HR Management & Compliance

Binding Arbitration Ordered Despite Agreement Ambiguity

Arbitration agreements are basically contracts, and they won’t be enforced absent proof both parties agreed to their terms. When the agreement is ambiguous and the ambiguity was created by the employer, one might expect a court won’t enforce the contract against the employee. But arbitration agreements are favored by some basic legal tenets, so is that enough to save an ambiguous agreement?

arbitration agreementTrial Court Finds Ambiguity

Jose Calderon and Western Bagel Company, Inc., signed an arbitration agreement. The company drafted the English version of it, and a third party created a Spanish translation.

The English version required the parties to engage in binding arbitration of employment disputes. The Spanish version called for both binding and nonbinding arbitration. Paragraph 10 of the English version stated that if any part of the agreement is found to be unenforceable, “this Agreement shall be reformed to the greatest extent possible to ensure that the resolution of all conflicts between the parties as described herein are resolved by neutral, binding arbitration.” No part of the English version provided for nonbinding arbitration.

The third-party translator translated paragraph 10 as follows: “If any provision of this Agreement . . . is found to be unenforceable, whether in whole or in part, this finding will not affect the validity of the rest of this Agreement and the Agreement will be carried out to the fullest possible extent to ensure that the resolution of all disputes between the parties as described herein are resolved via neutral, non-binding arbitration.” All other parts of the Spanish version of the agreement provided for “binding arbitration.”

Calderon was a Spanish speaker with limited English vocabulary. Consequently, he signed the Spanish version of the agreement. He subsequently sued Western Bagel for (1) failure to provide meal breaks, (2) failure to provide rest periods, (3) waiting time penalties, and (4) unfair business practices. Western Bagel attempted to enforce the binding arbitration agreement.

The trial court determined the inconsistency between the Spanish and English versions of the arbitration agreement created an ambiguity about whether the parties agreed to binding or nonbinding arbitration. To resolve the ambiguity, the trial court construed the agreement against Western Bagel because the company drafted it and had it translated. Therefore, the trial court ordered the parties to arbitrate their dispute on a nonbinding basis before the case could be further litigated. Western Bagel appealed.

Ambiguities Resolved in Favor of Arbitration

The Federal Arbitration Act (FAA) protects the integrity of many arbitration agreements by making them binding and limiting the reasons for which courts can review and set aside arbitration awards. To that end, the court of appeal disagreed with the trial court and determined the FAA prohibited the trial court from construing the ambiguity against the drafter of the agreement, Western Bagel.

The court of appeal primarily relied on the U.S. Supreme Court’s decision in Lamps Plus, Inc. v. Varela. In that case, the Supreme Court ruled that construing ambiguities against the drafter “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” The Court stated an “individualized form of arbitration [is] envisioned by the FAA,” wherein “parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution, lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.”

Given those goals, the Supreme Court determined that ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration, regardless of who drafted the ambiguous language. Specifically, it stated that “the FAA provides the default rule for resolving ambiguity here”—that is, ambiguities about the scope of an arbitration agreement must be resolved in favor of binding arbitration. To hold otherwise would be inconsistent with the FAA’s goals because it would “undermine the central benefits of arbitration itself.”

Ultimately, the court of appeal ruled the trial court erred and should have required Calderon to participate in binding arbitration in accordance with the terms of the arbitration agreement. The court also observed that Paragraph 10 of the arbitration agreement comes into play only when a portion of the agreement is found unenforceable. Because the other parts of the Spanish-language agreement called for binding arbitration and Paragraph 10 wasn’t at issue, the court questioned whether there was really even ambiguity in the first place.

Bottom Line

Ordinarily, any ambiguity in a contract is construed against the drafter, being the party responsible for the ambiguity. But arbitration has special rules. If an ambiguity exists in an arbitration agreement that is subject to the FAA, it likely would be construed to favor binding arbitration. This is a good outcome for employers, but you should use caution when drafting arbitration agreements and be as clear as possible to avoid ambiguities.

Paymon Mondegari and Ryan McKim can be reached at Clark Hill PLC in Los Angeles, Rpmondegari@clarkhill.com and rmckim@clarkhill.com.