The arbitration clause as super contract.

• Author: Frankel, Richard
• Position: Abstract through II. The Federal Policy Favoring Arbitration, p. 531-554

ABSTRACT

It is widely acknowledged that the purpose of the Federal Arbitration Act (FAA) was to place arbitration clauses on equal footing with other contracts. Nonetheless, federal and state courts have turned arbitration clauses into "super contracts " by creating special interpretive rules for arbitration clauses that do not apply to other contracts. In doing so, they have relied extensively, and incorrectly, on the Supreme Court's determination that the FAA embodies a federal policy favoring arbitration.

While many scholars have focused attention on the public policy rationales for and against arbitration, few have explored how arbitration clauses should be interpreted. This Article fills that gap and asserts that the judiciary's inappropriate reliance on the federal policy favoring arbitration distorts state contract law to push cases into arbitration that do not belong there, thereby unfairly depriving litigants of access to the courts. By creating special rules that favor arbitration and that deviate from state contract law, courts are enforcing arbitration agreements in situations where they would not enforce other agreements. This Article challenges the judiciary's favored treatment of arbitration clauses and identifies several areas in which arbitration clauses are being over-enforced as a result. The fact that courts send too many disputes into arbitration also is significant because it undermines the perception, common among both academics and judges, that courts remain hostile to arbitration rather than supportive of it.

Because the original purpose of the Federal Arbitration Act was to make arbitration clauses just like other contracts, this Article proposes that courts should construe the federal policy favoring arbitration in a way that is consistent with state contract law rather than in a way that uproots it. Doing so best ensures that litigants are not unfairly forced into arbitration where they never agreed to it.

TABLE OF CONTENTS INTRODUCTION I. PLACING ARBITRATION CLAUSES ON EQUAL FOOTING--THE ENACTMENT AND EARLY HISTORY OF THE FEDERAL ARBITRATION ACT II. THE FEDERAL POLICY FAVORING ARBITRATION A. Moses H. Cone B. Moses H. Cone's Limitations C. A Life of its Own III. OVERRIDING STATE CONTRACT LAW A. Ambiguous Contracts B. Waiver C. Non-Signatories 1. Agency 2. Equitable Estoppel CONCLUSION INTRODUCTION

Although the issue of the enforceability of mandatory arbitration clauses is a controversial one, it should not be. The Federal Arbitration Act (FAA) was enacted in 1925 with a simple goal: to overcome existing judicial unwillingness to enforce arbitration clauses by placing arbitration clauses on "equal footing" with other contracts. (1) The Act made such clauses as enforceable as any other contract provision and subject to the same defenses as applied to other contracts. (2)

Current interpretation of the FAA, however, places arbitration clauses not on equal footing, but on a pedestal. Courts have strayed from the FAA's original purpose and have turned arbitration clauses into a type of "super contract." (3) Although courts purport to apply general contract law when interpreting arbitration clauses, they have in fact distorted contract law by creating special rules for arbitration clauses that make them enforceable in situations where other contracts are not. The consequence is that many litigants are improperly losing their right of access to the courts and are being forced to submit to arbitration.

Much of this arbitration favoritism is attributable to lower-court misinterpretation of thirty-year-old dicta from the United States Supreme Court in Moses H. Cone Memorial Hospital v. Mercury Construction Corporation, (4) In that case, the Court stated that the FAA embodies "a liberal federal policy favoring arbitration" and establishes that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration" notwithstanding any state policies to the contrary. (5)

The Court's creation of a federal policy favoring arbitration has been transformational. The use of arbitration clauses has exploded in the last thirty years, (6) and such clauses are routinely inserted by corporations into employment agreements, consumer contracts, brokerage agreements, and the like. (7) Since the Supreme Court first declared the federal policy favoring arbitration, Moses H. Cone has been cited more than 30,000 times by courts, advocates, and commentators. (8)

Lower courts have seized upon the federal policy favoring arbitration to enforce arbitration clauses in a wide range of circumstances. (9) This Article explores how courts have misread and wrongly extended Moses H. Cone to establish special rules regarding the interpretation of arbitration clauses that often are in conflict with traditional rules of contract interpretation designed to protect contracting parties. In doing so, courts have overlooked various facts indicating that Moses H. Cone should be given a narrow reading--one that effectuates the FAA's overarching purpose of maintaining consistency with state contract law rather than a reading that overrides it. (10)

In particular, this Article examines three areas in which courts have given arbitration clauses "super contract" status: (1) interpreting ambiguous contracts in favor of arbitration rather than in accordance with the traditional contract rule of interpreting ambiguities against the drafting party; (11) (2) creating special rules that make it more difficult to find that a party waived the arbitration provision than to find that a party waived other contractual terms; (12) and (3) interpreting arbitration clauses to bind individuals to arbitrate disputes with parties who never signed the arbitration clause. (13) The result is that courts are substantially over-enforcing arbitration clauses and that parties are wrongly losing their right to go to court.

Determining the proper framework for interpreting the scope and breadth of arbitration clauses is an under-theorized issue. Much of the debate over arbitration has focused on whether arbitration is a fairer and better alternative to litigation, (14) or on whether the FAA was intended to create any substantive law at all. (15) Substantially less attention has been paid to what rules should govern how arbitration clauses are interpreted. (16) This is somewhat surprising, given that questions involving arbitral waiver, scope, and enforcement of arbitration clauses by non-signatories are a frequent and growing source of litigation.

The issue of the proper interpretive rules for arbitration clauses is an important one to address. First, challenging the scope and reach of an arbitration clause is one of the few remaining avenues for parties to keep a dispute in court and out of arbitration. (17) State legislatures have been unable to protect a litigant's right to go to court because the Supreme Court has held that virtually any state law that regulates arbitration is preempted by the FAA. (18) The Supreme Court also has constricted the ability to challenge arbitration clauses on fairness grounds, as it has foreclosed certain unconscionability defenses to arbitration clauses, (19) and required that other challenges to arbitration be resolved by the arbitrator rather than by a court. (20) By contrast, the interpretive issues addressed in this Article all concern open questions that the Supreme Court has yet to confront.

Second, examining how courts give arbitration clauses favored treatment contributes valuable insight into the debate over whether the judiciary...