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Arbitration: A Litigation Alternative

During recent years, the use of arbitration provisions in various contexts has become increasingly common. The arbitration process is often less costly, less time consuming and more predictable than a trial before either a judge or jury. Consequently, arbitration provisions are often used in consumer transactions, employment contracts and many other situations.

The arbitration concept was borne with the creation of the Federal Arbitration Act ("FAA"), 9 U.S.C. §1, et. seq. The FAA specifically provides that a "written provision in...a contract evidencing a transaction involving [interstate] commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, agreement in writing to submit to arbitration an existing controversy arising out of such a contract...shall be valid, irrevocable and enforceable...." 9 U.S.C. §2. Since the enactment of the FAA, the United States Supreme Court has ruled, in a case arising in Alabama, that an agreement which contains a provision requiring arbitration of a dispute between parties that evidences a transaction affecting interstate commerce is specifically enforceable. See, Allied-Bruce Terminix Co. v. Dobson, 513 U.S. 265 (1995); see also, Citizen's Bank v. Alafab Co., 123 S.Ct. 2037 (2003).


These decisions were based in part upon Congress' declaration in the FAA of a national policy favoring arbitration. See Shearson-American Express, Inc. v. McMahon, 482 U.S. 220, 227 (1987)(the FAA establishes a federal policy favoring arbitration that requires rigorous enforcement of agreements to arbitration); Moses H. Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983)("as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability").


Importantly, a transaction must affect interstate commerce before a dispute arising out of the transaction can be subject to resolution under an arbitration provision. It is often up to those attempting to enforce an arbitration provision to show the transaction at issue has a sufficient nexus to interstate commerce to invoke the provisions of the FAA. See, e.g., Jim Walter Homes v. Saxton, [Ms 1020513, Oct. 24, 2003] So.2d (Ala. 2003)(holding a financing agreement signed by a homeowner involved "interstate commerce" for the purposes of triggering application of the act where the financing for the homeowner's house, as well as some of the construction materials, originated in another state); GreenTree Financial Corp. v. Channell, 827 So.2d 90 (Ala. 2002); Ex parte Stamey, 776 So.2d 85 (Ala. 2000)(finding there was sufficient evidence of an affect on "interstate commerce" where plaintiff's dealt with an out-of-state office and signed an agreement acknowledging their transaction involved interstate commerce).


For example, in either the residential or commercial construction context, the "interstate commerce" requirement can be satisfied if building materials are shipped to a construction site across state lines. In consumer finance and purchase transactions, if documents or products made part of the transaction cross state lines, the interstate commerce requirement of the FAA is likely satisfied. Even wrongful death claims and those arising out of the provision of funeral services have been compelled to arbitration where the transactions in question had some affect on "interstate commerce".


Once a lawsuit is filed and a court determines the claims are subject to a valid arbitration agreement, the only proper remedy is for the court to order the dispute be resolved through arbitration. See Mitchell Nissan, Inc. v. Foster, 775 So.2d 138 (Ala. 2000)("[t]rial courts are required to stay or dismiss proceedings and to compel arbitration when the parties have entered into a valid contract containing an arbitration agreement."); Ex parte McNaughton, 728 So.2d 592 (Ala. 1998)("trial courts are required to stay or dismiss proceedings and compel arbitration when the parties have entered into a valid contract containing an arbitration agreement."). The matter will then be decided by an arbitrator selected as required by the provisions of the arbitration agreement and a judge and jury will no longer be involved.


Finally, an arbitrator's award is binding on the parties and generally is as enforceable as a judgment in a court of law. Unlike a verdict by a judge or jury, an arbitration award can only be appealed and vacated: (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. §10.


In conclusion, the use of arbitration provisions is becoming widespread and those provisions are regularly deemed enforceable by Alabama courts. If your business is not currently using arbitration provisions, their benefits are worthy of your consideration.

Contributing Author:

Christopher J. Zulanas
Christopher J. Zulanas, Shareholder
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This client alert is provided solely for educational and informational purposes. It is not intended to constitute legal advice. No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers.