Arbitration Developments in Arizona…

  • September 8th, 2010

    Arbitration Developments in Arizona During 2000-2009

    By David C. Tierney, Esq.

    In Arizona, the last decade has produced no “game changing” decisions regarding arbitration.  Rather, our seven key cases reflect seven nationwide trends.

    A. Litigation Will Be Stayed for Arbitration:

    The first trend is the appearance of cases in the Nation wherein someone asserts that only one small part of the multi-count case is arbitrable — and argues that the entire case must therefore be heard in the courthouse, since the small arbitrable portion will be “controlled” by the litigation results.  In Hallmark Industries, LLC vs. First Systech International, Inc., 203 Ariz. 243, 245, 52 P.3d 812, 814 (App.2002), Hon. John Pelander writing, our Court of Appeals followed the U.S. Supreme Court’s reversal of a Ninth Circuit Court of Appeals’ Decision[1]Hallmark struck down the concept of “if it is intertwined with litigable issues, the arbitrable issue gets tried in court.”  Instead, our Court of Appeals said that, where there is a non-severable issue that is to be arbitrated, the rest of the court case will be stayed under A.R.S. § 12-1502 (D) while the arbitration is concluded.  The Court noted that our statutes require the courts to “validate arbitration agreements” and “to make the arbitration process effective.”  The Court said that any risk of “inconsistent results” or “inefficiency” is the result of the parties having bargained for arbitration as the method for resolving disputes.

    1. Usually, Arbitrators Decide Arbitrability:

    This early “sortie” in favor of defending arbitration clauses and giving them full effect was followed by Brake Masters Systems, Inc. vs. Gabbay, 206 Ariz. 360, 367, 78 P.3d

    1081, 1088 (App.2003).  Without citing to the struggle at the National level[2] (over whether courts or arbitrators decide arbitrability), our Court reached out to declare how it is to be determined that a matter is or is not arbitrable.  Our Court noted that when facing a question of whether or not a dispute is arbitrable, the Arizona citizen has two options.  He can go to court and seek a court order under A.R.S. § 12-1502 (A) compelling his adversary to arbitrate (and the court will determine arbitrability); or he can simply commence arbitration and the arbitrator can determine all issues, subject to a later attack on the award, claiming that there was no jurisdiction in the arbitrator and that he “exceeded his powers” under A.R.S. § 12-1512 (A), thus, that the award must be vacated.  In this case, the applicable rules for the arbitration were AAA Commercial Rules, which stated that the arbitrator (under Rule 7) would rule on all questions of arbitrability.  The Court of Appeals ruled that this provision in the AAA Rules satisfied the First Options requirement.  The arbitrator’s decision on arbitrability was described as one to be upheld, unless there was clear error by the arbitrator.

    1. Due Process Does Not Preclude Arbitration in Adhesion Contracts:

    At the mid-point of the decade, our State caught the edge of the wave of cases coming out of California attacking contracts of adhesion containing arbitration clauses, seeking to invalidate the contract’s arbitration clauses as inherently unfair to consumers.  In Harrington vs. Pulte Home Corp., 211 Ariz. 241, 250, 119 P.3d 1044, 1052 (App.2005), the Court of Appeals (through Judge Barker) wrote that our state’s “reasonable expectations” doctrine did not mean that all arbitration clauses were void; that inserting bold print about arbitration resulting in a loss of jury trial was not required, and that AAA case fees were not substantively or procedurally unconscionable.  The Court found no fraud, duress, or unconscionability in the mere inclusion of an arbitration clause.  The Court distinguished the earlier Arizona case involving an arbitration clause that had been included without explanation in an abortion clinic’s admission papers.  The court noted that the case had involved a young woman, under stress, who was seeking an abortion — as opposed to involving homebuyers in a commercial transaction.  See Broemer vs. Abortion Services of Phoenix, Ltd., 173 Ariz. 148, 149, 840 P.2d 1013, 1014 (Ariz.1992).  This Harrington opinion sets limits in Arizona for the national trend to investigate abuses of substantive and procedural due process, which trend was heralded by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83, 99 Cal. Repts. 2nd 745  6 P.3d. 669 (2001).

    1. No Magic Words Are Needed to Incorporate An Arbitration Clause:

    In 2007, a different sort of attack on arbitration clauses was attempted in Weatherguard Roofing Co., Inc. vs. D. R. Ward Construction Co., Inc., 214 Ariz. 344, 349, 152 P.3d 1227, 1232 (App.2007).  Here the General Conditions to the Construction Contract between the owner and the general contractor were incorporated by reference into a subcontract.  The subcontractor argued that, without the language of incorporation having expressly mentioned the arbitration clause, that clause could not be made part of the subcontract.  The subcontractor insisted that he had not specifically agreed to employ arbitration.  Our Court held that no magic words related specifically to dispute resolution (or to a loss of jury trial rights) were required and that the Construction Contract’s “flow-down clause” had imported the arbitration requirements into the subcontract.

    1. “Summary” Proceedings Will Be Employed on a Motion to Compel


    A nursing home case next dealt with a litigant’s attempt to escape from an arbitration clause.  Citing the Brake Masters case, the court stated that when a litigant places before the trial court a question of arbitrability, the court shall dispose of that question in “summary proceedings,” i.e., upon affidavits and memoranda, as if the issue is one for summary judgment, UNLESS a party petitions for an evidentiary hearing, asserting an issue of material fact.  In Ruesga vs. Kindred Nursing Centers West, LLC, 215 Ariz. 589, 595, 161 P.3d 1253, 1260 (App.2007), our Court repeated that arbitration is to be  a “speedy” remedy and to be dealt with speedily if an interruption in arbitration is attempted.

    1. The Procedural Rules Adopted Will Control:

    All across the Nation, arbitration awards are being attacked based on claims that the arbitrators acted in such a way as not to “give a fair hearing” to the parties before them.  In FIA Card Services, N.A. vs. Levy, 219 Ariz. 523, 525, 200 P.3d 1020, 1022 (App.2008), the respondent in an arbitration attacked the process employed by an NAF arbitration.  A one-day late response had, in effect, led to a default against the credit card holder who had challenged a balance claimed due on his credit card.  Following the lead of the U.S. Supreme Court in Mastrobuono vs. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57, 115 S.Ct. 1212, 131 L.Ed. 2d 76 (1995), our Court said that, essentially, the procedural rules agreed upon by the parties are the rules in force for that arbitration.  Thus, the Court upheld the application of the rules of the NAF and the default entered by the arbitrator.

    1. Public Policy Vaguely Stated Will Not Bar Arbitration Clauses:

    Finally, in Mathews ex rel. Mathews vs. Life Care Centers of America, Inc., 217 Ariz. 606, 608, 177 P.3d 867, 869 (App.2008), Judge Irvine writing, our Court held that the agreement of a vulnerable adult’s representative to arbitrate his claims was binding.  The Court found that the public policy stated in our vulnerable adult statutes (A.R.S. § 46-455 (O)) did not bar the use of arbitration.  The representative of the elderly patient had wanted a jury trial and had tried to get the court to block arbitration.  Judge Irvine found insufficient proof of legislative intent to bar the effect of private arbitration clauses designed to resolve disputes between the nursing home and the patient.

    The decade finished as it had commenced.  Arizona courts have shown a strong inclination to keep open and functional the arbitration channel, so that it can take matters out of the courthouse.  They have shown a desire to keep the arbitration channel free from litigation over the procedures contracted for by the parties.  They have not been eager to pull back into the judicial channel decisions about what is to be arbitrable.  They have been unwilling to make it easy for litigants to attack arbitral awards.  In short, in Arizona, as in the rest of the Nation (except for California), arbitration is encouraged and protected.

    However, having failed to “clip the wings” of arbitration in the courts, the foes of arbitration have gone to Congress.  This next year will likely determine whether the FAA will be altered and whether large classes of disputes will be declared incapable of being made subject to pre-dispute arbitration agreements.  See Arbitration Fairness Act of 2007, H.R. 3010; S.B. 1135, 110th Congress (2007), and Arbitration Fairness Act of 2009, H.R. 1020, 111th Congress (2009).

    [1] Dean Witter Reynolds, Inc. vs. Byrd, 470 U.S. 213, 217, 105 S. Ct. 1238, 1240-41, 84 L.Ed. 2nd 158, 163 (1985) reversed Byrd vs. Dean Witter Reynolds, Inc., 726 F.2d 552, 554 (9th Cir. 1984).

    [2] Rule 7(a) of the AAA Commercial Rules reads as follows:  “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections to the existence, scope, or validity of the arbitration agreement.” (Emphasis added.)  This rule in the AAA Commercial Rules (and the analog Rule 8(a) in the Construction Rules) was designed to overcome a situation created by the U. S. Supreme Court in 1995.  The U. S. Supreme  Court ruled in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S. Ct. 1920 (1995), that if an arbitration clause placed the arbitration under the FAA (9 U.S.C. §1), then unless the parties “clearly and unmistakably” provided otherwise, a court would determine the arbitrability of the particular dispute.  The AAA Rules are designed to “neuter” the First Options decision and to require that the arbitrator (instead of the court) deal with the question of whether some or all or none of the parties’ disputes be arbitrated.