Are Mandatory Arbitration Provisions Enforceable in Business Litigation?

Many businesses do not read the contracts they sign as closely as they should. As a result, they might be surprised to find out that they cannot file a breach of contract suit in court. Instead, business contracts are increasingly including mandatory arbitration clauses. When a dispute arises, the parties must present their case to an arbitration panel, not to a court, which might not be the forum in which you want to litigate.

What is Arbitration?

In many ways, arbitration is like litigation in court. Each side presents evidence to a neutral decision maker, who decides which side wins. However, the decision maker is not a judge but an arbitrator or a panel of arbitrators. Unlike litigation in court, arbitration is also private, which is why businesses often prefer it. By keeping the proceedings private, a company reduces the risk that its trade secrets and other confidential information will be exposed.

Businesses also like arbitration agreements because they will have a hand in choosing the arbitrators. Many large businesses prefer to work with the same arbitrators—which should immediately cause concern for the party on the other side. Fairly or not, some arbitrators have earned a reputation as “hired guns” who routinely decide cases in a favorable manner for large clients.

Arbitration is often less expensive and faster than regular litigation—although that is less true as more complex cases are being submitted to arbitration. Regardless of its desirability, however, judges enforce arbitration provisions. If you try to bring a lawsuit in court, the other side can ask the judge to dismiss or stay the litigation until you submit your dispute to an arbitration panel.

Is the Arbitration Agreement Enforceable?

Federal law strongly encourages courts to enforce arbitration agreements. Nevertheless, the fact that your contract contains an arbitration agreement does not necessarily mean it is enforceable.

To answer that question, a judge will first need to determine which law applies – The Federal Arbitration Act or one of North Carolina’s arbitration laws. Generally, if the contract does not affect interstate commerce, then the court will apply the federal law. The state laws apply in other situations, such as intrastate activity or international activity.

North Carolina law uses general principles of contract law to determine whether an arbitration agreement is enforceable. An agreement might not be enforceable if:

• There was no mutual agreement to decide disputes using arbitration
• No consideration supports the agreement to arbitrate
• The other party waives its right to arbitrate

However, any doubts as to enforceability will be decided in favor of arbitration, so the evidence needs to strongly show that the arbitration agreement is invalid.

Contact a Wilmington, North Carolina Business Litigation Attorney

If you are involved in high-stakes business litigation, you need a law firm with the experience and skills to handle your case the right way. At Hodges Coxe Potter & Phillips, we pursue all avenues for leveraging the strengths of our client’s case, including enforcing or fighting the enforcement of an arbitration agreement. If you see litigation on the horizon, meet with one of the premiere business litigation law firms in Wilmington today. You can schedule your consultation by calling 910-772-1678 or shooting us a message online.