Chapter 5 - § 5.4 • VOID, VOIDABLE, AND UNENFORCEABLE PROVISIONS IN AN AGREEMENT TO ARBITRATE

• Jurisdiction: Colorado

§ 5.4 • VOID, VOIDABLE, AND UNENFORCEABLE PROVISIONS IN AN AGREEMENT TO ARBITRATE

§ 5.4.1—Terms That May Void An Arbitration Contract/Clause

Generally, the common law of contracts determines the validity of an agreement to arbitrate. Sometimes, provisions within an arbitration agreement will be severed and the arbitration clause enforced. In other instances, the "illegal" clause permeates the entire agreement and makes the arbitration provision unenforceable. See § 7.11.1. One example of a common law rule affecting enforceability is lack of mutuality of the obligation to arbitrate.³⁹

Even if there is an agreement to arbitrate, the agreement may be void or voidable. State and federal statutes provide that agreements to arbitrate shall be valid and enforceable, except on the grounds that exist at law or in equity for the revocation of a contract. These grounds apply to all contracts. If it is a ground for voiding a contract applicable only to arbitration contracts, if the FAA applies, it may preempt and eliminate the ground for voiding the contract.

The Magnuson-Moss Warranty Act, 15 U.S.C. §§ 2301, et seq., has been interpreted by the Federal Trade Commission to preclude pre-dispute arbitration provisions that would eliminate a plaintiff's access to the courts for remedies. This Act has been found to be superseded by the FAA, although the courts are split. The courts are somewhat split as to whether rules issued under the Magnuson-Moss Warranty Act barring pre-dispute binding arbitration clauses, 40 Fed. Reg. 60168, 60211, are valid, given the dictates and policy of the FAA. For example, arbitration clauses are barred.⁴⁰

The grounds under Colorado law for revocation of contracts generally include fraud or deceit, negligent misrepresentation, duress, undue influence, mistake, illusoriness, and impossibility of per-formance.⁴¹ State law probably applies to define these grounds, even when the FAA applies to the arbitration agreement. But see § 5.2.6.

In Huizar v. Allstate Insurance Co. ,⁴² the Colorado Supreme Court held that a trial de novo clause in an uninsured motorist arbitration provision of an automobile insurance policy was void as against public policy. The clause was applicable only when the award exceeded the $25,000 financial responsibility limits of the State of Colorado. The public policies considered were:

1) Policy against dilution of the uninsured motorist coverage;
2) Policy against undue delay in access to the courts and in favor of speedy resolution of disputes; and
3) Policy in favor of encouraging arbitration.

The court noted that the clause favored the insurer because it is unlikely that the insured would ever seek to avoid a high award, even if the award was lower than the insured's expectations.⁴³

An arbitration clause that attempts to bind one party to the arbitration agreement as written, while withholding the power to interpret, modify, rescind, or supplement its terms unilaterally, is illusory, as it binds one party without binding the other.⁴⁴ "Plaintiffs would be both irretrievably bound and at the defendant's mercy, while defendants are bound to nothing."⁴⁵

Similarly, a provision in the arbitration agreement that requires the plaintiff to pay one-half the costs of arbitration may be unenforceable, at least where an employee asserts employment rights and cannot afford the cost of arbitration.⁴⁶ A provision in the clause that limits the hearing to two days may be void if it is an impossible period of time in which the plaintiffs can present their case. Such a provision constitutes a limitation on a plaintiff's access to an adequate forum for statutory relief.⁴⁷ Similarly, where the agreement provided that the prevailing party could recover attorney fees, the statute upon which the claim was based provided for the plaintiff's recovery of attorney fees, and the plaintiff testified that he could not pay attorney fees were he to lose, the contract clause was unenforceable. Thus, as to statutory claims, the arbitration must be an effective and accessible forum for the statutory claims and vindicate the plaintiff's statutory rights.⁴⁸ So, too, a prohibition on post-hearing briefs may violate a statutory right of a plaintiff to collect attorney fees if successful.⁴⁹

The fact that arbitration may result in greater limitations on discovery, either because of express provisions in the arbitration agreement or as a result of the arbitrator's discretion, does not make an arbitration clause invalid, either generally or as to specific claims.⁵⁰

Restrictive provisions that generally may be valid in an arbitration clause may not be valid as applied to statutorily created claims. For example, provisions in arbitration agreements barring the recovery of treble damages, attorney fees, and costs may be invalid when applied to antitrust claims, because they "prevent the vindication of statutory rights under state and federal law."⁵¹

When an agreement is subject to unilateral alteration by the employer, the arbitration agreement may be illusory, unenforceable, and void in its entirety.⁵²

In Encore Productions Inc. v. Promise Keepers,⁵³ the arbitration clause incorporated the Rules of Procedure for Christian Conciliation. Those rules provided that "the Holy Scriptures (the Bible) shall be the supreme authority covering every aspect of the conciliation process."⁵⁴ The plaintiff asserted these rules conflicted with the provision that Colorado law shall govern...