What Happens if a Contract Has an Arbitration Clause but Violates Laws?

Question from SAM, What Happens if a Contract Has an Arbitration Clause but Violates Laws?

Answer from AI:

When a contract includes an arbitration clause but also appears to violate civil or statutory laws, it raises complex legal issues. Here’s a general explanation of how such situations are typically handled.

Understanding Arbitration Clauses

An arbitration clause is a part of a contract that requires the parties to resolve their disputes through arbitration rather than through the court system. Arbitration is a private process where an arbitrator, a neutral third party, makes a decision that is usually binding.

Enforceability of Arbitration Clauses

Arbitration clauses are generally enforceable under the Federal Arbitration Act (FAA) in the United States. The FAA supports the validity and enforcement of arbitration agreements, reflecting a strong federal policy favoring arbitration.

However, there are exceptions where courts may refuse to enforce arbitration clauses, particularly if the contract itself is found to be illegal or unconscionable.

Claims for Violations of Civil or Statutory Laws

If a contract violates civil or statutory laws, the following claims might be relevant:

1. Unconscionability: A contract or clause may be deemed unconscionable if it is excessively unfair to one party. Courts may refuse to enforce an unconscionable arbitration clause. Case Law: In AT&T Mobility LLC v. Concepcion, the Supreme Court held that arbitration agreements could be enforced even if state law would otherwise deem them unconscionable, but this is subject to limitations.
2. Illegality: If the contract involves illegal activities, the entire contract, including the arbitration clause, may be void. Case Law: In Buckeye Check Cashing, Inc. v. Cardegna, the Supreme Court ruled that challenges to the legality of a contract as a whole should be decided by the arbitrator, not the court.
3. Public Policy: Contracts that violate public policy may not be enforceable. Courts may refuse to enforce arbitration clauses if doing so would contravene public policy. Case Law: In Doctor’s Associates, Inc. v. Casarotto, the Supreme Court held that state laws that impose special requirements on arbitration agreements are preempted by the FAA.

Steps to Take

If you believe a contract with an arbitration clause violates civil or statutory laws, consider the following steps:

• Consult a Legal Professional: Seek advice from an attorney who specializes in contract law or arbitration. They can provide personalized guidance based on the specifics of your case.
• Review the Contract: Carefully review the contract to understand the scope of the arbitration clause and any potential violations of law.
• File a Motion: If you wish to challenge the arbitration clause, you may need to file a motion in court to have the clause declared unenforceable.
• Prepare for Arbitration: If the arbitration clause is upheld, prepare to present your case in arbitration, including any arguments about the contract’s legality.

Resources

For more information, you can refer to the following resources:

• U.S. Courts ADR Glossary
• American Arbitration Association (AAA)

Remember, while this information provides a general overview, it is crucial to consult with a legal professional to address your specific situation and receive tailored advice.