Clients often like arbitration provisions because of a belief, sometimes true and sometimes not, that binding arbitration provides a quicker, more efficient, and less expensive alternative to formal litigation. Whether this is true or not is dependent on, among other things, an understanding and analysis of the facts and circumstances underlying the particular transaction in which the parties are seeking to place an arbitration requirement, the relationship between the parties, and the rights, duties, and obligations implicated by the proposed arbitration.
The recent opinion of Judge Catherine C. Blake of the U.S. District Court for the District of Maryland in Raglani v. Ripken Professional Baseball, — F.Supp.2d —- (D. Md. 2013), provides us with a good reminder about two elements which must be present for a binding arbitration provision to be enforceable. First, the arbitration agreement itself must provide that both parties mutually promise to submit their disputes to arbitration. Second, the arbitration agreement must provide a neutral forum to resolve disputes.
In Raglani the defendant sought to dismiss or stay an employment discrimination case because the plaintiff had not submitted her claims to binding arbitration as provided in the defendant’s employment policies which the plaintiff, upon being hired, had acknowledged contained valid and legal obligations. Based on federal and Maryland law, Judge Blake refused to enforce the arbitration agreement and allowed the plaintiff’s case to continue.
It is the law of most jurisdictions that if a party to a binding arbitration agreement ignores that agreement and initiates a lawsuit or other court proceeding, the defendant may obtain dismissal or a stay of the lawsuit upon a showing of (1) the existence of a dispute between the parties, (2) a written arbitration agreement or provision covering the dispute, and (3) the failure, neglect, or refusal of the non-movant to arbitrate the dispute. Movants, such as the defendant in Raglani, who are seeking relief under the Federal Arbitration Act must also demonstrate a nexus between the transaction/dispute at issue and interstate or foreign commerce.
However, the Raglani opinion reminds us that in order to get to the point of considering these factors, the arbitration agreement at issue must be enforceable, which means the arbitration agreement, like any other contract, must be supported by valid consideration. Under Maryland law, the validity of the consideration supporting an arbitration agreement is determined by looking to the arbitration agreement itself without reference to the validity of the larger contract (if any). Thus, under Maryland law, an arbitration agreement, or an arbitration provision within a larger contract, must be supported by consideration independent of the larger contract. In the context of arbitration agreements, the requirement of valid consideration means that the arbitration agreement must contain an explicit mutual exchange of promises to arbitrate. Accordingly, an arbitration agreement that only requires one side to submit its problems to arbitration has no mutuality of obligation and thus is not a valid, enforceable arbitration agreement. The arbitration clause at issue was unilateral in that it did not require the defendant employer to submit its problems to arbitration and thus Judge Blake found that the arbitration clause was unenforceable as lacking sufficient consideration.
Additionally, under Fourth Circuit caselaw, even if the arbitration provision applies to both parties equally, it must provide a neutral forum to resolve disputes. The arbitration clause at issue in Raglani provided that the defendant employer had sole and exclusive control over the list of potential arbitrators. Although Judge Blake wrote that this was sufficient grounds to rule that the arbitration clause at issue did not provide a neutral forum, the arbitration clause at issue in this case also did not provide sufficient rules by which an arbitration would be conducted.
Raglani provides a clear reminder to business lawyers and clients in Maryland and the Fourth Circuit (Maryland, Virginia, West Virginia, North Carolina, and South Carolina) to keep two key factors in mind when drafting arbitration agreements that are intended to be binding: First, the arbitration agreement itself must provide that both parties mutually promise to submit their disputes to arbitration. Second, the arbitration agreement must provide a neutral forum to resolve disputes. For the forum to qualify as “neutral” it must, at a minimum, adopt sufficient rules to govern a proceeding. Business lawyers and clients may also wish to consider including a process whereby both parties to the dispute have input into the choice of arbitrator.