its full commerce clause powers. The result of the decision is that any contract that has the "slightest nexus" with interstate commerce can be covered by the FAA if the parties to the contract choose to select arbitration as a dispute resolution method.

Finally, the Court in the Allied/Terminix case looked at the question of the fairness of enforcing arbitration as a form of dispute resolution in consumer contracts. The Dobsons claimed that the contract they signed was a contract of adhesion and the arbitration provision should not be enforced. Their argument was that arbitration clauses are, essentially, waivers of the traditional right to jury trials and should not be lightly presumed to be enforceable, particularly where there is an imbalance in bargaining power and understanding of the legal system between the consumer and the institution providing the services or goods involved.

The Court rejected the suggestions that arbitration is unfair to consumers. The American Arbitration Association ("AAA") had filed an amicus brief in the case, and the Court seemed impressed with the statistics presented by the AAA which illustrated that arbitration is cheaper, is faster, minimizes hostility and disruption, and is more flexible than litigation in most cases. However, the Court did leave open the issue of the enforceability of arbitration contracts under state general contract law. In other words, if a contract is unconscionable or was executed as a result of fraud, the contract itself and its arbitration clause might not be enforceable. It is important to parties who deal with the general public and use arbitration as a dispute resolution tool that the Court took this step in affirming the enforceability of arbitration provisions in consumer contracts.

The Casarotto Case

In Doctor's Associates, Inc. v. Casarotto,(fn3) the U.S. Supreme Court reviewed the enforceability

---

64

of § 27-5-114(4) of the Montana Code, which makes arbitration clauses in contracts unenforceable unless notice that the contract in which it appears is subject to arbitration is typed in underlined capital letters on the first page of the agreement. The contract signed by the respondent did not have the required first page notice, and the Montana court had refused to enforce the arbitration agreement.

The U.S. Supreme Court reversed the ruling of the Montana Supreme Court and held that in cases where the FAA is applicable, Montana cannot prohibit enforcement of arbitration agreements in contracts that are otherwise enforceable. The Casarotto decision that states may not single out arbitration clauses for "suspect status[,] requiring instead that such provision be placed upon the same footing as other contracts" also calls into question the continued viability of Lambdin v. District Court.(fn4) In Lambdin, the Colorado Supreme Court refused to enforce an arbitration clause because any agreement to arbitrate a claim under the Wage Claim Act(fn5) is a waiver of a right under the Act by an employee (the right to file a civil action to decide wage issues) and so is void and unenforceable under CRS § 8-4-125.

The Mastrobuono Case

The U.S. Supreme Court also dealt with arbitration issues in Mastrobuono v. Shear-son Lehman Hutton, Inc.(fn6) In Mastrobuono, the Court dealt with the effect of choice of law provisions on remedies available to the arbitrator. In Mastrobuono, a dispute arose between the parties regarding the mishandling of the plaintiff's security trading account...