California First-Year Law Students' Exam (Baby Bar) — MCContractsEasy
A software company hires a new programmer. The employment contract includes a clause stating: 'Any dispute or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules.' Six months later, a dispute arises regarding unpaid bonuses. The programmer files a lawsuit in state court. What is the most likely outcome regarding the lawsuit?
- AThe court will dismiss or stay the lawsuit and compel arbitration.
- BThe court will proceed with the lawsuit because the programmer has a right to a jury trial.
- CThe court will allow the lawsuit to proceed because the dispute is about unpaid bonuses, not directly about the 'Agreement's breach'.
- DThe court will allow the lawsuit to proceed if the arbitration clause is deemed unconscionable.
Show answer & explanationAnswer & explanation
Correct answer: A. The court will dismiss or stay the lawsuit and compel arbitration.
Arbitration clauses are generally favored by courts and are enforceable under both state and federal law (e.g., Federal Arbitration Act). If a valid arbitration clause covers the dispute, courts will typically compel the parties to arbitrate rather than litigate.
Why the other options are wrong
- B. While a jury trial is a right, it can be waived by contract, as in an arbitration agreement.
- C. A dispute over unpaid bonuses clearly 'arises out of or relates to' the employment agreement and its alleged breach, falling within the clause's scope.
- D. While unconscionability is a defense, there are no facts here to suggest the clause is unconscionable.
Arbitration Clause Enforceability
A contractual provision requiring disputes to be resolved through arbitration rather than litigation. Such clauses are generally enforceable by courts.
- Strongly favored by law (e.g., Federal Arbitration Act).
- Courts will compel arbitration if the clause is valid and covers the dispute.
- Defenses include unconscionability, fraud, or lack of mutual assent.
Memory trick: Arbitration Clauses Are Court's Favorite Way to Resolve Disputes.