Are Agreements to Arbitrate Always Enforceable? Recent Fourth Circuit Case Illustrates Exceptions
More than ever before, agreements provide for disputes to be resolved through arbitration instead of through the court system. Arbitration provisions are included in many commercial contracts, and increasingly in consumer contracts such as cable and wireless service agreements. There is a vigorous and often contentious debate about the use of arbitration provisions. You can learn more about the pros and cons of arbitration provisions by viewing our video at: https://gross.com/arbitration-clause-business-contracts-pros-cons-fairfax-virginia
Under most circumstances, courts eagerly enforce arbitration provisions. In fact, the Federal Arbitration Act (FAA) demonstrates a strong national policy in favor of arbitrating disputes. Most states have similar laws, including Virginia (See VA Code Section 8.01-581.01) which requires a court to send a lawsuit filed in Court to arbitration if the arbitration provision is “valid, enforceable and irrevocable”. Therefore, it was quite unusual when an exotic dance club’s motion to send a case to arbitration was denied despite the fact that its “dancers” had signed agreements with arbitration clauses. The analysis performed by the U.S. Court of Appeals for the Fourth Circuit in its 2018 Degidio v. Crazy Horse Saloon & Restaurant opinion describes when a court might refuse to enforce an arbitration provision. Reasons for denying a demand for arbitration in the Degidio case were the following:
1. Delay in invoking arbitration – The dance club waited three years after the litigation commenced to request arbitration. Since the purpose of arbitration is to expedite and facilitate settlement of disputes, referring the case to arbitration would have caused more delay. The Court stated that the delay “forced plaintiffs and the district court to spend unnecessary time and resources on issues that might have to be reargued before an arbitrator”.
2. Arbitration request was a litigation strategy – The dance club only requested arbitration after filing multiple motions for summary judgment, serving discovery, and requesting certifications of law to the South Carolina Supreme Court. Thus, the request was only made because the dance club was not successful in obtaining favorable court rulings. The Court found the dance club was “disdainful of orderly judicial process and lacking in respect that opposing parties in an adversary proceeding are due.”
3. Arbitration agreements were solicited during pendency of the case – Without informing the court, the dance club required dancers, who were not part of the lawsuit, to sign arbitration agreements even after the lawsuit was filed. The court found that “(w)hen such agreements are signed during the pendency of litigation, there is an increased risk that arbitration will operate not to expedite the resolution of disputes, but to prolong the entire process and to give defendants a second opportunity to contest unfavorable judgments.” In addition, the Court found the facts surrounding the execution of the agreements were “ripe for duress” and that the terms of the new arbitration agreements were misleading with respect to “important remunerative and scheduling benefits” provided to the dancers.
Even though the policy of requiring arbitration has become a recognized principle in federal and state courts, it is not without limits. Through its conduct, the exotic dance club lost the right to enforce the arbitration provisions. Undoubtedly, the legal principles cited to deny enforcement of arbitration provisions will be used in subsequent cases.
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Gross & Romanick, P.C. is a law firm located in Fairfax, Virginia. Since 1980, our attorneys have dedicated themselves to providing cost efficient legal services to individuals and businesses in Northern Virginia and the Washington, D.C. Metro Area. We meet our clients’ needs by applying hard work with integrity to find creative and practical legal solutions. Our extensive business litigation experience, and our understanding of the transactional mistakes that often lead to expensive courtroom battles, helps us to advise our clients on business deals and the resolution of commercial disputes. To learn more about our firm, visit: www.gross.com or call us at 703-273-1400