01/02/2013 11:57 am ET Updated Mar 03, 2013

Arbitration Required by the Word "All"

Advocates of mandatory arbitration clauses in contracts assert that arbitration speeds dispute resolution, is less costly than litigation, provides privacy, and preserves relationships by being less adversarial. Critics state that mandatory arbitration creates private justice, conceals information that the public should know, undermines the impact of community standards that a jury provides, and when combined with a distant forum creates hardships that disadvantage a less wealthy party.

Regardless of the debate concerning their desirability, mandatory arbitration clauses are typically enforced by courts provided there is no proven arbitrator bias, the subject matter of the dispute is included in the arbitration agreement, both parties have equal rights and obligations under the agreement, and the parties in question have in fact agreed to the arbitration clause.

A recent decision of the federal Court of Appeals for the First Circuit, Awuah v. Coverall North America, Inc., indicates how easily one may agree to arbitration. In this case the arbitration clause was included in a franchise agreement. The parties signed a transfer of the franchise agreement and never saw or requested a copy of the original franchise agreement. The transfer agreement stated that the transferees agreed to perform "all responsibilities, duties, indebtedness and obligations of the Franchisee under the [Franchise] agreement." The transferees unsuccessfully argued that this language related to financial obligations and did not include an obligation to arbitrate. The court disagreed stating that "all means all."

The court stated that signing a written agreement binds one to its terms, whether read or unread. Furthermore the Federal Arbitration Act states that arbitration agreements "shall be valid, irrevocable, and enforceable... " and this statutory provision preempts any state law that requires special notice of an arbitration provision in order to bind a party to arbitration. While the transfer agreement in question did not use traditional "incorporation by reference" language, "no such magic terms are required" to transfer rights and obligations, including the obligation to arbitrate.

The Court's decision illustrates how a single word in an agreement may impose significant obligations on a party. It further illustrates the way in which the Federal Arbitration Act may overturn contradictory state statutory provisions. To exclude arbitration the transfer agreement should have either carefully limited and listed the rights and obligations being transferred or specifically excluded the obligation to arbitrate. A subjective belief concerning the meaning of "all responsibilities... " carries little weight in court. As the court stated, all means all.