September 24, 2010
Author(s): Edward Clancy
Recent Case Law Dictates that FAA Preempts Illinois State Law Restrictions
Even though arbitration provides an efficient alternative to litigation, nursing homes have been reluctant to place arbitration provisions in contracts with residents because of Illinois state laws, such as the Nursing Home Care Act and the Health Care Arbitration Act, that restrict arbitration or mandate the terms of arbitration agreements. Recent Illinois case law has eliminated these limitations, however, and has completely changed the landscape for arbitration agreements.
In April 2010, the Illinois Supreme Court held, in Carter v. SS Odin Operating Co., that the Federal Arbitration Act (FAA) preempts Illinois state law restrictions on arbitration agreements. The Carter decision invalidated the anti-waiver provision of the Nursing Home Care Act, which voids any agreement of a nursing home resident to waive his or her right to trial by jury. In light of this decision, a properly drafted arbitration agreement will eliminate the arbitration prohibition under the Nursing Home Care Act and the restrictions under the Health Care Arbitration Act. Nursing homes and other healthcare providers must now comply only with general state contract law in drafting arbitration provisions.
The FAA provides that an agreement to arbitrate is “valid, irrevocable, and enforceable, save upon such grounds as exist…for the revocation of any contract.” State laws that restrict arbitration or mandate the terms of arbitration agreements conflict with the FAA. However, if the parties to an arbitration agreement expressly agree that state law will govern all sections of the agreement, the FAA will not apply. As a precaution to ensure enforceability, drafters should reiterate that the FAA governs the arbitration provision in their contracts.
Like these choice of law provisions, delegation provisions affect the enforceability of arbitration agreements. Generally, if a contract contains a delegation provision that expressly gives an arbitrator the authority to decide whether the agreement is enforceable, the matter will go before an arbitrator, not a court. Drafters promoting arbitration must balance the convenience of such delegation provisions with the precedent of judicial decisions.
Possible State-Law Defenses Against Arbitration Agreements
Biased Arbitrators. Illinois courts may find that a provision in an arbitration agreement is unenforceable if it names arbitrators with a clear, pre-existing bias in favor of the drafting party. If there is a consistent relationship between the institution and specialized arbitrators, charges of partiality on the part of the arbitrators might follow. Healthcare providers should ensure that arbitration agreements do not name particular arbitrators, and they should require arbitrators to disclose any dealings that might create an impression of bias. They should also confirm that they are not arbitrating disputes internally and that they allow opposing parties to submit claims in a neutral forum.
Prohibitive Administrative Costs and Arbitral Venues. Parties to arbitration must pay the administrative costs of arbitration, including any arbitration fees. Some arbitration agreements specify that the party drafting the agreement must pay the arbitrators. Courts might find such agreements unenforceable, because arbitrators might be inclined to favor the drafting party, if such a payment provision generates continued business. On the other hand, courts might find agreements that require the non-drafting party to pay most or all of the costs of arbitration to be unenforceable, because such agreements could discourage dispute resolution. In order to ensure that arbitration agreements are enforceable and that costs of arbitration are not prohibitively expensive, drafters can divide the administration costs of arbitration equally among the parties. Statements such as “[Provider] and [Resident or Patient] shall equally bear all fees and expenses of the arbitration” will most likely survive a court challenge.
Agreements that require arbitration far from the non-drafting party’s home might also be unenforceable. Healthcare providers should ensure that arbitration agreements provide for arbitration in venues within a reasonable distance of non-drafting parties, even if agreements require a particular forum.
Lack of Mutuality. If one party must agree to arbitration but the other retains an option to sue, the arbitration agreement might be void for lack of mutuality. Although promises to arbitrate need not be identical, the drafter of an arbitration agreement should ensure that both parties are agreeing to arbitrate.
Hidden Contractual Terms. Although Illinois courts are reluctant to find arbitration clauses unenforceable when notice of the clause appears in contractual text, courts will not enforce arbitration provisions that are so difficult to find and to read that non-drafting parties cannot be aware of them. Healthcare providers should confirm that parties are able to read and understand all arbitration provisions in healthcare contracts before executing these agreements.
Mental Incapacity. Finally, healthcare providers that use healthcare arbitration agreements should be aware that residents and patients must possess sufficient mental capacity in order to validly execute their contracts. This is particularly important in nursing homes and other healthcare settings where a resident or patient might have a significant mental impairment. When a third party signs an arbitration agreement on behalf of a resident or patient, healthcare providers should confirm that the third party has the authority to bind the resident or patient to the agreement.
Healthcare providers can use the following checklist to create arbitration agreements that are enforceable under the FAA and general state contract law.
Recommendations for Drafting
Recommendations for Execution
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