Originally from Dispute Resolution Journal

While it is common practice for businesses to include an arbitration clause in their standard contracts, not everybody understands the obligations imposed by such clauses. Worse, some parties simply don’t bother to read the part of the contract that requires arbitration in case of a dispute. In this article, Thomas Lyons explores the problems stemming from a “unilateral” arbitration clause or when an arbitration clause comes as an “unfair surprise.” The article notes some cases showing that the courts are generally split over this issue.

Many businesses prefer to resolve commercial disputes through arbitration rather than a trial. They include in their transaction forms a provision requiring arbitration of all disputes arising from the transaction. For example, a form may say “This contract is subject to all the terms and conditions printed on the reverse side.” The back of the form will typically include a clause such as:

Arbitration: Any controversy arising under, or in relation to, this contract shall be settled by arbitration. If the parties are unable to agree respecting the time, place, method or rules of the arbitration, then such arbitration shall be held in the City of New York, in accordance with the laws of the State of New York and the rules of the American Arbitration Association.

However, other businesses do not include such a provision and may prefer to avoid arbitration, generally or selectively.

Typically, these two views will clash when one business sends out a standardized form specifying goods or services it offers to purchase. The seller sends back its standardized form agreeing to fill the order, oftentimes with the goods requested. The so-called “battle of the forms” can occur when the parties’ preprinted terms and conditions, including arbitration provisions, are not in complete agreement. The documents rarely mirror each other. However, many businesspeople do not pay much attention until the deal goes sour.1 The question then arises whether the party which prefers arbitration can enforce its clause.

The Supreme Court has held that the Federal Arbitration Act2 preempts any state statute which imposes special requirements on the enforceability of arbitration clauses.3 State laws which apply generally to all contractual provisions are not preempted.4 The Act does not address whether a unilateral arbitration clause becomes part of the parties’ agreement. State commercial law decides the issue.