Chapter 7 - § 7.6 • DEFENSES TO THE ENFORCEMENT OF THE AGREEMENT TO ARBITRATE
| Jurisdiction | Colorado |
State contract law generally governs the formation of an arbitration agreement. See § 5.2.3. Similarly, most defenses to the enforcement of an arbitration agreement are based upon and governed by state law.112
FAA
See also § 8.6 as to who decides the defenses, and § 5.13.
FAA § 2 provides that arbitration agreements are enforceable — a mandate of FAA policy that arbitration agreements shall be enforced. However, § 2 further states a major exception to enforcement — that exception being that arbitration agreements are not enforceable upon "such grounds as exist in law or equity for the revocation of any contract." Thus, the arbitration agreement must be a valid and enforceable agreement. The precise words are important. The grounds are those "for the revocation of any contract," not grounds for the revocation of "arbitration contracts." Probably "all" means "any contract." Similarly, case law establishes that "revocation" includes "invaliding," "voiding," and similar terms.
As with interpretation of arbitration agreements, courts look to state law to define these grounds. However, such grounds as any state may have may not be adopted if they impede the implementation of the philosophy of the FAA. When a court under the FAA looks to the state law for such grounds and the elements of those grounds, the FAA is not uniform throughout the United States. The issue of the FAA overriding state law has substantially occurred with respect to the defense of unconscionability. See § 7.6.14.
The U.S. Supreme Court has defined examples of such "grounds" as fraud, duress, or unconscionability.113 However, there is no reason to believe this list is exclusive.
CRUAA
The language of the CRUAA is practically identical to FAA § 2 as to defenses to enforceability of arbitration agreements: an arbitration agreement "is valid, enforceable, and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract."114 If the CRUAA is applicable, these grounds are governed by Colorado choice of law rules. Generally, state law also governs those grounds when the FAA is applicable.115 However, if the state law defense to the enforcement of the arbitration agreement — duress, unconscionability, illusory, etc., see §§ 8.6 and 8.7 — results in no valid, enforceable contract, federal law may preempt state law and thereby avoid the state-law de-fense.116 It appears, so far, that FAA preemption applies only in some circumstances when state law would block the arbitration from going forward.
The court or arbitrator may find that there was an offer containing an arbitration clause and an acceptance of that offer — in sum, a contract. Nevertheless, there may be defenses to the contract being a valid and binding contract.
Once it is determined that there is an agreement to arbitrate, and it is for a procedure within the scope of one of the arbitration statutes, if raised by a party, it must be determined whether the agreement is not enforceable because of some defense thereto. State contract law generally applies, but again, will be preempted or voided by federal law if the FAA applies and if the state law restricts the validity of the agreement to arbitration.
If the agreement is valid on initial inquiry, arbitration may be compelled even if one of the affirmative defenses might ultimately invalidate the contract. In Comanche Indian Tribe of Oklahoma v. 49, L.L.C.,117 the Tribe's arguments revolved around its claim of sovereign immunity. The Tribe claimed that the Tribe's chairman did not have authority to sign the contracts (which contained the arbitration clauses) and that the waiver of sovereign immunity in the contracts was invalid.
The district court found that all but one of the contracts was valid and that the Tribe had waived its sovereign immunity. The court then stayed the pending court proceedings and compelled arbitration. An appeal to the Tenth Circuit followed.
In essence, the court made substantive rulings relating to sovereign immunity to determine whether the arbitration clause in the contracts was valid and enforceable. Having concluded that the Tribe had waived sovereign immunity, it was for the arbitrator to determine the claims relating to breach of the contracts. On appeal, the Tribe could argue that the arbitration clause was unenforceable because it did not effectively waive its sovereign immunity (and other issues that might arise). The Tenth Circuit was mindful that a gateway issue may require reversal, but, nonetheless, it was not ripe for decision.
The following is a brief discussion of some of the defenses that may apply to make an agreement to arbitrate unenforceable.
§ 7.6.1—Fraudulent Inducement Of The Contract
Fraudulent inducement to enter into a contract is a common law ground that makes a contract void or voidable. In Prima Paint Corp. v. Flood & Conklin Manufacturing Co.,118 decided under the FAA, the U.S. Supreme Court held that establishing fraud in the inducement of a contract containing an arbitration provision does not void the arbitration clause; rather, to be a defense to enforcement of arbitration, there must be fraud in the inducement of the arbitration clause. If the defense asserted is fraud in the inducement of the contract as a whole, and not specifically of the arbitration clause, the court typically will enforce the arbitration clause and allow the arbitrator to decide the issue of fraud in the inducement of the contract as a defense to the underlying claims. Thus, as to many asserted defenses to the parties having agreed to arbitration, the courts hold that the arbitration clause portion exists separately from "the contracts in which they are embedded." Thus, a defense that the contract was "void" or "voidable" is arbitrated.119
Colorado has followed Prima Paint and held that to escape an arbitration clause in a contract, the fraud must be in the inducement of the arbitration clause itself unless otherwise agreed upon by the parties. An allegation of fraud in the inducement of the contract itself will be subject to arbitration.120
• Annot., Claim of Fraud in Inducement of Contract as Subject to Compulsory Arbitration Clause Contained in Contract, 11 A.L.R.4th 774.
See § 8.7.4.
§ 7.6.2—Duress
Duress is a common law defense to the enforcement of contracts generally, and no doubt, an arbitration clause therein. Presumably, the Prima Paint approach will be followed when the defense is asserted: duress is a valid defense to the arbitration clause only if the duress relates to the inclusion of the arbitration clause in the contract. A contention of duress with respect to the contract as a whole will not defeat the arbitration of that issue — the court probably will enforce the arbitration clause and forward the duress defense to the contract to the arbitrator for determination.
§ 7.6.3—Mistake
Mistake — unilateral or mutual — may be a defense at common law to enforcement of a contract. Probably the Prima Paint approach to a fraudulent inducement defense would be followed were a mistake defense asserted to avoid the contract.
§ 7.6.4—Forgery
A signature forgery contention goes to the validity of the entire contract and, therefore, should be arbitrated.121
§ 7.6.5—Illusory
FAA
In Dumais v. American Golf Corp.,122 the Tenth Circuit held that an arbitration agreement allowing one party the unfettered right to alter the arbitration agreement's existence or its scope was an illusory contract and therefore void. The court did not state whether the FAA or the New Mexico Arbitration Act was applicable. The court applied New Mexico substantive law to determine the validity of the contract. This case was subsequently called into question by Vernon v. Qwest Communications International, Inc.123
On the other hand, where one party reserved the right to terminate or modify the arbitration provision, but the reservation did not apply to claims of which the party had actual notice as of the date of the amendment, and any termination would not be effective until 10 days after reasonable notice or to claims that arose prior to the termination, these limitations were sufficient to avoid rendering the agreement illusory.124
CRUAA
In Rains v. Foundation Health Systems Life & Health,125 the Colorado Court of Appeals upheld the validity of an arbitration provision that permitted only one party to compel arbitration, afforded remedies to that party outside of arbitration, gave that party the right to propose three neutral arbitrators from whom the other party had to select the arbitrator, and did not expressly provide for document discovery (other than in the arbitrator's discretion). In another case, a mandatory arbitration agreement entered into as a condition of continued employment that required an employee to pay a portion of the arbitrator's fees was held unenforceable under the FAA.126 However, such a provision perhaps can be severed from the otherwise valid arbitration agreement.
§ 7.6.6—Waiver
See § 7.9.
§ 7.6.7—Expired/Terminated Contract
Some parties have asserted that when a contract expires or terminates, the arbitration clause therein expires, even if there are outstanding disputes concerning the contract. An arbitration clause in a contract is presumed to survive the termination of the contract (unless otherwise provided), even if the facts of the dispute occurred after the contract expired.127
CRUAA
The Colorado Court of Appeals has held that an arbitration clause in a warranty survived the expiration of the warranty.128 The case involved claims for flooding against a contractor on a new home. The alleged wrongful acts (of construction) occurred before the warranty expired, although these acts were not known and could not have been reasonably discovered by the claimants until after the warranty expired.
Similarly, in Newmont U.S.A. Ltd. v. Insurance Company of North America, the Tenth Circuit stated: "[A]n...
To continue reading
Request your trial