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Enforceability of Arbitration Clauses in Contracts

Arbitration is a form of alternative dispute resolution. It is an out-of-court proceeding where a neutral party, called an arbitrator, hears evidence from both sides of a dispute and then makes a decision, which may be binding. Contracts often include an arbitration clause that provides for arbitration of any ‘dispute or claim arising out of or relating to the contract, or alleged breach thereof.’ The thought when crafting a contract is that arbitration can be a more efficient process to resolve a dispute rather than resorting to court proceedings.   However, many instances arise where one party to a contract objects to the arbitration clause after a controversy or claim arises out of the subject agreement. When this occurs, a court is left to determine the enforceability of the arbitration clause.

Pennsylvania courts have employed a two-prong test in determining whether arbitration should be compelled. A court must determine (1) “that a valid agreement to arbitrate exists between the parties” and (2) “that the specific dispute comes within the substantive scope of the agreement.” Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1114 (3d Cir. 1993) (citation and internal quotation marks omitted).

In evaluating the first prong, a court looks to determine if a valid contract exists. If the contract is valid, then the court will likely find the arbitration clause to be valid absent any fraud, duress, or unconscionablility.

The second determination for a court is whether the dispute is within the scope of the arbitration clause. This query is highly fact sensitive. For example, in Smay v. E.R. Stuebner, Inc., 864 A.2d 1266 (Pa. Super. Ct. 2004), the Superior Court dealt with a broad arbitration clause within a construction contract between two co-defendants that stated, “Any controversy or Claim arising out of or related to the Contract, or the breach thereof, shall be settled by arbitration….” Based on this language, the court determined that the indemnification issue between the parties was subject to arbitration, and directed that resolution be sought in that forum rather than the Court of Common Pleas.

On the other hand, in Setlock v. Pinebrook Pers. Care & Ret. Ctr., 56 A.3d 904 (Pa. Super. Ct. 2012), Plaintiff’s estate instituted a wrongful death claim related to the deceased’s care at Defendant’s nursing home. At the time of the deceased’s admission, a nursing home admission contract was signed that included an arbitration clause providing that, “Any Dispute controversy arising out of or in connection with under or pursuant to this Agreement shall be determined by arbitration.” Despite the apparent expanse of the language constituting the arbitration agreement, the court held that the tort claim was not within the scope of the arbitration clause, and specifically reasoned that the “contract in no way discusses liability for a cause of action, the arbitration clause in the unrelated contract between the parties cannot be read so broadly as to encompass any and all disputes that arise between the parties.”

As with all contracts, a court’s interpretation of enforceability (or lack thereof), can never be certain. However, as it relates to arbitration clauses, preparation with the broadest language possible is recommended.