Tennessee Business Litigation Law Blog

Under Tennessee law, the enforceability of arbitration agreements are generally governed by the Tennessee Uniform Arbitration Act. (TUAA).  However, in contracts involving interstate commerce, the Federal Arbitration Act (FAA) also governs.  The Court of Appeals was recently faced with the following question:  What happens when a contract governed by Tennessee law, but also involving interstate commerce, satisfies the requirements of the FAA, but fails the requirements of the TUAA…is the arbitration clause enforceable?

The Court of Appeals held that it is.   In Hubert v. Turnberry Homes, LLC., the home buyers argued that the arbitration clause in their contract with the home builder was invalid because it was not separately signed and initialed as is required by the TUAA.  The homebuilder responded that this was a contract involving interstate commerce and that the FAA contained no such requirement. The homebuilder argued that states may not enact special statutory requirements for arbitration agreements, over and above those contained in the FAA, that are not applicable to contracts generally.

In agreeing with the homebuilder, the Court of Appeals reasoned that:

the text of § 2 [of the FAA] declares that state law may be applied if that law    arose to govern issues concerning the validity, revocability, and enforceability of contracts generally, and stated that generally applicable contract defenses such as fraud, duress, and unconscionability may therefore be applied to invalidate arbitration agreements without contravening Section 2 of the FAA…

by the same token, “[c]ourts may not, however, invalidate arbitration agreements under state laws applicable only to arbitration provisions.”

 Accordingly, the Court held that because the TUAA requirement in question was applicable only to certain contracts involving arbitration clauses, it was pre-empted by  the FAA.  However, the Court did allow the homebuyers to proceed judicially on their claim of fraud in the inducement.  The Court reasoned that prior Tennessee Supreme Court decisions required that this cause of action be allowed to go forward, and that it was not empowered to find otherwise.

Read the full opinion here.

Tennessee Courts have made it very clear over the past few years that they favor arbitration and that arbitration clauses in contracts will be enforced.  However, the opinion in Sumner County Board of Education v. Carden Co. Inc., is a good reminder that, despite the Courts' preference for arbitration, they will not read an arbitration provision into a contract where one does not reasonably exist.

In Carden, the parties' original contract included an arbitration provision which was deleted by a subsequent amendment.  The amendment contained a paragraph stating that "all references to arbitration contained herein are deleted and replaced with the following..."  Carden argued that "herein" only referred to the amended paragraph and not the remainder of the contract, and that the arbitration provisions in the remainder of the contract therefore remained viable.  Carden further argued that since arbitration is favored in Tennessee, the Court should construe the contract in a manner that would give effect to the arbitration provisions. 

After reviewing the contract as a whole, the Court concluded that Carden's argument was not reasonable.  While the Court conceded that they amendment could have been drafted more clearly, it was not willing to say that the amendment was ambiguous in its effect -- i.e. to remove all references to arbitration in the contract.  Accordingly, the Board was free to file an action in Court.

Again, Carden is a good reminder that, while arbitration may be favored in Tennessee, Courts will not disregard ordinary rules of contract construction to read it into agreements.

Arbitration has become one of the more frequently used tools for resolving potential  litigation in the state of Tennessee.  Importantly, the rules governing procedure in these settings, especially in complex commercial cases, can vary dramatically from the general rules of civil procedure.  Accordingly, it is imperative that any attorney who pursues commercial arbitration on behalf of their client be thoroughly familiar with the procedural guidelines that will be followed in the proceeding.  This should be clarified with the arbitrator well in advance.  Additionally, organizations such as the American Arbitration Association make their rules available on-line.

In CARTA v. LOCAL 1212 AMALGAMATED TRANSIT UNION, the Tennessee Court of Appeals recently summarized the enormous deference afforded to arbitration awards. See below:

Tenn. Code Ann. §29-5-313 provides that an arbitration award shall be vacated where it is shown that the arbitrator exceeded his/her powers. The trial court cannot vacate an award just because the court feels that the arbitrator erred - the court is limited to the statutory grounds only. We are required to apply a “deferential standard of review”, and accept the facts as found by the trial court unless they are erroneous. We are “not permitted to consider the merits of an arbitration award even if the parties allege that the award rests on errors of fact or misrepresentation of the contract.” When the issues presented are questions of law, we are required to resolve them with “utmost caution, and in a manner designed to minimize interference with an efficient and economical system of alternative dispute resolution.” An arbitration award cannot be vacated because the arbitrator made a mistake of fact or law, and it also cannot be vacated because it is irrational, or provides relief that could not or would not be granted by the court.

In rendering its recent opinion in Chapman v. H.R. Block, the Court of Appeals addressed the enforceability of an allegedly unconscionable arbitration agreement. The Plaintiff argued that the arbitration agreement she signed as part of a loan contract was unconscionable for a host of reasons…one of which was that it prevented the Plaintiff from pursuing the arbitration on a Class Action basis. In affirming the judgment in favor of H.R. Block, the Court of Appeals noted two considerations relevant to determining the enforceability of an arbitration agreement that prohibits Class Action relief: (1) whether the Plaintiff could effectively prosecute his or her claims through arbitration without recourse to class action, and (2) whether a class was actually certified by the trial court. Finding that neither of these considerations weighed in Plaintiff’s favor, the Court ruled that the Class Action prohibition did not invalidate the enforceability of the agreement.