The decision to arbitrate a dispute is historically a matter of contract between the parties. Arbitration agreements, once entered into, are treated in the same manner as any other contract, and therefore subject to standard contract law defenses such as fraud and unconscionability. The purpose of a delegation clause in an arbitration agreement is to delegate authority to the arbitrator to determine the scope and validity of the arbitration agreement.

The delegation clause serves a distinct function: it precludes drawn out discussions and costly discovery procedures designed to determine whether the clause is unconscionable in the first place. The Supreme Court has affirmed that issues pertaining to an arbitration clause can be decided by an arbitrator and challenges to the legality of the agreement or the arbitration provision specifically are within the authority of the arbitrator. In the leading case to address the validity of delegation clauses, the Supreme Court in Rent-A-Center, West, Inc. v. Jackson stated that delegation clauses are to be enforced unless the clause itself is deemed unenforceable or irrational.

In California, the contracting parties are permitted to assign any issues with respect to enforceability of the agreement to the arbitrator if the relevant clause is “clear and unmistakable.” In arbitration agreements with delegation clauses, the court can review challenges to the validity of the clause notwithstanding the arbitrator’s authority to evaluate challenges to the agreement in its entirety. The claimant must substantiate that the delegation clause was unconscionable in both a procedural and substantive manner.

The California Court of Appeals has rejected the assumption that a delegation clause is unconscionable merely because an arbitrator may have financial self-interest in the outcome. This notion would prejudice arbitration as a form of alternative dispute resolution which runs contrary to the goals and intentions of the Federal Arbitration Act. Moreover, the court disagreed with the assertion that using an arbitrator to hear a dispute would presumptively favor an employer. The court affirmed that a party who was being compensated for dispute resolution services could nevertheless remain impartial.

Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.