Paralegal Certification PrepContracts and Business LawMedium
A client, a software development firm, enters into a contract with a large corporation to develop a custom enterprise resource planning (ERP) system. The contract includes a clause stating that 'any dispute arising out of or related to this contract shall be submitted to binding arbitration in accordance with the rules of the American Arbitration Association (AAA).' After a significant disagreement arises regarding project scope and payment, the corporation files a lawsuit in state court. What is the most likely outcome regarding the lawsuit?
- AThe state court will allow the lawsuit to continue, but the losing party will have the option to appeal to arbitration.
- BThe state court will dismiss the lawsuit and compel the parties to arbitration.
- CThe state court will proceed with the lawsuit as arbitration clauses are generally unenforceable.
- DThe state court will hear the case but apply the AAA rules for evidence.
Show answer & explanationAnswer & explanation
Correct answer: B. The state court will dismiss the lawsuit and compel the parties to arbitration.
Arbitration clauses in contracts are generally favored and enforceable under both state and federal law (Federal Arbitration Act). When a valid arbitration clause exists, courts typically compel the parties to resolve their disputes through arbitration, rather than litigation.
Why the other options are wrong
- A. Arbitration is a primary dispute resolution mechanism, not an appeal option after litigation.
- C. Arbitration clauses are highly enforceable under U.S. law, contradicting this statement.
- D. Courts do not apply arbitration rules; they either hear the case or compel arbitration.
Arbitration Clause
A contractual provision that mandates that any disputes arising under the contract will be resolved through binding arbitration rather than litigation in court.
- Favored by law (e.g., Federal Arbitration Act).
- Generally enforceable unless found unconscionable or invalid.
- Results in an award that is typically binding and difficult to overturn.
Memory trick: Arbitration = Always Resolve Before Trial.