Did you know that you can form an arbitration agreement without ever using the word “arbitration”? That’s what the Second Circuit held this week in Bakoss v. Certain Underwriters at Lloyds of London, __ F.3d __, 2013 238708 (2d Cir. Jan. 23, 2013).
Bakoss analyzed the clause in a disability insurance certificate providing what happens if the parties dispute whether the insured is “totally disabled.” The certificate gives the insured and insurer the right to get an opinion from a doctor of their choice. If the two doctors disagree, they “shall [jointly] name a third Physician to make a decision on the matter which shall be final and binding.” The legal issue was whether that agreement – to name a third doctor to decide the dispute – was an arbitration agreement within the meaning of the Federal Arbitration Act. The federal district court found it was, and the Second Circuit affirmed.
Finding that federal common law was the right place to look in deciding what is and is not an arbitration agreement, the Second Circuit cited two cases from the 1980s finding that similar dispute resolution provisions were “arbitration agreements.” In essence, those cases say that any time “the parties have agreed to submit a dispute for a decision by a third party, they have agreed to arbitration.”
Why is this important? Because it means that many contracting parties have unknowingly inserted an “arbitration agreement” into their contracts, one which carries with it all the enforcement provisions of the FAA (and the New York Convention, for international contracts). Just as one example, the parties to those contracts may have lost their ability to have a court decide whether the contracts as a whole are invalid under applicable law, because under the Prima Paint line of cases the court may only hear objections to the validity of the arbitration agreement itself. Similarly, if these arbitration agreements do not contain any provision for class actions, the parties to these contracts may have lost their ability to bring any sort of collective action.