Virginia Business Litigation Lawyer Blog

Arbitrability--whether a contract creates a duty for the parties to arbitrate (rather than litigate) a particular grievance--is ordinarily a question of law to be decided by the court. Virginia, however, adheres to a public policy favoring freedom to contract. If two sophisticated businesses reach a deal providing that any arbitrability issues shall be resolved by binding arbitration rather than decided by a court, Virginia courts will enforce that agreement as written and defer to the arbitrator on questions of arbitrability.

An example is found in the recent case of Systems Research and Applications Corporation v. Rohde & Schwarz Federal System, Inc. SRA, a government contractor for the United States Agency for International Development (USAID), hired Rohde & Schwarz as a subcontractor for a project involving telecommunication services equipment in Lebanon. R&S did not complete its performance by the contract deadline and SRA refused to pay its invoices. SRA took the position that the dispute was a "Government Contract Dispute" which, under the terms of the subcontract, could not be submitted to arbitration. R&S disagreed and initiated arbitration proceedings. SRA responded with a declaratory judgment action and a motion to stay the arbitration. The court denied the motion to stay and dismissed the case.

The court found that parties may provide by contract that all matters will be subject to arbitration, including questions of arbitrabilty. However, because allowing an arbitrator to decide issues of arbitrability is contrary to the general rule, "courts should not assume that the parties agree to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so."

R&S argued that the parties agreed to arbitrate all issues and pointed to a provision in the contract that incorporated the rules of the American Arbitration Association. SRA responded that the arbitration clause in question only covered particular types of claims. The court took the position that the arbitrator's authority to decide questions of arbitrability should not turn on whether the arbitration clause is narrow or broad. The court concluded that "the incorporation of the AAA Rules in the Subcontract's arbitration clause, and the waiver provision drafted by the SRA which by its terms bars this action, together constitute clear and unmistakable evidence that the parties intended for the issue of arbitrability to be decided by the arbitrator."

Toyota Motor Sales, Inc., will not be able to take advantage of a mandatory arbitration clause in an online agreement with a Los Angeles woman because the agreement was obtained by fraud and is therefore entirely void, a California state appeals court has held.

Amber Duick was targeted by Toyota as one of the people who would take on the role of "Player 2" in an interactive ad campaign entitled "Your Other You." She sued Toyota and its advertising company, Saatchi & Saatchi North America, Inc., in 2009, after Toyota involved her in 2008 in an advertising campaign for its Matrix automobile as an evidently unwitting participant.

Sometime in 2008, Duick clicked a box on a Toyota-sponsored website entitled "Personality Evaluation Terms and Conditions." The website indicated that by clicking, she was agreeing to participate in a five-day "digital experience through Your Other You," and that she might receive emails, phone calls, or text messages from Toyota during that period. Duick soon found that instead of a personality test, she received several disconcerting emails from someone identifying himself as "Sebastian Bowler," which implied that Bowler enjoyed drinking to excess, owned a pit bull, had been running from law enforcement, and had damaged a hotel room. Duick was told that she was liable for the hotel damage, even though she had never been there and had never met Bowler. Finally, at the end of the process, Toyota revealed that this was all made up. It was a prank on Duick that was part of the ad campaign for the Matrix.

Duick suited Toyota and Saatchi for $10 million in California state court for damages and other relief, claiming intentional infliction of emotional distress, negligence, and false advertising. Toyota moved to compel arbitration and take the case out of the court system. The trial court refused to compel arbitration, and the California Court of Appeal affirmed.

The appeals court reasoned that the contract with Duick, including the arbitration clause, was void and unenforceable because it was obtained by fraud "in the inception"; in other words, that Duick was deceived by Toyota and Saatchi as to the nature of the act she was performing when she clicked the box. Thus there was no valid and enforceable contract.

The defendants "led Duick to believe that she was going to participate in a personality evaluation and nothing more," the court wrote. "In particular, a reasonable reader in Duick's position would not have known that she was signing up to be the target of a prank. It might have been possible to draft the terms and conditions in such a way as to correct that a misimpression, but defendants did not do so." Accordingly, the contract, including the arbitration clause, was held void and unenforceable under California law.