This article is written by Vasudha Tewari pursuing Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
Party autonomy had always been given supremacy in any arbitral proceeding. With the introduction of any fresh law or interpretation of any existing one, party autonomy has gained more power and recognition. Likewise, interpretation of any law has always played a vital part. Even in contracts, when two parties come together to perform a business the ideas they propose can be interpreted in different ways evolving into disputes demolishing the relationships that go way back.
This article talks about a developing debate about the validity of ambiguous agreements and the issues arising from such agreements. People often tend to use the ambiguousness of such agreements to dictate terms and to fetch the maximum benefit. One such case namely Lamps Plus, Inc. v. Varela emerged in 2019 in the US Supreme Court where an ambiguous agreement was used to initiate class arbitration, the case is further elaborated in this article later. Here, we’ll be discussing various doctrines used to deal with such agreements, the scope of class arbitration, and the risks associated with them.
What are ambiguous agreements?
Contract drafting is always handled with extra cautiousness making it easier for the parties, court, or arbitrator to know what the parties meant to agree upon. Quite often ambiguous or conflicting terms are found in the agreements, making the court or arbitrator approach parties for their interpretations of those terms to resolve disputes arising out of it. Language is a matter of interpretation and interpretations may differ. An agreement can be said to be ambiguous when it contains more than one meaning. The innocence of these situations can be understood from the time it takes to get resolve. Clear misunderstood cases are normally resolved by a healthy discussion over these terms.
On the other hand, cases can often be dragged to courts for document verifications and resolving these issues. While dealing with such cases courts use several tests and doctrines to predict if this ambiguity arose out of an intended act or was mere confusion. Where neither party knows or has reason to know, of the ambiguity, or where both parties know or have reason to know of it, the ambiguous term is given the meaning that each party intended it to convey. Whereas, when one party knows or has reason to know, of the ambiguity, and the other does not, it conveys the meaning given to it by the latter—which means, in essence, that there is a contract predicated upon the meaning of the party who is without fault.
To resolve such issues, where one party was aware of it and in a position to avoid this issue at a much earlier stage, courts have been using the doctrine of Contra Proferentem. This doctrine derives its essence from insurance law, where the intent behind these ambiguous agreements is to frame the contracts in a way for the buyer to interpret differently and fall into signing into it. Result of which is that many times parties do not stand at the same level while signing into the agreement and usually one party dominates the other. According to this doctrine;
- Upper hand while interpreting it is given to the one who had no role in inserting such ambiguous term or clause or;
- The cost is placed upon the party who was in the best position to avoid such harm.
Relying on this doctrine, Supreme Court in the case of Bank of India vs. K. Mohan Das where the question arose with respect to the interpretation of some of the provisions of the voluntary retirement scheme of 2000 of the appellant bank, Judge Lodhia opined that as it was the bank who ultimately formulated the terms in the Contractual Scheme which stated “the optees of voluntary retirement under that Scheme will be eligible to pension under the Pension Regulation, 1995,” therefore, they bear the risk of lack of clarity, if any. He further said that in these kinds of cases the interpretation is against the party who has drafted the policy or agreement.
Courts also consider parties’ negotiations, course of conduct, and the custom and practices of the relevant industry when interpreting the ambiguous contract terms. Now, there also are several ways in which a party may curb or reduce its liability in a contract. For example, a party can do so by insertion of an exclusion or exemption clause under which for certain types of losses, the party will not be liable to pay. The doctrine of Contra Proferentem attracts cases of the indemnity clause, exclusion clause, and liquidated damages clause. Tracing the judicial trend it can easily be observed that courts have repeatedly used this doctrine against the insurers and corporate giants, who trap their customers or small fishes in the market by framing such contracts that provides them an upper hand.
What is class arbitration?
Class arbitration is a swiftly developing concept. Class arbitration cases are basically class action suits being referred to as arbitration. It can also be defined as multiparty cases i.e., those cases where the claimant represents a class, dealing with the same subject matter.
Class action suits are built to save the court’s time and the claimant’s money, both of which are far less in class action suits as compared to normal individual civil suits. Similarly, class arbitration is an attempt to increase the scope of arbitration by making it cheaper and less time-consuming for class sufferers. Though in India the concept of class arbitration has not yet been in practice there have been several significant judgments and debates on it in various other states. Class arbitration has been considered as an uninvited guest by Federal Arbitration Act (FAA).
India has been actively encouraging arbitration over the past few years. Section 8 of the Arbitration and Conciliation Act, 1996 provides that judicial authority, before which a dispute, that is the subject of an arbitration agreement, is brought, must refer the parties to the arbitration. Whereas, disputes related to corporate law in India are dealt with by a parallel structure of tribunals, established in 2013 by the Companies Act. While these National Company Law Tribunals are quasi-judicial authorities, they are entitled to refer parties to arbitration under this section. Class arbitration, though not yet there, can be placed in this sphere of corporate disputes which are to be referred to the Arbitral Tribunals. Indian courts anyway are of the opinion that only cases in personam may be referred to arbitration.
Brazil has well-developed systems both in arbitration and class actions and yet the use of arbitration as a class-litigation dispute resolution has been little discussed. In the European Union, class arbitration has also awakened curiosity in a few jurists. Prof. Christopher R. Drahozal of the University Of Kansas School Of Law at an Annual ITA-ASIL Conference in Washington remarked that class arbitrations largely involve consumer and employment claims, but that a significant number are business-to-business disputes. Class arbitration is generally prohibited except it is clearly permitted in the agreement. There have been various judgments around the world concerning the issues related to class arbitration like:
- Waiver of a class arbitration clause to be present in the agreement, where class arbitration isn’t being intended.
- The inclusion of a clear class arbitration clause in the agreement but would not result in a class relief.
- The extent of and criteria for judicial review of an arbitrator’s award concerning the permissibility of class arbitration.
Eventually, the special emphasis is always laid on the party’s intention on how they structure their agreement, to whom, and how they choose to arbitrate their dispute. Therefore, a party cannot be compelled to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.
Can ambiguous agreement compel class arbitration?
Ambiguity in any agreement gives rise to such situations where one party can profit from its vagueness. Such situations have previously developed when parties claimed to have included an interpretation of opting to class arbitration in the event of any dispute. Series of judgments on the class arbitration has repeatedly weighted towards party autonomy. Courts emphasized; the statute, therefore, requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a class-wide basis. The ambiguity of an agreement could not be taken for granted to impose class arbitration. For any class arbitration proceeding, to begin with, the existence of a clause specifically giving permission to approach an arbitral tribunal as a class should be there. The power of an arbitrator derives from the agreement itself thus; consent of both the parties regarding anything and everything in an arbitration agreement is given utmost supremacy. In a series of cases, the Supreme Court of the US had demanded more clear mention of the allowance to move forwards with class arbitration in the original agreement.
US Supreme Court on class arbitration arising out of ambiguous agreements
Individual disputes are both inexpensive and less time-consuming. Lately, courts haven’t been appreciating the concept of class arbitration until and unless it is expressly mentioned in the agreement. The journey goes back to 2010 when the US Supreme Court in the case of Stolt-Nielsen S. A. v. Animal Feeds Int’l Corp., started restricting access to class arbitration. The primary issue presented before the SC was that since the agreement is silent about the class dispute, whether the arbitration clause permits for class arbitration. While setting aside the arbitration panel’s decision to impose class arbitration, the Supreme Court relied primarily on the Federal Arbitration Act to conclude that parties could not be compelled to submit their disputes to class arbitration if the arbitration agreement was “silent” on the class arbitration issue. The court said that the parties cannot be made to resolve disputes in a way they didn’t originally agree upon. Next, was the case of Epic Systems Corp. v. Lewis where the court held that employers can require employees to submit all work-related disputes to individual arbitration and rejected the argument that the National Labour Relation Act creates a right to group arbitration and thus prohibits such a requirement.
A landmark judgment came later in 2019 as a roadblock to class arbitration. In the case of Lamps Plus, Inc. v. Varela, a claim was filed by an individual against a manufacturer, i.e., his employee. The manufacturer made an appeal for the district court’s judgment, to allow both individual and class arbitrators, relying on the judgment of Stolt-Nielsen that agreement was silent about class arbitrability therefore class arbitration shall not be allowed without the consent of both the parties. The court of appeals thus alleged the manufacturer for framing an ambiguous agreement, and since it failed to make it clear in the agreement about non-inclusion on class arbitration, it may be considered as his willingness to accept class arbitration. The manufacturer then appealed in the SC of the US, where the court embraced the manufacturer’s view and said that arbitration agreements are to be strictly adhered with the party autonomy because even arbitrators wield only the authority they are given. They again indicated class arbitration to not be their favorite child by reasoning it to be expensive and time taking as compared to individual disputes. Another important issue that was dealt with in this case was whether an arbitrator or court would have the jurisdiction to decide the matters of class arbitrability. The court considered the view of eleventh circuit cases where it was suggested for the court to weigh in because class arbitrability is a fundamental, or “gateway,” question. Concluding with the judgment, the court held that it is on the parties to clearly define the type of claims it’ll be covering, whether it would retain its right to class arbitration, or exclude it entirely and the matter of class arbitrability would fall under the jurisdiction of an arbitrator or judge.
Class arbitration has been considered both by the courts and the FAA as a not so welcomed guest. By the series of court decisions, it has been proved that courts adhere strictly to the provisions of FAA. Further, by these decisions courts have again upheld the flag of party autonomy in arbitration and gave preference to maintaining the true essence behind arbitration. Class arbitration could get lengthy and complex which would be against the nature of the arbitration. Thus, parties opting for it should be thorough with the process they are signing in for and express consent should be given for it in the agreement itself. Employers should review their arbitration agreements to determine whether there is an unambiguous class action waiver clause to make clear that the parties do not consent to class arbitration.
The reason behind the court not allowing for this provision without it being in knowledge of the parties could also be the huge liability and risk it exposes on an employer. As much as it is essential to focus on the welfare of the labor class, it also should not allow for the exploitation of such provisions. Class arbitration seems to give an employee or an employer a power which if left open or unchecked could cause huge damage, thus its access should not be allowed if the parties aren’t aware of the risks at hand.
- Stolt-Nielsen S. A. v. Animal Feeds Int’l Corp 559 U.S. 662 (2010)
- Bank of India vs. K. Mohan Das, 2009 (5) SCC 313
- Epic Systems Corp. v. Lewis 138 S. Ct. 1612 (2018)
- Lamps Plus, Inc. v. Varela No. 17-988, 2019 WL 1780275 (U.S. Apr. 24, 2019)
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