Arbitration Clauses Binding on Contract Assignees

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Mandatory arbitration clauses present in contracts are binding on assignees of those contracts, even where the transfer agreements assigning those contracts do not themselves contain arbitration clauses, the United States Court of Appeals for the First Circuit has ruled.

The plaintiffs in Awuah, et al. v. Coverall North America, Inc., No. 12-1301, slip op. (1st Cir. December 27, 2012), signed “Consent to Transfer Agreements” or “Guaranties to Coverall Janitorial Franchise Agreements,” assigning the franchise contracts to the plaintiffs. While the transfer agreements did not contain arbitration clauses, the underlying franchise agreements contained mandatory arbitration clauses. The plaintiffs filed suit in United States District Court and sought class action certification. The District Court found that the plaintiffs were not bound by the arbitration clauses, holding that actual notice of the arbitration clauses was necessary to bind them, certified the plaintiffs as a class, and entered judgment in their favor against the defendant franchisor.

The First Circuit disagreed. Although the Court noted that the transfer agreements did not all use explicit language “incorporating by reference” the franchise agreements’ arbitration clauses, no such language was required. “Massachusetts law is explicit that it does not impose a special notice requirement upon agreements containing arbitration clauses,” according to Chief Judge Sandra L. Lynch, writing for the unanimous panel. The plaintiffs’ argument that they had not received copies of the franchise agreements containing the arbitration clauses likewise was unavailing. There was no evidence that they had requested or been denied copies of the franchise agreements. As Chief Judge Lynch noted, “it has long been the rule that ‘typically, one who signs a written agreement is bound by its terms whether he reads and understands them or not.'”

Further, even if state law contained a special notice provision, or other particular requirement for arbitration clauses, federal law would preempt any such provision. The Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., requires courts to treat arbitration clauses in the same manner as all other contracts. Under the FAA, the Court noted, arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract…even if the district court had identified a principle of state law that imposed a special notice requirement before parties such as these could enter into an arbitration agreement, as it did not, such a principle would be preempted by the FAA.”

The lesson, as it often is, is caveat emptor. No special notice or other provisions apply to contractual arbitration clauses. A party that signs an assignment of contract, incorporating by reference an original agreement, is bound to the terms of the original contract by reference, whether it reads the original contract or not.


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