Time and again we get calls from small business owners describing a scenario where a) they entered into a valid and binding contract with another entity or person that contained a mandatory arbitration clause, b) an issue under the contract has arisen that arguably triggers the arbitration provision for purposes of dispute resolution yet, c) despite their best efforts, the opposing party or entity is giving them the cold shoulder and refuses to engage in the arbitration process. What many innovators and small business owners may not realize is that putting a mandatory arbitration clause into a contract is the easy part, enforcing the clause when push comes to shove is an entirely different story.
The Mandatory Arbitration Clause in a Contract
To back up a bit, an agreement to arbitrate a dispute can be written into just about any contract. Technically speaking the mandatory arbitration clause is meant to govern the resolution of any dispute that arises under the contract in a timely and relatively cost-efficient manner (compared to a three-year lawsuit). Put another way, to agree to mandatory arbitration is to agree to avoid the time and expense inherent in formal litigation in the event any dispute arises under the contract.
Enforcing Arbitration Provisions in Massachusetts
In Massachusetts, consistent with a liberal interpretation of the freedom of contract, agreements to arbitrate are enforceable, and their enforcement is strongly favored as a matter of public policy. This means that when the issue is presented to a Court, unless there is a really good reason to not enforce the mandatory arbitration provision, Massachusetts courts err on the side of honoring and enforcing the terms of an arbitration provision as previously agreed to by the parties to the pertinent contract. This liberal interpretation is codified at Mass. Gen. Laws c. 251, §1, “[a] written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties shall be valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
Using the Courts to Enforce Arbitration Clauses
Practically speaking, unfortunately, even where a contract has clear and unmistakable language requiring the parties to enter into mandatory arbitration for any disputes arising thereunder, it is often the case that the court system must be engaged to force the recalcitrant party to come to the arbitration table. In Massachusetts, the issue has come up so often that the Legislature has codified the procedure required to enforce a mandatory arbitration clause at Mass. Gen. Laws c. 251, §1, et seq. Utilizing this statute:
A party aggrieved by the failure or refusal of another to proceed to arbitration under an agreement described in section one may apply to the superior court for an order directing the parties to proceed to arbitration. If the opposing party denies the existence of the agreement to arbitrate, the court shall proceed summarily to the determination of the issue so raised and shall, if it finds for the applicant, order arbitration; otherwise, the application shall be denied.
Mass. Gen. Laws c. 251, §2(a).1
Once an application to the superior court for an order directing the parties to proceed to arbitration is filed, a court may order arbitration only where it is satisfied that the parties have agreed to arbitrate that particular dispute. In order to do so, the court must resolve any issue that calls into question the formation or applicability of the specific arbitration clause sought to be enforced. “Where there is no provision validly committing them to an arbitrator, these issues typically concern the scope of the arbitration clause and its enforceability.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995).
The Reality Is You May Still Need to Litigate Your Contract Dispute
Ultimately, even when the small business owner and innovator calls my office with a well drafted contract containing an enforceable mandatory arbitration provision, it often comes as a surprise to learn that forcing the opposing party to honor the arbitration provision may require formal litigation in order to obtain a Court order to compel the recalcitrant party to engage in the arbitration process it previously agreed to engage in.
1 Likewise, if an action is brought on a claim that is subject to arbitration, the opposing party may file a motion to stay the proceedings and order arbitration to proceed. Mass. Gen. Laws c. 251, § 2(c)-(d).
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Hey, I Never Signed That Contract! Now You Want to Force Me to Arbitrate?