Insights & Events

Hollingsworth LLP partners Grant Hollingsworth and Brett Covington authored an article for Bloomberg Law that discusses the importance of drafting arbitration agreements to include certain key provisions, which can avoid costly litigation. A well-written and up-to-date mandatory arbitration clause is critical to protecting your company; otherwise, you may be trapped in unnecessarily complex and protracted litigation. As the U,S, Supreme Court stated in May in Coinbase, Inc. v. Suski, “the first question in any arbitration dispute must be: What have these parties agreed to?”

Hollingsworth and Covington recommend explicitly stating that the Federal Arbitration Act governs their interpretation and enforcement as this law doesn’t apply de facto and there are many benefits. The primary benefit is the robust case law enforcing arbitration agreements under the FAA, including recent Supreme Court decisions reversing lower courts that refused to compel arbitration. Failing to include this provision can lead to unnecessary and often costly court fights over whether the FAA or a state arbitration statute applies.

The authors also state that the scope of an arbitration agreement should be as broad as possible, such as covering “all claims arising from or relating to the contract and/or the relationship between the parties.” In the US Court of Appeals for the Fourth Circuit, if an arbitration agreement only covers claims arising from or relating to the contract, the court must apply a “significant relationship” test to determine whether the legal claims are sufficiently related to the contract before the court can order arbitration. But if the arbitration agreement also covered the “relationship between the parties,” then the “significant relationship” test wouldn’t apply—removing an additional hurdle for the party seeking to compel arbitration.

Hollingsworth and Covington suggest including a delegation clause so that if a party refuses to arbitrate, the arbitrator and not the court decides any questions of arbitrability and validity or enforceability. With this provision, the only question a court should properly consider when deciding whether to compel claims to arbitration is if an arbitration agreement exists—a question of contract formation under state law principles that can never be delegated to an arbitrator. Many attorneys overlook delegating questions of contract validity or enforceability, which routinely involve complex, fact-intensive disputes over whether an agreement is unconscionable under state law. Delegating the question of contract enforceability to an arbitrator can help reduce potential confusion by a court when ruling on a motion to compel arbitration.

Reproduced with permission. Published August 13, 2024. Copyright 2024 Bloomberg Industry Group 800-372-1033.