Validity of Arbitration Agreement Is For Judge To Decide

Lots of people are jumping on the mandatory arbitration wagon — employers, lenders, auto lessors. All believe that arbitration of disputes is less expensive than litigating them in courts of law and that arbitrators tend to be more sympathetic to their side than judges — perhaps. The Federal Arbitration Act states that arbitration agreements shall be valid and enforceable, save upon such grounds as would permit revocation of any other kind of contract (9 U.S.C. § 2). But when a consumer alleges that he has grounds for revocation, who decides whether he does? A judge or an arbitrator? A judge, according to one court. The judge ruled, in effect, that the validity of an arbitration agreement is not an arbitrable issue and that he was the one who should decide whether there were grounds for revoking the agreement. (Toppings v. Meritech Mortgages Services, Inc., NO. CIV. A. 2:00-1055 (S.D. West VA., Apr. 23, 2001)(2001 WL 408990).)

Grounds for Revocation

What grounds permit a consumer to revoke an arbitration agreement and litigate a Truth-in-Lending or Truth-in-Leasing claim in a court of law? Judges disagree to some extent, but they have generally permitted consumers to rescind an arbitration agreement if the consumer can prove:

  • Unconscionability, that is, an agreement grossly unfair to the consumer. One court, for example struck down an arbitration agreement because it permitted an insurer to appeal an arbitration award in excess of a specified amount but did not permit the consumer to appeal an award less than that amount. (Worldwide Ins. Group v. Klopp, 603 A.2d 788(Del. 1992).)
  • Lack of consent. An arbitration agreement does not bind a consumer if he has never, in fact, consented to it. taught judges disagree as to what constitutes consent.
  • Consent induced by fraud or duress.

What if a consumer had no objection to the arbitration clause but argued that the loan transaction was revocable in its entirety because it was unconscionable, or because they had been induced to consent to the loan by the lender's fraud or duress? Who would decide that question, the judge or an arbitrator?

It would depend, it seems, upon how broadly the clause was worded-the broader the more likely that the judge would construe it as making the validity of the entire transaction an arbitrable issue. Take, for example, an arbitration clause which reads:

Any controversy or claim arising out of or relating to [this contract], or the breach thereof, shall be settled by arbitration....

The U. S. Supreme Court thought that clause broad enough to require arbitration of one party's allegation that it was induced by the other parties fraud to enter the contract. If the claim is fraud in the inducement of the arbitration clause itself, the judge may decide the claim. But the Federal Arbitration Act does not permit a judge to decide a claim that the entire contract was induced by fraud-that question must to to arbitration. (Prima Paint Corporation v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L.Ed.2d 1270 (1967)