Case: A lab management services contract sent conflicting messages: Clause 32 said that all disputes under the contract would be resolved by binding arbitration; but Clause 7 said that all claims under the agreement would be submitted to the federal court in New Jersey. So, when a dispute broke out and the lab sued, the management firm asked the court to send the case to arbitration. The court refused. Parties must use clear and unambiguous language to waive their right to a court trial, it reasoned. And the fact that they stuck Clause 7 into the agreement undermined the required clarity. However, the appeals court reversed.
Significance: The appeals court relied on technicalities that you need to be aware of in negotiating your own contracts:
- There’s a law called the Federal Arbitration Act that governs the interpretation of arbitration clauses in contracts transacting interstate commerce (as was the case here);
- The FAA requires courts to enforce binding arbitration when the parties show a clear intent to arbitrate;
- According to court cases, a provision indicating the parties’ agreement to conduct the arbitration in accordance with the American Arbitration Association (AAA) is evidence of such an intent; and
- Clause 32 included such a clause.
Bottom Line: If your lab contracts with a party from a different state and wants to ensure disputes will be decided by arbitration rather than litigation, make sure the arbitration clause includes language like the following:
The parties agree that the arbitration to take place under this Agreement will be performed in accordance with the commercial arbitration rules of the American Arbitration Association (AAA), which are hereby incorporated into this Agreement.