Chapter 5 - § 5.2 • REQUIREMENTS FOR AN AGREEMENT TO ARBITRATE

JurisdictionColorado
§ 5.2 • REQUIREMENTS FOR AN AGREEMENT TO ARBITRATE

The references in this section to an agreement to arbitrate are to either an arbitration clause in a contract for a transaction other than arbitration or an agreement limited to defining arbitration for a specific dispute(s). Both are agreements to arbitrate, and both must fulfill the statutory and common law requirements to be enforceable.

§ 5.2.1—FAA Requirements For A Valid Arbitration Agreement

Arbitration clauses at common law often were not enforceable. This was changed by the adoption of the FAA, and thereafter in many states by the passage of the Uniform Arbitration Act or its equivalent. As noted in Chapter 2, the public policy of Colorado favored arbitration long before the adoption of the FAA or the Uniform Arbitration Act.

FAA § 2 provides:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

FAA § 9 provides for confirmation of an award, "[i]f the parties in their agreement have agreed that a judgment of the court shall be entered upon the award." The transactions and contracts to which the FAA applies are discussed below. However, the elements of a valid arbitration clause under the FAA are:

An agreement in writing:

1) To submit an existing or future dispute to arbitration; and
2) Providing that judgment may be entered by a court on the award.

This probably does not mean that there must be any explicit language that an enforceable judgment may be entered by a court on the award.1

The FAA does not require that the agreement to arbitrate be signed by the parties.2

As indicated above, the only statutory requirement for an arbitration agreement is that it be in writing (physical or electronic form). If an agreement is governed by the FAA, it might also need to state that a court may enter judgment on any award.

The FAA § 9 statement that confirmation is authorized where "the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration," has resulted in litigation, probably unnecessarily. For example, providing in the agreement that the award was "binding" was held to not fulfill the § 9 requirement,3 whereas "shall be final and binding on the parties" has been held sufficient.4 A provision that the award "shall be final and binding upon each party and may be enforced in any court of competent jurisdiction" fulfills the requirement.5 Similarly, where the arbitration agreement did not have a provision that judgment may be entered upon the award (FAA § 9), the incorporation of American Arbitration Association (AAA) rules that provided that the parties all be deemed to have consented that judgment upon the award may be entered sufficed to fulfill § 9.6

In a somewhat unique case, a federal district court held that "in the cotton yarn textile industry a plaintiff is subject to the general obligation to arbitrate disputes and must proceed by arbitration, if at all, due to the established usage of trade in the industry."7 Generally, custom is incorporated into all contracts.

Where an agreement governed by the FAA fails to provide that judgment may be entered on an award, the losing party may assert that the award cannot be enforced. Such an attack probably will not succeed, since incorporated rules may so provide.8

An arbitration agreement may be very short, e.g., "the parties agree to arbitrate any dispute that arises, hereinafter, or that exists with respect to a subject," plus perhaps a provision for enforcement in a court. Indeed, in one non-Colorado case, only two words in an agreement were held to constitute an agreement to arbitrate: "arbitration clause."9 The details of the arbitration process are defined by the applicable statutory and common law, and the agreement of the parties, and thereafter further defined by the arbitrator pursuant to his or her inherent powers. Frequently, "agreements of the parties" incorporate the rules of the AAA or other arbitral organization, which make them a part of the agreement.

By contrast, the arbitration agreement may be extremely long and detailed, defining the arbitration process in minute detail. If not contrary to applicable statutory and common law provisions that do not allow variation by agreement of the parties, the parties generally are free to define their arbitration procedure, and the arbitrator must proceed in accordance with the agreement. Arbitration is not a single "system." Rather, within the limitations of the statutes, the parties can design by agreement the system that best fits their needs. With limited statutory exemptions, the agreement of the parties governs.

In summary, the agreement of the parties governs the arbitration to the extent of its terms, except to the extent that statutory and common law may restrict that agreement in a few limited areas.

A valid "short form" arbitration agreement might read:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.

Even if this is all that the parties have agreed to, it is an enforceable arbitration agreement. The applicable statute and the arbitrator's inherent powers to define the procedure and system supplement this clause.

Website Arbitration Clauses in Retail Purchases

In frequent litigation are the website purchases where an arbitration clause is a part of the purchase. For example in Nguyen v. Barnes & Noble, Inc.,10 the issue was whether the plaintiff/purchaser had assented to the website's "Terms of Use," which would make them part of the purchase contract. The terms provided for arbitration. The terms were available to visitors to defendant/sellers websites via a hyperlink in the lower left corner of every page of the website. Plaintiff never pulled up the terms or otherwise read them. The "Terms of Use" were a browse wrap agreement: one where "the user can continue to use the website or services without visiting the page hosting the browse wrap agreement or even knowing that such a webpage exists." Compare a "click wrap" agreement, which requires the user to "click" on a box indicating agreement with the terms.

The court, in holding that there was no agreement to arbitrate, said:

[W]here a website makes its terms of use available via a conspicuous hyperlink on
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