“The parties may submit any disputes arising out of this Agreement to binding arbitration.”
“The parties shall submit any disputes arising out of this Agreement to binding arbitration.”
These clauses appear to be distinct—the first being permissive and the latter being compulsory. However, when determining whether arbitration is mandatory under a particular agreement, most courts do not recognize this distinction.
Under the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1. et seq., a contract involving interstate commerce is “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Many states also have substantially similar arbitration provisions. See, e.g., D.C. Code § 16-4301.
Despite the strong presumption favoring arbitration, the Supreme Court has repeatedly held that the presumption is not boundless. “[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 648 (1986). “Arbitration under the [FAA] is a matter of consent, not coercion,” and the FAA simply pre-empts state laws that regard arbitration agreements differently than other contracts. Volt Info. Sciences, Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989).
Nevertheless, most courts addressing the question hold that language providing that a party “may” submit a dispute to arbitration requires mandatory arbitration. For example, in United States v. Bankers Insurance Company, 245 F.3d 315 (4th Cir. 2001), the Fourth Circuit held that an arbitration agreement’s use of “permissive phraseology” was not dispositive. 245 F.3d at 320. The arbitration clause in question provided:
If any misunderstanding or dispute arises between the Company Bankers and the FIA with reference to any factual issue under any provisions of this Agreement. . . such misunderstanding or dispute may be submitted to arbitration for a determination that shall be binding upon approval by the FIA.
(emphasis added).
The court held that the arbitration clause mandated arbitration because if it did not, it “would render the clause meaningless for all practical purposes” since parties “could always voluntarily submit to arbitration.” 245 F.3d at 321 (quoting Austin v. Owens-Brockway Glass Container, Inc. 78 F.3d 875, 879 (4th Cir. 1996)). Instead, the court interpreted the use of “may” to give the aggrieved party the choice to arbitrate or abandon the claim. Id. Other courts agree. See, e.g., Local 771, I.A.T.S.E. v. RKO Gen., Inc., WOR Div., 546 F.2d 1107, 1115-16 (2d. Cir. 1977) (holding arbitration was exclusive remedy under contract dispute even through the terms specified the parties “may submit” to arbitration); Atkins v. Louisville and Nashville R.R. Co., 819 F.2d 644, 647-49 (6th Cir. 1987) (holding arbitration mandatory where clause uses “may”); Bonnot v. Congress of Independent Unions, 331 F.2d 355, 359 (8th Cir. 1964) (“The obvious purpose of the ‘may language is to give an aggrieved party the choice between arbitration or the abandonment of its claim.”).
Arguably, a permissive arbitration clause that provides detailed rules and procedures for an arbitration is not meaningless, but rather, provides how an arbitration will occur should the parties voluntarily agree to submit their dispute to arbitration.See Bell Atl. Corp. v. CTC Comm’ns Corp., 1998 U.S. App. LEXIS 20160, * 6 (2d Cir. 1998) (holding a permissive arbitration clause is not meaningless because it establishes the applicable rules if the parties voluntarily submit their dispute to arbitration). See also Briggs & Stratton Corp. v. Local 232, Int’l Union Allied Indus. Workers Am., 36 F.3d 712, 715-16 (7th Cir. 1994) (holding arbitration is “optional” under clause that uses “may”); Gangemi v. Gen. Elec. Co., 532 F.2d 861, 866-68 (2d Cir. 1976) (holding an arbitration clause that used “may” was permissive in the context of other provisions in the contract).
Thus, because courts may interpret permissive arbitration clauses to be mandatory, parties that seek to use arbitration as a voluntary method to resolve disputes should carefully consider the language used in arbitration agreements.
Cindy Chang is an associate in the firm’s Washington, D.C. office and a member of the insurance and reinsurance and litigation groups. Prior to joining the firm, Ms. Chang completed a clerkship with the Honorable Kathianne Knaup Crane of the Missouri Court of Appeals. She can be reached at 202-842-1081 or cchang@mmmlaw.com.