I was recently contacted by a man who was dealt with unfairly by a much larger company he was trying to do business with. The bigger company, on a whim, decided that they didn’t want to do business with him anymore, so they came up with every reason they could muster – some legitimate, some not – to deem this poor guy in breach of contract.

The guy is intent on suing the big, bad company for breach of contract in a New York court; he is adamant that he doesn’t want to go to arbitration as called for in their agreement because he is convinced he won’t get a fair shake at arbitration (not to mention that it will prove rather expensive for him).

There’s one problem, however: as noted in an earlier article of mine,  it’s very difficult to invalidate a mandatory arbitration clause in New York. Even though he wanted to cast his claim as a business tort, as distinct from a straight breach of contract claim, I pointed out to him that if his attempt to circumvent the arbitration clause could be undone that easily, then mandatory arbitration clauses would be rendered virtually meaningless.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Over the last few months, I’ve been asked why certain mandatory arbitration provisions in an employment agreement couldn’t be invalidated on the grounds that the employees were “forced” to sign it against their will on threat of losing their job.

The reason is fairly simple: the courts – beginning with the United States Supreme Court – have clearly sided in favor of upholding arbitration provisions rather than invalidating them.

First, and at the outset, one New York Federal Judge held that claims of adhesion are generally considered objections to a contract and not to an arbitration provision. See Wright v. SFX Entm’t Inc., 00 Civ. 5354, 2001 WL 103433, at *3 (S.D.N.Y. Feb. 7, 2001). Applying this rule, the court held that the question of whether the arbitration clause was enforceable had to be determined by the arbitrator rather than the courts.

Moreover, and in any event, the courts generally disfavor invalidating contracts on grounds of adhesion or unconscionability, stating: “A court will find adhesion only when the party seeking to rescind the contract establishes that the other party used ‘high pressure tactics,’ or ‘deceptive language,’ or that the contract is unconscionable.

“Typical contracts of adhesion are standard-form contracts offered by large, economically powerful corporations to unrepresented, uneducated, and needy individuals on a take-it-or-leave-it basis, with no opportunity to change the contract’s terms.”

To that end, and in the employment context, the United States Supreme Court stated as follows: “The unequal bargaining power between employers and employees is not a sufficient reason to hold that arbitration agreements are never enforceable in the employment context. Cf., e.g., Rodriguez de Quijas, supra, at 484, 109 S.Ct., at 1921-1922. … Such a claim is best left for resolution in specific cases.”  Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S.Ct. 1647 (1991).

In light of the Supreme Court’s relatively clear language on the subject, a trial court’s unwillingness to challenge it in a specific case is quite understandable.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

When your contract has been breached, your first reaction might very well be to bring a lawsuit in State or Federal Court. But that course of action may not be available, particularly if your written contract contains a clause mandating that all disputes be resolved by arbitration.

So, you ask, under what circumstances are those clauses enforceable?

Well, first, and as a threshold matter, the question as to whether the parties agreed to arbitrate should be decided by a court, not an arbitrator. That said, and while “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit” Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 131 (2d Cir.2003) (per curium), the preference for arbitration is so strong that, “under the FAA, ‘any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.’ “ JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 171 (2d Cir.2004) (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)).

So, what are the factors that a court looks to in deciding whether a case must go to arbitration?

The longstanding rule in New York is as follows:

“In deciding whether any part of an action should be directed to arbitration, [the] Court must determine: (i) whether the parties had an agreement to arbitrate; (ii) the scope of that agreement; (iii) if federal statutory claims are asserted, whether Congress intended those claims to be non-arbitrable; and (iv) if some, but not all, of the claims are subject to arbitration, whether to stay the balance of the proceedings pending arbitration. See JLM Indus., 387 F.3d at 169; Oldroyd v. Elmira Sav. Bank, FSB, 134 F.3d 72, 75-76 (2d Cir.1998).”

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

It is no secret that mandatory arbitration clauses have essentially become standard fare in business contracts, particularly in the employment or consultant context. But, as a Federal appeals court recently held, “It is well-accepted that although the presumption in favor of arbitration is strong, “the obligation to arbitrate nevertheless remains a creature of contract.” Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224 (2d Cir. 2001).

On a practical level, that means that there are some important facts that must be in place before a New York court will bar a lawsuit, and compel the parties to pursue arbitration; one such fact is that the party seeking to compel arbitration must actually be a party to the underlying contract – or at the very least,  a tacitly acknowledged third-party beneficiary of the contract (i.e., that the contract was entered into for their benefit).

And, according to a New York Federal judge in a May 20 opinion, that was exactly what was missing in Miness v. Ahuja. In that case, the plaintiff sold to defendants several nursing homes that had been owned by his family. As part of the purchase agreement, the defendants agreed to retain plaintiff as a consultant for a period of two years, providing that the nursing homes met certain performance criteria.

After defendants terminated plaintiff – well before the expiration of the two-year period, plaintiff sued, and defendants predictably sought to dismiss the case on the grounds that it was barred by a mandatory arbitration clause that was in the agreement.

There was one “little” problem with this argument, however; the entities that signed the agreement with the plaintiff were not the same ones that were sued. The defendants’ operating companies – which had signed the employment agreement – were not parties to the lawsuit, and therefore, the Court held, lacked standing to enforce the arbitration provision of the contract, stating:

“[T]he only signatories to the Miness Employment Agreement are Miness and the Operating Companies. The Operating Companies are not parties in this action, and thus cannot invoke its provisions in this case. As for the defendants, none are party to the Miness Employment Agreement, and unless they are explicit third party beneficiaries of the contract, they cannot enforce its terms. See Premium Mortg. Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009) (“A non-party to a contract governed by New York law lacks standing to enforce the agreement in the absence of terms that ‘clearly evidence an intent to permit enforcement by the third party’ in question,” quoting Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 66 N.Y.2d 38, 45, 495 N.Y.S.2d 1, 485 N.E.2d 208 (1985)). Here, there is nothing in the Miness Employment Agreement that suggests that the defendants have a right to enforce the contract as third parties.”

Post Footer automatically generated by Add Post Footer Plugin for wordpress.