Arbitration Agreements

Introduction

Arbitration agreements are contracts requiring parties to resolve disputes through private arbitration rather than litigation. Under the Federal Arbitration Act (FAA), arbitration agreements are presumptively valid and enforceable. The law governing the formation, interpretation, and enforceability of arbitration agreements addresses questions of contract formation, applicable contract defenses, the scope of the agreement, and the allocation of decision-making authority between courts and arbitrators.

Formation of Arbitration Agreements

Arbitration agreements are subject to ordinary principles of state contract law. Formation requires offer, acceptance, and consideration. The agreement must be in writing under the FAA, though electronic signatures and agreements are generally sufficient. Courts examine whether a reasonable person would have understood that they were agreeing to arbitrate disputes.

The Supreme Court in First Options of Chicago v. Kaplan (1995) held that courts presumptively decide whether the parties agreed to arbitrate, applying ordinary state law principles. The party resisting arbitration bears the burden of showing that no valid arbitration agreement exists. Courts examine the contract formation issue independently, without the presumption favoring arbitration that applies to the interpretation of arbitration agreements.

Unconscionability

Unconscionability is the most commonly invoked defense to enforcement of arbitration agreements. The doctrine has both procedural and substantive components. Procedural unconscionability examines the circumstances of contract formation, including the use of fine print, take-it-or-leave-it terms, and disparities in bargaining power. Substantive unconscionability examines whether the contract terms are overly harsh or one-sided.

Courts have found arbitration agreements unconscionable when they impose prohibitive costs on the claimant, limit the available remedies, restrict the time for bringing claims, or require arbitration in a distant forum. In Discover Bank v. Superior Court (2005), the California Supreme Court held that class action waivers in consumer arbitration agreements were unconscionable, though the Supreme Court later held in AT&T Mobility v. Concepcion (2011) that the FAA preempted this rule.

Delegation Clauses

Many arbitration agreements contain delegation clauses that assign questions of arbitrability—including whether the agreement is valid and whether a particular dispute falls within its scope—to the arbitrator. The Supreme Court in Rent-A-Center, West v. Jackson (2010) enforced a delegation clause under the FAA, holding that challenges to the arbitration agreement as a whole are for the arbitrator to decide.

Delegation clauses are enforceable unless the party challenging arbitration specifically challenges the delegation clause itself. To invalidate a delegation clause, a party must show that the delegation clause is itself unconscionable or otherwise invalid under generally applicable contract defenses. The Court applied this principle in Howsam v. Dean Witter Reynolds, Inc. (2002), distinguishing between gateway issues of arbitrability and procedural questions that are presumptively for the arbitrator.

Scope of Arbitration Agreements

The interpretation of an arbitration agreement’s scope is governed by the presumption of arbitrability: any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. This presumption applies to questions of whether a particular claim falls within the agreement’s scope.

The Supreme Court has held that arbitration clauses covering claims “arising out of or relating to” the contract should be broadly construed. In Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985), the Court held that statutory claims, including antitrust claims, are arbitrable unless Congress intended to preclude arbitration. The Court has found arbitration agreements enforceable for claims under the Securities Act of 1933, RICO, and various employment discrimination statutes.

Conclusion

Arbitration agreements are subject to contract formation principles and generally applicable contract defenses, but the FAA’s pro-arbitration policy shapes their interpretation and enforcement. The doctrines of unconscionability, delegation, and scope of arbitration define the boundaries of enforceable arbitration agreements. The allocation of decision-making authority between courts and arbitrators continues to evolve, with delegation clauses shifting many arbitrability questions to arbitrators.