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Court holds that arbitration agreement fails for lack of consideration

Agreements requiring employees to arbitrate any claims they may have against their employers arising from their employment can save both time and money.  Courts, however, will review such agreements very carefully to ensure that they do not unfairly disadvantage employees by, among other things, denying them remedies or procedural tools that would be available to them in traditional litigation before a court.  As a recent case demonstrates, courts will also review arbitration agreements to be sure they satisfy basic principles of contract law.

In Domin v. River Oaks, Inc.pdf, the employee signed an arbitration agreement that stated, in part:

I understand and voluntarily agree that any disputes regarding the terms of this pay plan or my employment or termination from employment…will be resolved exclusively in accordance with binding arbitration….Although I understand that signing this arbitration agreement is not required as a condition of my employment, I desire to take advantage of the benefits of arbitration and understand that I give up the right to trial by jury….

The employer later terminated the employee’s employment, and the employee filed suit claiming sexual harassment.  The employer asked the court to stay the lawsuit pending arbitration.  The court, however, found the employee’s argument regarding lack of consideration for the arbitration agreement to be persuasive and ordered the employer to proceed with the litigation.

The court confirmed that, for an arbitration provision to be valid and enforceable, the basic contractual elements must be present: offer, acceptance, and consideration.  Consideration is the quid pro quo that supports a contract and makes it enforceable:  “If you will do this, I promise to do that.”  As the court noted, if signing the arbitration agreement had been a condition of employment (which it was not) or if the arbitration agreement had required both the employer and the employee to submit any claims to arbitration (which it did not), the employee’s claim would be before an arbitrator rather than a federal judge.  Indeed, the court found that the only party promising to do anything was the employee.  As a result, the arbitration agreement was not an enforceable contract and the employer must now defend employment-related claims in a forum it thought it would be able to avoid.

As this case shows, it is crucial to ensure that arbitration agreements satisfy the basic requirements for a valid contract and include the additional safeguards courts have imposed to protect employee rights.  Otherwise, your arbitration clauses may result in protracted litigation regarding the enforceability of the arbitration agreement rather than an expedited arbitration decision that resolves the dispute once and for all.