The question of whether an arbitration agreement is enforceable is an oft-disputed issue prone to be volleyed between the courts and an arbitrator; such was the case in Caldwell v. UniFirst Corporation, No. ED108409, 2020 Mo. App. LEXIS 1328 (Ct. App. Oct. 27, 2020).
This case involves a contract within a contract within a contract: a delegation provision contained in an arbitration agreement, which was contained in an employment contract. This not-uncommon scenario requires a court to look at the three contracts and analyze each independent of the others.
In Caldwell, a former at-will employee sued his former employer (UniFirst) under the Missouri Human Rights Act alleging disability discrimination and retaliation claims. UniFirst moved to compel arbitration based on the arbitration clause in Caldwell’s employment contract. UniFirst also asserted the employment contract contained a binding delegation clause that rendered the threshold issue of whether the case was arbitrable a matter to be determined by an arbitrator rather than by the court. The district court denied UniFirst’s motion holding the arbitration clause lacked adequate consideration in two aspects: first, Caldwell’s at-will employment was insufficient consideration to support the arbitration agreement, and second, the arbitration clause lacked mutuality because UniFirst unilaterally reserved for itself the ability to assert certain claims in court against Caldwell while Caldwell was required to arbitrate all potential claims.
The case made its way to the Missouri Supreme Court, which transferred the case back to the Court of Appeals with the direction to reconsider the case in light of the Supreme Court’s decision in Soars v. Easter Seals Midwest, 563 S.W.3d 111 (Mo. banc 2018). In Soars, the court held a delegation clause is severable and should be reviewed independent of any underlying arbitration clause. But in Caldwell, the parties conceded the delegation provision was not at issue, so on reconsideration, the Court held that because the subject delegation provision – standing alone –was valid, the question of whether the arbitration agreement as a whole was valid was for the arbitrator to decide.
Under Missouri law, an arbitration clause requires its own consideration. Accordingly, the arbitrator ruled that while Caldwell’s at-will employment may have supplied sufficient consideration to support the employment agreement, it could not also provide adequate consideration to support the arbitration clause. UniFirst moved to vacate the arbitration order arguing the arbitrator exceeded his power. The trial court denied the motion and affirmed the arbitration order, which UniFirst then appealed.
On appeal, in relevant part, only the question of whether the arbitration agreement was supported by consideration was before the Court. At the outset, the Missouri Court of Appeals (Eastern District) held that Missouri contract law principles – including consideration – govern whether an arbitration agreement is valid. Under Missouri law, a promise by one party to a contract is sufficient consideration in exchange for a promise by the other party. But when one party retains the unilateral right to sidestep its obligations, that party’s promise is considered “illusory” and thus unenforceable. Here, because only one party was bound to arbitrate its claims. Both the trial court and the Court of Appeals concluded that the arbitration agreement lacked mutuality of promise and therefore lacked consideration. Thus, the arbitration provision was held unenforceable and the arbitrator’s order was affirmed.
A little over a year ago, BSCR published a blog that describes a case in which the Eighth Circuit reminds employers to go back to the basics when administering arbitration clauses. The Eighth Circuit held an employee’s tacit acknowledgement of an arbitration provision by, for example, clicking through the pages of an employment contract on the computer, is not evidence that an employee accepts the arbitration provision. Last month, Caldwell v. UniFirst Corporation became another example, this time in state court, of the importance of focusing on contracts fundamentals – here, on the language of the provision itself.
The enforceability of an arbitration clause, particularly in the employment context, has become the well-traveled subject of recent litigation. Which begs the question: why all the fuss when so many employers include arbitration clauses, often coupled with delegation clauses, in employment contracts – aren’t these employers well-equipped to draft arbitration clauses and, in fact, don’t the employers intentionally include these provisions for the very purpose of avoiding litigation? In other words, why are employers including and administering these routine provisions in ways that provide employees paths to the courtroom? The simplest explanation is that too many employers don’t know they’re doing it wrong. Notwithstanding these apparent pitfalls, there are relatively simple solutions to tackling arbitration agreement drafting and administration. The BSCR employment & labor law team are willing and able to assist you as you navigate your employment arbitration agreement development and implementation needs.