Recent Issues in Arbitration
Alabama law on arbitration is constantly changing, and there can sometimes be two to three decisions relating to arbitration issued by the Supreme Court of Alabama in any given week. Moreover, the Alabama Supreme Court has not been particularly consistent in its rulings on arbitration and has been known to completely reverse itself on any given position on rehearing of a case or in a subsequent opinion. As such, when dealing with arbitration issues, it is important to keep up with the latest decisions, either through Westlaw or through one of the services that provide immediate summaries of Alabama opinions before they are even published in the Reporters.
The following paper touches on some recent issues in Alabama arbitration law but by no means should it be considered to be an exhaustive discussion of the issues involved in Alabama arbitration law.
The Federal Arbitration Act, § 2, provides that an arbitration clause in a “contract evidencing a transaction involving commerce … shall be valid, irrevocable, and enforceable, save on such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C.A. § 2. These words have been broadly construed and there need only be a showing that the transaction in question affects interstate commerce. Allied-Bruce Terminix, Inc. vs. Dobson, 513 U.S.C. 65, 115 S.Ct. 834, 130 L. Ed.2d 753 (1995).
The leading Alabama case on the factors relevant to interstate commerce is Sisters of the Visitation vs. Cochran Plastering Company, Inc., 775 So.2d 759 (Ala.2000). Under the Sisters of the Visitation case, the factors relevant as to whether a transaction “substantially affects” interstate commerce are as follows: (1) citizenship of the parties and any affiliation they might have with out-of-state entities; (2) where tools and equipment that were used at a project site originated and whether they had moved in interstate commerce; (3) intrastate vs. interstate allocation of costs and services involved in a project; (4) subsequent movement across state lines; and (5) the degree of severability from other contracts.
Significantly, the Supreme Court has also explained that the Court’s first duty is to determine whether the moving party has met the burden of proving in a transaction that substantially affects interstate commerce. See Alternative Financial Solutions, LLC vs. Colburn, 2001 WL 1451106 No. 1001285 (Ala. Nov. 16, 2001). If the moving party cannot satisfy this initial burden of production of evidence regarding interstate commerce, then the Court will not even get to the issue of the scope of the agreement. Id. The recent opinion in Alternative Financial Solutions, LLC vs. Colburn, supra, gives a good overview of how the Court is applying the five factors from the Sisters of the Visitation case.
SCOPE OF ARBITRATION CLAUSES
Federal substantive law provides that the question of whether the parties agreed to arbitrate their dispute is to be governed by ordinary state law principles relating to the formation of contracts. Ex parte Roberson, 749 So.2d 441, 445 (Ala.1999). The question whether an arbitration clause applies to a claim is a matter of state-law contract interpretation, which ‘is guided by the intent of the parties, and which intent, absent ambiguity in the clause, is evidenced by the plain language of the clause.’ Coastal Ford, Inc. v. Kidder, 694 So.2d 1285, 1288 (Ala.1997) (citation omitted). The question whether a contract’s arbitration clause requires arbitration of a given dispute remains a matter of contract interpretation. Ryan Warranty Services, Inc. v. Welch, 694 So.2d 1271, 1272 (Ala.1997). The answer depends on the intent of the parties, and the threshold question is whether the parties intended that the particular dispute be covered by the arbitration clause. Id. at 1273.
The federal courts apply the rule that if the contract is ambiguous or unclear as to the scope then it should be liberally construed in favor of arbitration. The Alabama Supreme Court has explained its attitude toward that rule as follows: “The rule applied by the federal courts, that ambiguities in arbitration clauses will be construed in favor of arbitration, arises only if there is an ambiguity.” Ex parte Hagan, 721 So.2d 167, 174 (Ala.1998) (holding that claim presented did not fall within scope of arbitration clause). In a few recent cases, the Alabama Court has also said that the F.A.A. mandates “that a court give the broadest possible interpretation to an arbitration agreement and resolve all doubts in favor of arbitration.” Ex parte Morris, 782 So.2d 249, 253 (Ala.2000).
In place of the federal court’s liberal interpretation favoring arbitration, the Alabama courts have often emphasized a slightly different idea. “An arbitration agreement applies only to disputes to which the parties have agreed for it to apply.” Ex parte Hagan, supra at 174. The Court quoted a U.S. Supreme Court decision for the principle that arbitration is nothing more than a matter of contract between the parties and a way to resolve disputes, “but only those disputes — that the parties have agreed to submit to arbitration.” Id. See also A.G.Edwards & Sons, Inc. v. Clark, 558 So.2d 358 (Ala.1990). “A party to a contract can be forced to arbitrate only those issues he or she specifically agrees to submit to arbitration.” Ryan Warranty Services, Inc. v. Welch, 694 So.2d 1271, 1273 (Ala.1997).
The Alabama Supreme Court has construed narrowly arbitration clauses requiring arbitration of disputes that “arise from” or “arise under” an agreement, whereas the courts apply a broader interpretation to arbitration provisions requiring arbitration of all disputes that arise from or are “related to” the contract. See Reynolds & Reynolds Company v. King Automobiles, Inc., 689 So.2d 1 (Ala.1996) (“All disputes…arising from or related to this agreement”); and Greentree Financial Corporation of Alabama v. Vintson, 753 So.2d 497, 505 (Ala.1999) (All disputes ‘arising from or relating to’ the contract). Compare Koullas v. Ramsey, 683 So.2d 415 (Ala.1996); and Old Republic Insurance Company v. Lanier, 644 So.2d 1258 (Ala.1994) (“Any dispute arising out of this agreement”).
SIGNATORIES VS. NON-SIGNATORIES
A recent case on whether non-signatories to a contract can be compelled to arbitrate their claims is Cook’s Pest Control Inc. v. Boykin, 807 So.2d 524 (Ala.2001). Ernestine Allen was a patient at Knollwood Hospital when she was bitten over 300 times by fire ants. She sued the hospital for negligence and wantonness. She subsequently amended her complaint to sue Cook’s Pest Control, alleging negligence, wantonness, and breach of contract (as a third party beneficiary) after she discovered that Cook’s had a contract with Knollwood for pest control. The defendants moved for arbitration based on an arbitration clause in the contract between Cook’s Pest Control and Knollwood Hospital. The day before the hearing on the motion the plaintiff moved to amend her complaint to dismiss her breach of contract claim, which the trial court apparently granted before ruling on the arbitration issue. The Honorable James Wood denied arbitration. The arbitration clause in the contract between the hospital and Cook’s Pest Control required arbitration of any dispute, controversy or claim “arising out of or relating to the service agreement or the breach thereof or arising out of any prior or future dealings between Cook’s and customer [Knollwood Hospital] shall be settled by arbitration.”
The Supreme Court started out by observing that the general rule is that a non-signatory to an arbitration clause cannot be forced to arbitrate her claims and it was undisputed that the plaintiff was not a signatory. The Court held that the theory of third party beneficiary could not be applied to compel arbitration here because plaintiff had withdrawn her contract claim and disavowed her status as a third party beneficiary and the Court further concluded that she was not “burdened by the contract.” The Court also held that her claims were not intertwined with the contract but that her negligence claims were independent of any contractual obligations. “Our cases recognizing ‘intertwining claims’ as a basis for compelling arbitration have typically involved arbitration clauses broad enough to embrace intertwined claims…and allegations of a conspiracy between the non-signatory and the signatory to the arbitration agreement.” 2001 WL 729291, *3. “However, this is not such a case.” Id. “Consequently, the claims are not subject to arbitration under the doctrine of intertwining.” Id.
Finally, in Cook’s, the Court also addressed the issue of the scope of the arbitration clause. The Court observed that the arbitration clause concerned disputes between Cook’s and its customer, which was Knollwood Hospital. “This Court has held that a non-signatory cannot require arbitration of a claim by the signatory against the non-signatory when the scope of the arbitration agreement is limited to the signatories themselves.” Id.
In Georgia Power Company v. Partin, 727 So.2d 2 (Ala.1998), the Court held that the injury claims of an employee injured on the job were covered by an arbitration provision. The plaintiff was employed as a maintenance foreman for Orba Corporation. He was injured when he fell from a slow moving train at a coal loading facility owned by Georgia Power Company and operated by plaintiff’s employer, Orba Corporation. Orba Corporation had entered into a “operations agreement” with Georgia Power which imposed certain duties on Georgia Power to construct and equip the coal loading facility and made it responsible for certain defects or deficiencies in the maintenance or construction of the facility. That same operations agreement also included an arbitration clause, which provided that any dispute or controversy between the parties as to any question of fact which may arise under the agreement would be subject to arbitration. The plaintiff sued Georgia Power and specifically argued that Georgia Power was negligent or wanton in failing to correct certain unsafe working conditions and in maintaining the facility, as required by the operations agreement. Plaintiff claimed to be a third party beneficiary of the operations agreement between Georgia Power and his employer, Orba. He had never signed the arbitration agreement. Nevertheless, the Court applied the arbitration agreement to plaintiff’s personal injury claim, finding that, as a third party beneficiary, he was bound by both the benefits and the burdens of the contract he sought to enforce, which included the arbitration clause. The Court in Partin held that the employee’s negligence claim for personal injury, for alleged negligence in maintaining the facility in violation of the operations agreement, was covered by the scope of the arbitration clause which would apply “in the event of any dispute, difference of opinion or controversy between the parties as to any question of fact which may arise under this agreement.”
The plaintiff in Partin also argued that the arbitration clause only covered contractual disputes but not his tort claim for negligence causing a personal injury. Georgia Power argued that the contract creating the duties was at the very heart of the plaintiff’s claims. The Supreme Court agreed. “In order for a dispute to be characterized as arising out of the subject matter of a contract, for purposes of arbitration, it must at the very least raise some issue that cannot be resolved without a reference to, or construction of, the contract itself.” The Court cited Koullas v. Ramsey, 683 So.2d 415 (Ala.1996) for this proposition. “Because both the contract claims and the tort claims involve questions of fact as to Georgia Power’s duties to Jerry Partin arising from the operations agreement, we agree that both kinds of claims are included within the scope of the arbitration agreement in that contract.” 727 So.2d at 6.
MERGER CLAUSES AND ARBITRATION
In Ex parte Palm Harbor Homes, Inc., 798 So.2d 636 (April 20, 2001), the seller and the purchasers in a manufactured home purchase executed three documents containing arbitration clauses. The documents included a “Manufactured Home Retail Installment Contract and Security Agreement”, an “Agreement for Binding Arbitration”, and an “Alabama Arbitration Provision.” The Supreme Court of Alabama, in that matter, found that because only the Retail Installment Contract contained a merger clause, which stated that it was the only agreement between the parties regarding the purchase of the home, and because the Retail Installment Contract appeared to be a fully “integrated” agreement including all terms necessary and convenient to the contract, that therefore only the Retail Installment Contract could be enforced in terms of arbitration and not the separate “free-standing” agreements, which did not have merger clauses.
The Court in Ex parte Palm Harbor Homes also stated that “Were we to ignore the merger clause, however, we would still observe that the Installment Contract appears — on its face — to be a fully integrated agreement.” Ex parte Palm Harbor Homes, 798 So.2d at 661. The Court further noted that “By contrast, the only substantive provisions contained in the free-standing instruments are those that, for the most part, vary and contradict the arbitration provision contained in the Installment Contract.” Ex parte Palm Harbor Homes, 798 So.2d at 661.
Ex parte Palm Harbor Homes stated the following with regard to the effect of “merger clauses”:
When a contract contains … a merger clause, the agreement is deemed to be “integrated,” such that evidence of prior or contemporaneous agreements shall not be admitted to contradict the terms of the agreement. Johnson Enters. Of Jacksonville, Inc. v. FPL Group, Inc., 162 F.3d 1290, 1309 (11th Cir.1998). Merger clauses thus create a presumption that the writing represents an integrated, that is, the final and complete, agreement of the parties. Tallmadge Bros., Inc. v. Iroquois Gas Transmission Sys., L.P., 252 Conn. 479, 504, 746 A.2d 1277, 1291 n. 15 (2000).
Ex parte Palm Harbor Homes, 798 So.2d at 660.
SELECTION OF ARBITRATOR
In Ex parte Cappaert Manufactured Homes, 2001 WL 1450656 (Ala. Nov. 16, 2001), the Supreme Court of Alabama essentially held that the plaintiff buyers of a manufactured home cannot simply reject the first arbitrator proposed by the manufacturer (or any other defendant, for that matter) under an arbitration clause requiring the concurrence of the buyers in the selection of the arbitrator, and then as a result have the court select the arbitrator instead. The opinion also seems to suggest that when a plaintiff rejects an arbitrator proposed by the defendant, they must give some explanation for doing so.
MAGNUSON-MOSS WARRANTY ACT
In Ex parte Thicklin, 2002 WL 27925 (Ala. Jan. 11, 2002), the Supreme Court of Alabama found that a mobile home manufacturer’s failure to disclose in its warranty the requirement that the consumer arbitrate their claims against the manufacturer violated the disclosure requirements of the Magnuson-Moss Warranty Act. The Court found that the trial court, therefore, abused its discretion in compelling the consumer to arbitrate her express warranty claims and her claims alleging Magnuson-Moss violations. The Court, nonetheless, found that the consumer’s implied warranty claims were subject to arbitration.
However, dealers of products which do not issue their own written warranty nor adopt someone else’s warranty probably are not liable under the Magnuson-Moss Warranty Act, nor subject to its requirements with regard to written warranties. In the case of Richardson vs. Palm Harbor Homes, Inc., 254 F.3d 1321 (11th Cir. June 28, 2001), the Eleventh Circuit held that the Magnuson-Moss Warranty Act did not apply to a claim against a mobile home dealer for breach of an oral express warranty. The Court specifically noted that the Magnuson-Moss Warranty Act only applies to written warranties: “As explained above, if the MMWA [Magnuson-Moss Warranty Act] supersedes the FAA at all for any claims, it is by the negative implication of the MMWA’s provisions and history approving and regulating the prescription of non-binding, as opposed to binding, extra judicial dispute resolution. See Cunningham, 25 F.3d at 616 [Cunningham vs. Fleetwood Homes of Georgia, 253 F.2d 611 (11th Cir. 2001)]. That regulation of nonbinding dispute resolution is limited to provisions in written warranties. See 15 U.S.C. § 2310(a)(2),(3).” Richardson, 254 F.3d at 1327.
The Supreme Court of Alabama has held, in the matters of Cavalier Manufacturing, Inc. vs. Jackson, 2001 WL 367600 (Ala. April 13, 2001) and Ex parte Thicklin, 2002 WL 27925 (Ala. Jan. 11, 2002), that the portion of an arbitration clause that prohibited the arbitrator from awarding punitive damages is unconscionable and would violate public policy and was, therefore, void and unenforceable.
ILLEGALITY AND ARBITRATION
The Supreme Court of Alabama has held that when a contract containing an arbitration clause is void and unenforceable because it is illegal, then no claims arising out of or relating to that contract are subject to arbitration. Alabama Catalog Sales vs. Harris, 794 So.2d 312 (Ala. Sept. 15, 2000).
However, in the case of Bear Stearns Securities, Inc. vs. Renis Jones, III, 789 So.2d 161 (December 22, 2000), the Supreme Court of Alabama held that where an agreement containing an arbitration clause did not require or contemplate any illegal activity, then said contract was not void for illegality, even where illegal acts might have been committed in the performance of the contract.
In the Bear Stearns matter, the plaintiff, Renis Jones, III, sued, among other parties, Bear Stearns Securities, Inc., a brokerage firm, and David Calicchio, a broker with First Cambridge. In connection with the transfer of Jones’ account from Redstone Securities to First Cambridge Securities, Jones executed on November 11, 1996, a “Customer Agreement” with Bear Stearns securities, that, authorized Bear Stearns to act as clearing broker for Jones’ account with First Cambridge, and also provided for arbitration. Jones sued Calicchio and Bear Stearns Securities and others in June of 1998, alleging that the defendants engaged in various improper activities relating to his investment accounts, and that the defendants had suppressed from him certain knowledge about Calicchio’s alleged activities. Jones specifically alleged that in January of 1997, Calicchio conducted three unauthorized transactions involving Jones’ account with First Cambridge, and that those transactions damaged him.
The trial court denied the defendants’ Motions to Compel Arbitration, contending that the plaintiff had presented substantial evidence indicating that the primary purpose of the agreement with Bear Stearns was to facilitate the illegal sales of securities by Calicchio and that Calicchio was not registered to sell securities as required by Alabama law. The trial court, therefore, concluded that the contract was void under general law and under equitable principles of contract law.
The Supreme Court of Alabama reversed, holding that the trial court erred in denying Bear Stearns’ Motion to Compel Arbitration of Jones’ claims. With regard to the plaintiff’s contention that the contract was void because Calicchio was not a licensed broker in Alabama, the Court noted that the agreement clearly provided that Bear Stearns was to act as the clearing broker for First Cambridge, not Calicchio. Moreover, as part of the agreement, Bear Stearns was acting as the clearing broker for the plaintiff’s account with First Cambridge and the Court noted that First Cambridge and Kenneth Orr, First Cambridge’s Chief Executive Officer, were both licensed by the Alabama Securities Commission to do business in Alabama at the time Jones executed the agreement with Bear Stearns.
Moreover, the Court noted that nothing about the plaintiff’s agreement with Bear Stearns required or contemplated illegal activity of any kind. The Court specifically found that if a contract did not of itself require illegal activity, the mere fact that the contract was allegedly performed illegally does not render the contract void:
… The fact that certain illegal actions were later taken by Calicchio while he was an employee of First Cambridge does not make the contract between Jones and Bear Stearns illegal. See Chandler vs. Lamar County Board of Education, 528 so.2d 309 (Ala.1988), holding that if the four corners of a contract did not require illegal activity, then the contract was not void as illegal, and following the holding in Bush vs. Russell, 180 Ala. 590, 61 So. 373 (1913), in which this Court held that a contract that can be performed in a legal manner is not rendered illegal simply because certain action that took place in the performance of the contract was illegal. …
Bear Stearns Securities, Inc., 789 So.2d at 165.
CHALLENGES TO THE VALIDITY OF THE ARBITRATION
CONTRACT, SUCH AS FRAUD IN THE INDUCEMENT
There are numerous cases in Alabama involving challenges to the validity of the contract containing an arbitration clause or challenges to the arbitration clause itself (too numerous to mention here). The basic rule is that if the challenge goes to the whole contract containing the arbitration clause, the issue of enforceability is for the arbitrator to decide. When the challenge is to the arbitration clause itself, the issue is for the courts to decide. The basic principles were stated as follows in the case of Green Tree Financial Corporation of Alabama vs. Wampler, 749 So. 409 (Ala.1999):
 When deciding the threshold issue whether the court or the arbitrator decides a challenge to the enforcement of an arbitration clause entered into by the parties, the court first must satisfy itself that the terms of the arbitration clause are broad enough to permit the arbitrator to decide issues of arbitrability. However, a determination that, by the terms of the arbitration clause, the arbitrator is to decide issues of arbitrability does not end the inquiry. Where the attack is addressed to the arbitration clause itself, as opposed to the contract as a whole, the court, and not the arbitrator, resolves the issue. But, when the challenge goes to the whole contract, a contract that happens to contain an arbitration clause, the issue of enforceability of the contract, including the arbitration clause, is for the arbitrator to decide. Jones v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 604 So.2d 332 (Ala.1991), relied on in Investment Management, 727 So.2d at 75. See, also, Old Republic Ins. Co. vs. Lanier, 644 So.2d 1258, 1263 (Ala.1994).
Id. at 413.
The respective burdens of proof of the party seeking to enforce the arbitration clause and the party opposing it were set out in Ryan’s Family Steak Houses, Inc. vs. Regelin, 735 So.2d 454 (Ala. 1999):
‘The party seeking to compel arbitration has the burden of proving the existence of a contract calling for arbitration and the existence of an arbitrable dispute. In order to prevail on an assertion of arbitrability, the moving party is required to produce some evidence which tends to establish its claim.’
Jim Burke Automotive, Inc. v. Beavers, 674 So.2d 1260, 1265 (Ala. 1995) (Citation omitted.)
‘[A]fter a motion to compel arbitration has been made and supported, the burden is on the non-movant to present evidence that the supposed arbitration agreement is not valid or does not apply tot he dispute in question.’ Jim Burke, 674 So.2d at 1265, n.1. The plaintiffs did not do this.
In essence, if you are seeking to challenge the validity of a contract containing the arbitration clause, you need to address your challenge to the arbitration clause itself and not to the contract as a whole, so that it can be heard by the judge and not by the arbitrator. It is also necessary to establish, by affidavit or other proof, the factual basis for your challenge. The arbitration clause also needs to be broad enough so that the arbitrator is to decide the issue of arbitrability.
A very good summary on the issue of waiver of arbitration is found in the January, 2002 issue of The Alabama Lawyer entitled “When Does a Party Waive Its Right to Enforce Arbitration?” written by James W. Davis.