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Contract Disputes: Contractual Arbitration, Who Decides What?

Questions surrounding arbitration clauses in business contracts, such as transaction agreements, employment agreements, or buy-sell agreements, have produced business disputes over a number of issues, many of which have resulted in litigation. To our clients' surprise, and occasional dismay, much of that litigation has played out in the courts, not before arbitrators.

While arbitration can be a quicker and sometimes cheaper road to resolution, getting into a binding arbitration is not always as easy as putting a boilerplate clause in a contract. Businesses involved in contract disputes over a contract with an arbitration provision can often find themselves caught in an expensive dispute over what particular issues are to be decided to the arbitrator or by the court.

What we're trying to tell you is that just because your contract contains an arbitration clause doesn't mean that your contract dispute heads straight to an arbitrator. First, there is likely to be a question over whether the arbitration clause is enforceable at all. Second, there is likely to be a question over who gets to decide the question of whether the arbitration clause is enforceable: the arbitrator or the court.

What happens when the party to a contract contends that the contract containing the arbitration clause is unenforceable for some reason-be it for fraud or some other reason?

Well the Ninth Circuit Court of Appeals issued an opinion last week that gave a decidedly lawyerly answer: it depends. In Bridge Fund Capital Corp. v. Fastbucks Franchise Corp, the Court confirmed prior holdings that If the party challenging the arbitration is challenging the contract as a whole, the question of enforceability is for the arbitrator. However, when a party argues that the arbitration provision itself is unenforceable-regardless of the enforceability of the remainder of the contract-that narrow issue is for the court.

That much, so far as it goes, wasn't too enlightening; rather, it was a summary or reiteration of what those of us who litigate contract disputes or arbitration issues already believed the law to be.

But, how do we know the difference between a challenge to the contract generally or a more narrow challenge to the arbitration provision only? Well, prior to the recent Bridge Fund case, that depended on the "crux of the complaint." Where the plaintiff's complaint attacked the contract as a whole, the question was for the arbitrator. Where the plaintiff's complaint attacked merely an unfair or unenforceable arbitration provision, the question was for the court. That blanket rule never made much sense in the context most arbitration clauses. Most disputes simply aren't framed that way.

In Fastbucks, the Ninth Circuit recognized that many arbitration challenges will not neatly fit into the crux of the complaint rule. Many times, the challenge won't be found in any complaint at all, rather the challenge to enforceability is in the context of a much broader, much more complicated business dispute or partnership dispute.

As we suspected, the Ninth Circuit clarified that this issue has nothing to do with the claims or causes of action in the "complaint," let alone found somewhere in its elusive "crux." It has to do with the substantive basis for the challenge to the arbitration provision-however and whenever raised.

The plaintiff need not plead a challenge directly to an arbitration provision-and that provision only-to have that question decided by an arbitrator.

While this holding may not provide our business clients a whole bunch of clarity in dealing with their arbitration provisions, it did clear up an issue that had the potential to add to the confusion. And it is one that had the potential to add to the cost by requiring our clients to file a direct claim against the provision itself. Good news, if not earth shattering.

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