arbitrationIt is no secret that arbitration has become a common alternative to traditional courtroom litigation.  Arbitration clauses are widely employed in domestic and international commercial contracts.  With the advent of the global economy, contracting parties from different countries often rely on arbitration clauses to select a neutral forum and venue for resolving contract disputes.  And, in both the domestic and international context, contracting parties often favor arbitration because they believe it is a more rational process than a jury trial, while also being faster and less expensive than traditional litigation.  (Speed and cost are usually dependent on the particular rules of the arbitration and the nature of the dispute, however.  These are issues which should be discussed with an attorney prior to agreeing to an arbitration provision.)  Arbitration clauses can also be found in all sorts of consumer contracts, from cell phone agreements to the back of ballpark and movie theater admission tickets.

The popularity of arbitration is buoyed by the fact that the United States and most states have enacted legislation encouraging arbitration on public policy grounds and providing for the recognition and enforcement of arbitral awards.  For example, the Federal Arbitration Act, codified as 9 U.S.C. § 1 (available here or here), was enacted in 1925.  The current version of Florida’s arbitration statute, the Revised Florida Arbitration Code, codified as § 682.01, Fla. Stat., et seq., was enacted in 2013 (available here).

But, at its heart, arbitration is a consensual, contractual procedure.  A party cannot be forced to arbitrate unless it has consented to arbitration.  Unsurprisingly, in many disputes there is an initial dispute over whether the parties have in fact agreed to arbitration.  Often, the plaintiff will file a lawsuit in court seeking a jury trial, and then the defendant will file a motion to compel arbitration, asserting the existence of an arbitration agreement.  Thus, a body of law has grown around the threshold question of “arbitrability,” which is the term used to describe the analysis of whether or not a particular dispute is subject to arbitration.  (The Supreme Court undertook such an analysis of applicable federal law in the case of Rent-a-Center v. Jackson, 130 S.Ct. 2772, 2775 (2010), holding that under the Federal Arbitration Act, courts usually determine the threshold question unless the parties have agreed to refer the threshold question to the arbitrator).

Florida Rules For Arbitrability In Arrasola v. MGP Motor Holdings, LLC

Recently, in the case of Arrasola v. MGP Motor Holdings, LLC, Case No. 3D15-381 (3d DCA August 5, 2015), Florida’s Third District Court of Appeal addressed the issue of who decides threshold questions of arbitrability—the court or the arbitrator—under Florida’s Revised Arbitration Code.  The case involved a dispute centering around the sale of an automobile.  The underlying facts of the disputed transaction are not germane to a discussion of the arbitrability analysis, but the case generally involved tort and statutory claims brought by the purchasers against the auto dealer.  The purchase order for the vehicle had an arbitration clause which provided that any dispute would be referred to arbitration, including any dispute about as to “the validity of this [arbitration] provision.”  The purchasers filed their lawsuit in state court and the auto dealer filed a motion to compel arbitration, which was granted.  The purchasers appealed the trial court’s order granting the motion to compel, contending that the purchase order was invalid for a variety of reasons and thus the arbitration provision was not applicable.

The appellate court boiled down the issue to a question of arbitrability, stating that, “The issue … is not whether the Arrasolas may litigate, rather than arbitrate, their substantive claims against [the auto dealer].  The issue is whether there was an agreement to arbitrate the threshold determination of contract enforceability, termination, abandonment, rescission, or unconscionability.”  The appellate court applied the “gatekeeper” provision of Section 682.02 of the Revised Florida Arbitration Code (§ 682.02, Fla. Stat., available here).  Section 682.02 provides that “the court shall decide whether an agreement to arbitrate exists or a controversy is subject to an agreement to arbitrate,” but “an arbitrator shall decide whether a condition precedent to arbitrability has been fulfilled and whether a contract containing a valid agreement to arbitrate is enforceable.”  This seemingly confusing language relates specifically to the question of arbitrability.

In its review, the appellate court first noted that the trial court correctly determined that the arbitration clause was enforceable because there was no evidence of unconscionability with respect to the arbitration clause (notwithstanding any questions regarding the contract as a whole) and it was undisputed that the parties signed the purchase order.  Then, the appellate court noted the important difference between a challenge to the entire contract versus a challenge to just the arbitration provision included within the contract.  The appellate court pointed to Section 682.02 and the Supreme Court decision of Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444-45 (2006) (which had reversed an earlier decision of the Florida Supreme Court), both of which provide that challenges to the entire contract are questions for the arbitrator, whereas challenges to just the arbitration provision are for the court.  The appellate court agreed with the trial court that the Arrasolas’ additional arguments that the entire contract had been terminated or abandoned should be decided by the arbitrator, and confirmed the trial court’s order compelling arbitration.

The Process May Not Be Intuitive, But It Is Mandated By Law

 The result in Arrasola may seem illogical, in that the trial court was allowed to adjudicate the validity of the arbitration clause, but could not adjudicate the greater question of whether the entire contract (which contained the arbitration clause) was enforceable.  On a purely intuitive level, one would think that a successful challenge to the entire contract would void all the provisions of the contract, including the arbitration clause.  But, there is a legal reason, if not a common sense one, for this difference in who may adjudicate the challenges.  This dichotomy is mandated by the language of the Federal Arbitration Act, which was specifically intended to “overcome judicial resistance to arbitration” and “embod[y] the national policy favoring arbitration.”  (Buckeye Check Cashing, at pp. 443.)  Under the Federal Arbitration Act, “as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.”  (Id., at p. 445.)  This means that, under the law, a contract can be found unenforceable as a whole, but the arbitration clause in the contract will still be enforced so long as the arbitration clause by itself was not the specific result of some sort of improper conduct.  (When might an arbitration provision be subject to challenge, separate from the entire contract, you ask?  Good question.  Examples might include situations in which the arbitration clause was slipped into the final version of an agreement without the other side knowing about it, or the arbitration provision was altered after the agreement was signed, or the provision was buried in fine print or disguised within the agreement so that the party was unaware that the contract contained an arbitration clause.)

Takeaways

The appellate court’s decision in Arrasola is important because it illustrates how courts should apply the new “gatekeeper” language of Section 682.02 of the Revised Florida Arbitration Code, which in turn should make the results of arbitration challenges more predictable.  In particular, Florida law now follows the same analysis as federal law under the Federal Arbitration Act, so challenges to just the arbitration provision will be decided by a trial court, whereas challenges to the validity of the entire contract are referred to the arbitrator.  When considering a contract, or whether to bring a lawsuit or initiate an arbitration to resolve a contract dispute, it is important to consult with an attorney to consider how the arbitration clause, and the contract as a whole, will be reviewed and enforced by the courts or the arbitrator.

Eric A. Bevan is an attorney with the law firm of Fox Rothschild LLP and a member of the firm’s Litigation, Financial Services Industry and Construction practice groups.  He represents clients in the resolution and litigation of complex commercial disputes, including federal and state court litigation as well as alternative dispute resolution methods such as private arbitration and mediation.  You can contact Eric at 561-804-4470 or ebevan@foxrothschild.com.