Home > Uncategorized > Business Contracts: Should your Business Contract Include an Arbitration Clause?

Business Contracts: Should your Business Contract Include an Arbitration Clause?

A construction client of mine found itself faced with a lawsuit.

However, its Contract specifically provided that any dispute would be settled by binding arbitration.

Good, idea, or not?

It depends.

Generally, there are real benefits to arbitration, the two big benefits are related to cost and time.  Arbitration is typically much more cost-effective than litigation, and arbitration is typically handled much quicker as well.

However, arbitration clauses should be carefully drafted to contemplate each’s unique business. What might work for a nationwide manufacturer might not be the best for a local residential construction company.

 

some considerations….

 

 

1. Where is the Other Party located?

For a client who engages in business over state lines, an arbitration clause might not be effective if you are trying to quickly collect a debt that is owed to you.  Instead, you  might want a “Jurisdiction and Venue Selection Clause

This clause would include language indicating that no matter where the dispute occurred, the contract will be interpreted under Michigan law, and the parties agree that any dispute shall only be resolved in _______ County (Typically,  Kent County, Michigan, for my clients.) Therefore, if your contract contains a jurisdiction and forum selection clause, and you are owed money by a company in Florida, you would not need to retain a Florida attorney to try and collect.

Other considerations, generally are:

2. Is the Arbitration Agreement between the company and consumers? If so, companies need to be aware of consumer protection rights, and AAA rules regarding dispute resolutions with consumers.

The AAA has ruled that any company that wants to incorporate their services in its arbitration contract must follow their policies:

“The American Arbitration Association’s policy on consumer arbitration is guided by the state of existing law, as well as its obligation to act in an impartial manner. The Association supports the principles of the Consumer Due Process ProtocolAll cases involving a consumer where the claim is under $10,000 will be administered under the Consumer Rules and the fee schedule for those rules, without regard to the rules or fees that may be incorporated in the arbitration clause.” See, Consumer Due Process Protocol: http://ftc.gov/os/comments/debtcollectroundtable1/542930-00017.pdf

3. If the Arbitration Agreement involves a Construction industry, make sure the arbitration clause does not negate your ability to record a claim of lien with the register of deeds.

– as a side note, if the construction agreement is a residential construction agreement with the owner of the home, make sure the Agreement contains the specific language as required by the Michigan Construction Lien Act, MCL 570.1118.

A CASE WHERE THE ARBITRATION CLAUSE DID NOT PROMOTE EITHER: PROMPT RESOLUTION OR COST-SAVINGS.

A recent unpublished Michigan Court of Appeals Case demonstrates some of the complexities of arbitration clauses, and how, in practice, the value of an arbitration clause does not always work the way it should. See  Namari v. Subway Real Estate Corp., 308384, 2013 WL 5450283 (Mich. Ct. App. Oct. 1, 2013).

I. Facts of the Subway Franchise Agreement Disputes

This case involved a franchisee dispute over Subway restaurants.

Plaintiff: Namari.

Defendants: Subway Real Estate Corporation (SREC), and Doctor’s Associates Inc, (DAI).

On January 27, 2003, Plaintiff, Namari and Abraham Nunu entered into franchise agreements with DAI1 to operate 14 Subway restaurants in the Detroit area and SREC entered into subleases with the franchisees.
                                  a.  the Arbitration Clause
The franchise agreements contained an arbitration clause that provided in relevant part as follows:
The parties will arbitrate any Dispute the parties do not settle under the discussion and mediation procedures above and any Dispute which this Agreement provides will be submitted directly to arbitration except as provided in this Agreement.
The franchise agreements also contained termination clauses that allowed DAI to terminate the agreements for cause and “without prejudice to any of [DAI’s] rights or remedies provided under this Agreement….”
In 2004, shortly after signing the agreements, Nunu sued plaintiff.
DAI participated in the litigation and, according to plaintiff, ultimately the stores were split between the two parties with Nunu’s name being removed from the stores.
On November 16, 2007, DAI terminated plaintiff’s franchise agreements. Thereafter, according to plaintiff, DAI sued plaintiff and Nunu in Wayne Circuit Court.
In the meantime, it appears that while DAI was involved in a dispute with plaintiff and Nunu, on September 8, 2009, SREC terminated plaintiff’s subleases for his former Subway franchise locations. SREC then sued plaintiff in the 36th District Court to recover possession of the premises and for damages relating to the subleases.

– confusing, isn’t it?

On December 2, 2009, the parties were in court and verbally agreed to submit “ALL of their respective issues, disputes, and causes of action to arbitration” by entering an agreement to arbitrate on the record in the 36th District Court.
So now, just to clarify, there are two arbitration agreements at issue in this case:
                1.  a “written agreement to arbitrate” contained in the Franchise Agreement, and
                 2.  an oral agreement to arbitrate, contained on the record, in Court.

The 36th District Court adjourned the case “for arbitration” on December 2, 2009.
Almost two years later, Defendants demanded arbitration, for unpaid rents and other damages allegedly owned from the Subway leases.
Plaintiff demanded that instead of a single-arbitrator, that the arbitration would be performed by a 3-member panel of arbitrators.  Defendants objected.
So Plaintiff sued Defendants in Circuit Court.

“The parties filed numerous motions, briefs, and other pleadings in the lower court” (which directly translates into “very expensive”).

Defendants argued – the Franchise Arbitration Agreement called for a single arbitrator.
Plaintiff argued – the Franchise Agreement was terminated, the only arbitration agreement is the oral arbitration agreement, and it didn’t call for a single arbitrator.
After much more arguments and hearings (again, expensive) The trial court eventually entered an order finding:
1. that arbitration would proceed to a single arbitrator, and
2. DAI’s franchise agreements were terminated and unenforceable against plaintiff, and that “the 36th District Court agreement to arbitrate shall be the only legally operative and controlling agreement during the arbitration proceedings.”
Defendants appealed – arguing that whether or not the Franchise Agreement was enforceable against Plaintiff was an issue to be arbitrated, not decided by the Court.
So the question was: When is an issue in dispute subject to an arbitration clause, and when isn’t it?
II. Law – Whether an Arbitration Clause Applies To a Specific Issue in Dispute
“When deciding whether the parties agreed to arbitrate a certain matter, courts should ordinarily apply basic state-law principles that govern the formation of contracts.” Amtower v. William C. Roney & Co., 232 Mich.App 226, 234; 590 NW2d 580 (1998) (citations omitted).
“The cardinal rule in the interpretation of contracts is to ascertain the intention of the parties. Where the language of a contract is clear and unambiguous, the intent of the parties will be ascertained according to its plain sense and meaning.” Id. (emphasis, citations, and quotations omitted).
To ascertain the arbitrability of an issue, a court applies the “Fromm Test” where it must consider:
[1] whether there is an arbitration provision in the parties’ contract,
[2] whether the disputed issue is arguably within the arbitration clause, and
[3] whether the dispute is expressly exempt from arbitration by the terms of the contract.
The court should resolve all conflicts in favor of arbitration. [Fromm v. Meemic Ins. Co., 264 Mich.App 302, 305–306; 690 NW2d 528 (2004).]

Here, the Appeals Court overruled the Circuit Court – finding that the issue of whether the Franchise Agreement was enforceable was to be decided by the arbitrator.

The Court of Appeals did agree with the Circuit Court that the Oral Arbitration Agreement to arbitrate all disputes was the only arbitration agreement in effect.
III. Lesson: Arbitration Clauses are useful tools, but should be uniquely tailored depending upon the type of business.  Also, in practice, invoking arbitration clauses sometimes does not have the intended effect – saving money and time.
Questions? Feel free to contact me.
Jeshua@dwlawpc.com
(616) 454-3882
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Categories: Uncategorized
  1. October 24, 2013 at 2:09 am

    Interesting article, arbitration clauses are always an interesting matter. Thanks for sharing this article, good to know how arbitration clauses are handled in different jurisdictions.

  1. December 14, 2015 at 3:20 pm

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