Drafting a Usable Arbitration Clause

In this second of a two-part series on arbitration clauses, we start with acknowledgement that arbitration clauses in resident admission agreements (“Agreement”) are a good practice because they give you additional means of resolution and may avoid jury trials.  You have drafted your clause to include all foreseeable disputes and to require the issue of arbitrability to be decided by the arbitrator.  Now, you want to ensure that your arbitration clause cannot be rejected because it violates contract law.   Recall that the Federal Arbitration Act states that arbitration clauses are valid and irrevocable, except upon such grounds as exist for revocation of any contract.  9 U.S.C. §2.  Thus, the arbitration clause must be drafted to make it challenge proof as a contract.

The question of whether an arbitration clause violates principles of contract law is generally one for the courts to adjudicate because a clause that is illegal at its inception is totally unenforceable, including a referral of arbitrability to an arbitrator.  These contract claims are grounded in state contract law.  Each state has its own jurisprudence related to what conditions make contracts unenforceable, including unfairness, unequal bargaining positions, and one-sided arbitration terms.  Claims related to unfairness are often handled with an opt-out provision exercisable at the time of the contract signing.  Opt out language may include allowing parties to mark or “X” through the arbitration clause, indicating its rejection.

To avoid claims that the arbitration clause was hidden in the contract and the resident did not know the jury trial option was being waived, arbitration clauses can be offset from the appearance of the rest of the contract by boldface, upper-case type and instructions to carefully read the clause.  Also, most clauses specifically state that the right to a trial by jury is being waived to specifically advise of the jury trial waiver.

 Many contract-based challenges involve who signed the Agreement and whether the person had the capacity to sign with the authority to waive the resident’s right to a jury trial.  When a resident signs the Agreement, challenges are often to the resident’s competency, focusing on existence of incompetency adjudications, and lucidity when completing the admission paperwork.  Proof of competency can include illustrating that the resident made multiple rational decisions while completing the admission paperwork.  In the event that an incompetent resident signs the Agreement, the facility may face an uphill battle to enforce the arbitration clause.  Arguments can be made that performance under the contract and payment of the monthly fee requires enforcement of the Agreement.  However, plaintiffs can also note that performance was by the responsible party and not the resident who signed the agreement.  In sum, once the resident is identified as incompetent, the facility may want to consider who should sign the Agreement.

Many courts focus on instances when a person claiming to be the resident’s responsible party or attorney-in-fact signs the Agreement.  In those cases, it appears that verification of authority to sign the Agreement is important.  If the person signing does not have the authority to sign, many courts refuse to uphold the arbitration clause.  If the person does have authority to sign the Agreement, courts looks at how the authorized person signed the Agreement.  Some state courts have held that failure to sign on the appropriate responsible party line prohibits enforcement because the person did not sign as the responsible party.  Generally, care should be taken to ensure that the Agreement is executed with precision.  If you find that the person who signed the Agreement is not the responsible party or signed in the wrong location, it may be wise to correct the mistake immediately.  Also, it is helpful to obtain a copy of the document granting the responsible party authority to sign contracts on behalf of the resident.

In the right case, use of arbitration clauses may make a difference in reducing the value of a case and may promote early resolution without significant expenditures. Further, arbitration clauses may keep cases from juries, where plaintiff’s counsel tend to use biases and emotions to drive up verdicts.  Arbitration clauses are very valuable tools for long term care facilities to consider in the current litigious climate.

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