Don't Bet the Business

Commercial contracts of all colors often contain arbitration clauses. Arbitration clauses commit parties to a private dispute resolution process that takes their case outside of the public courts. 

Instead of a trial before a judge or jury, in arbitration, the parties argue their case to one or more people of their choosing, typically someone with expertise over the questions to be decided. Rather than obtaining a “verdict” from a judge or jury, the arbitrator decides the winner and loser as well as the appropriate remedy the winner receives as part of an “award.” 

There are many potential advantages to arbitration over judicial proceedings, plus some disadvantages.  Perhaps the most attractive advantage is that arbitration offers the possibility of a quicker, less costly, resolution. This prospect, alone, can lead parties to assume that requiring arbitration of any potential disputes should be required.    

In Michigan and elsewhere, arbitration is considered a purely contractual matter. As with any contract, a valid arbitration agreement must exist before arbitration is deemed mandatory or binding upon the parties needing a dispute resolution. Simply stated, a party cannot be compelled to arbitrate their case if they have not contracted to do so. 

Short of claims sounding in fraud or mistake, the inclusion of an arbitration provision in a contract is not typically disputed. What can be the subject of a hot debate when a fight breaks out is: (1) whether the arbitration clause encompasses the dispute and (2) whether the warring parties are bound by the agreement to arbitrate. Making matters more complex is that those same parties often disagree on who decides these questions – a judge or an arbitrator?

In Michigan, arbitration is governed by Michigan’s Uniform Arbitration Act, MCL 691.1681 et seq.  Section 1681(2) provides that a court decides if an arbitration agreement exists as to the disputing parties. The court also decides if the dispute falls within the scope of the agreement. Put another way, “[t]he existence of an arbitration agreement and the enforceability of its terms are judicial questions for the court, not the arbitrators.” Fromm v Meemic Ins Co, 264 Mich App 302, 305; 690 NW2d 528 (2004). Therefore, whether there exists an enforceable arbitration agreement between the parties to a dispute must be decided by a judge, not an arbitrator.

Michigan public policy favors arbitration. A judge tasked with deciding whether a dispute must be arbitrated does not review or analyze the merits of the case. There is a presumption in favor of arbitration, and when questions arise, the burden is on the party challenging the enforceability of the arbitration agreement. Not surprisingly, when disputes over arbitrability do arise, arbitration often comes out the winner. In some cases, this may be the result for no reason other than that the parties’ arbitration clause language left the court with no option but to compel arbitration.

Because arbitration clauses often are drafted in times of peace, their importance can be overlooked. Boiler-plate clauses are used when, in hindsight, more reflection and thought were needed to craft a more comprehensive agreement to clearly include, or exclude, types of disputes and the parties covered. Without the helpful hand of an experienced attorney, parties sometimes conclude that all arbitration clauses are the same and, therefore, one is as good as another. This is an unfortunate assumption, and one that can have devastating consequences for the unwary.