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June 06, 2018 Articles

The Casual Arbitration Agreement?

By Sheila J. Carpenter

Arbitration agreements are, as we all know, creatures of contract. The lengthy contracts we lawyers draft for our clients notwithstanding, it does not take much to create a basic contract. Thus, an arbitration agreement can be created with a few words. Even a quick email can create an agreement to arbitrate. On the other hand, an oral agreement relating to arbitration can be problematic.

Email Resurrects a Dead Arbitration Agreement
So v. EverBeauty, Inc., No. A-3560-16T4 (N.J. Super. Ct. App. Div. Jan. 2, 2018), is an unpublished decision but nonetheless instructive. Jang Won So was an employee of EverBeauty who sued his employer under New Jersey's antidiscrimination and workers' compensation laws. His employment contract contained an arbitration clause. Defense counsel asserted in a conversation with plaintiff's counsel that the matter should be submitted to arbitration. Defense counsel followed up via email, and after consulting with his client, plaintiff's counsel agreed via email to proceed with arbitration and offered to draft a stipulation of dismissal. When the stipulation was not forthcoming, defense counsel inquired about it and was told that the plaintiff had changed his mind about arbitrating.

EverBeauty filed a motion to enforce the arbitration agreement, conceding that the arbitration agreement in the plaintiff's employment contract was unenforceable. Instead, it argued that the exchange between counsel created an arbitration agreement. The trial court denied the motion, holding that any agreement to arbitrate was not supported by consideration. It also reasoned by analogy to a New Jersey rule of civil procedure that giving up the right to a jury trial "required proof 'that the promise was actually bargained for.'"

The Appellate Division of the Superior Court of New Jersey reversed. Noting that arbitration agreements are not subjected to more burdensome requirements than other types of contracts, it held that the contract was formed when plaintiff's counsel emailed defense counsel that his client agreed to arbitrate. The court held that, at that point, the parties had agreed on the essential terms of their contract and manifested an intention to be bound by those terms, creating a binding contract. To illustrate this point, the court pointed out than an email exchange between counsel offering $1,000 to settle a case and accepting the offer would create a binding contract to settle for that amount.

The court rejected the argument that there had been no consideration for the promise to arbitrate. The adequacy of the consideration was not important as long as there was some consideration. Because "arbitration is faster and less expensive than a trial, the agreement provided benefits to both parties."

Practice tip: It is ironic that an unenforceable arbitration agreement in an employment contract became enforceable via email between counsel. When representing a party who may not want to arbitrate, first consider whether the arbitration agreement is valid in the state where it would be enforced. This can be a complex question. A lawyer with insufficient experience to make that determination should take prompt steps to educate himself or herself or consult an expert.

Oral Arbitration Agreements
An arbitration clause sometimes can also be modified through an oral agreement to change its terms significantly. In Hamilton Park Health Care Center, Ltd. v.1199 SEIU United Healthcare Workers East, 817 F.3d 857 (3d Cir. 2016), the parties to a collective bargaining agreement (CBA) disputed,inter alia, how much of the increased cost of health benefits the employer would bear. The CBA provided the arbitrator with authority to decide this question for a single year. The CBA also provided that it could be amended only in writing and that the arbitrator had no authority to modify the CBA. During the course of the arbitration, the arbitrator suggested that the parties grant him the authority to make a multiyear award so that the increase in health care costs could be spread out over a longer period of time. The arbitrator rendered a multiyear award, reciting that the parties had orally agreed to this change to the arbitration clause. He said that the parties tentatively agreed to expanding his authority in joint session and subsequently firmly agreed in ex parte meetings with him. The employer filed a petition to vacate the award on the grounds that the arbitrator exceeded his authority because the CBA permitted only a single year award. However, the Third Circuit held that the employer had not produced evidence that the attorney working for the employer in the arbitration had not agreed to the extension of the arbitrator's authority. It deemed the arbitrator's finding in the award that there had been such an agreement to be conclusive.

The California Court of Appeal for the Second District took a different view of an alleged oral agreement to modify an arbitration clause. In Magness Petroleum Co. v Warren Resources of California, Inc., 127 Cal. Rptr. 2d 159, 103 Cal. App. 4th 901 (Cal. Ct. App. 2d Dist. 2003), the parties' contract specified that arbitration was to be conducted before the American Arbitration Association (AAA). However, when the parties' first dispute arose, they agreed in writing to arbitrate before a retired judge affiliated with JAMS, not AAA. There were further disputes between the parties, and the party that lost the first round before the JAMS arbitrator attempted to bring those disputes before the AAA. The JAMS arbitrator and the other party asserted that the parties had orally stipulated that any further disputes would come before the same arbitrator. Although it noted its dismay that the party demanding AAA only did so after it lost the first round and another arbitrator would have to read into a large and complex case, the court of appeal held that disputes subsequent to the first one must be heard before the AAA. The California arbitration statute required that agreements to arbitrate be in writing in order to be enforced. Thus, the agreement to change from AAA to JAMS required a writing signed by both parties.

Practice Tip
There are some circumstances and some states in which an oral agreement to arbitrate or an oral agreement to modify an arbitration agreement can be enforced. But because arbitration is a creature of contract, and "put it in writing" is almost always the best way to create a contract, practitioners need to keep in mind that not only must the initial arbitration clause be properly drawn and signed by the parties, agreements to add to, subtract from, or modify that clause should be committed to a writing signed by the parties, not just counsel. It can be tempting to rely on an oral agreement or a statement on the record when in the middle of arbitration or litigation. When adversaries agree to something in front of a neutral, we think we can rely on it. Unfortunately, when a party loses, that party may look desperately for some way to overturn the award. Because there are few grounds to overturn an arbitration award, arguing that the arbitrators exceeded their powers can look attractive.

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