Legislature(2003 - 2004)
03/12/2003 01:04 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 83 - REVISED UNIFORM ARBITRATION ACT Number 1942 CHAIR McGUIRE announced that the next order of business would be HOUSE BILL NO. 83, "An Act adopting a version of the Revised Uniform Arbitration Act; relating to the state's existing Uniform Arbitration Act; amending Rules 3, 18, 19, 20, and 21, Alaska Rules of Civil Procedure, Rule 601, Alaska Rules of Evidence, and Rule 402, Alaska Rules of Appellate Procedure; and providing for an effective date." REPRESENTATIVE GARA recounted that at the last hearing on HB 83, a sticking point arose regarding the language, "and whether a contract containing a valid agreement to arbitrate is enforceable", found on page 3, lines 9-10. He relayed that a proposed amendment has been developed to alleviate this sticking point, adding that he, Representative Berkowitz, and Mr. Lessmeier [approve] of the amendment. The proposed amendment [labeled 23-LS0047\H.1, Bannister, 3/11/03], which later became known as Amendment 1, read: Page 2, line 17, following "09.43.330(a)": Insert "or (b)" Page 3, line 5, following "contract": Insert ", and except as provided by (b) of this section" Page 3, following line 5: Insert a new subsection to read: "(b) To the extent an agreement that contains an arbitration provision is invalidated on the grounds that a party was induced into entering into the agreement by fraud, the arbitration provision in the agreement is not enforceable, and the party is not required to prove that the party was induced into entering into the arbitration provision by fraud." Reletter the following subsections accordingly. Page 3, lines 9 - 10: Delete "and whether a contract containing a valid agreement to arbitrate is enforceable" Number 1901 REPRESENTATIVE GARA explained that [Amendment 1] would delete the aforementioned controversial language, and would effectively adopt the dissenting opinion in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395 (1967). He elaborated: We have ... two ways to go on this arbitration Act. With most contracts, a contract is void if a person was defrauded into entering into it. That's the law in Alaska .... Prima Paint said, in the area of federal arbitrations, if you enter into a contract because you were duped into it by fraud, you still can't get out of the arbitration provision itself unless you can show that you were specifically duped into the arbitration provision of the contract. ... The committee aide has sent out some material explaining that rule to you: On one side is the Prima Paint court's philosophy that they want to do everything they can to uphold arbitration provisions; on the other side is the philosophy that if a contract is entered into by fraud, it just is invalid, and to pretend that somebody would really read the specific ... arbitration part of the contract and get duped into the arbitration part of the contract is sort of a fiction - that just doesn't happen in real life. So, [Amendment 1] ... adopts the rule that says if ... you're duped into a contract by fraud, the contract's just void and you don't have to, then, go to the second level of proving that not only were you duped into the contract, but you were specifically duped into the arbitration provision as well. ... I've got to tell you, I don't have the strongest feelings in the world about it, [but] I feel that this is the right way to go. ... I'll tell you, just so everybody knows, if we do this, our arbitration law will be different than the Federal Arbitration Act [FAA] .... Number 1778 REPRESENTATIVE GARA continued: The courts will be able to deal with this. ... There are areas where the state arbitration Act applies - those are in-state contracts, generally; there are areas where the [FAA] applies - those have to do with interstate commerce; [and] there are some joint areas, where they intersect. [And] by us following a different law than the [FAA], the courts are going to have to decide ..., in those joint areas where both acts could apply, whether we're allowed to differ from the federal law, and that will be a constitutional question for the courts. ... We'll know for ... state arbitrations, our law applies; for clearly federal arbitrations, their law will apply; and in this area where they intersect, where either law could apply, we're going to have to leave it for the courts to decide whether or not, if we adopt ... [Amendment 1], we're allowed to. Number 1739 REPRESENTATIVE GARA made a motion to adopt Amendment 1 [text provided previously]. CHAIR McGUIRE objected for the purpose of discussion. REPRESENTATIVE SAMUELS asked what percentage of cases would be affected by both state law and federal law, and do other states differ from the [FAA] as well. REPRESENTATIVE GARA said that although he could not answer the specifics regarding differences in law that other states might have as they relate to the Revised Uniform Arbitration Act (RUAA), it is common for states to adopt uniform laws that contain differences from the original uniform laws. In response to the question of how many cases might be affected by a difference in Alaska law, he said that he did not know, but offered the following observation: The state law will clearly apply among two local people; if they have a contract - two local people enter into a contract, it's just a local in-state contract - the state law will apply. If there's some impact on interstate commerce, if it's with an out-of- state company - the contract - then [either] the federal or the state law could apply. So, maybe the litigation will arise over a contract like that. And then, in federal government contracts and things having a very clear federal nature, only the Federal Arbitration Act applies. There will be some cases, I suppose, where [Era Aviation, Inc. ("Era"), for example,] enters into a supply contract with a fuel distributor in Washington, and in those, either law could apply, ... but I don't know numbers. REPRESENTATIVE GRUENBERG turned members attention to the "federal pre-emption issue," and said, "We are doing something that may be unconstitutional under the supremacy clause." He said that under Title 1, there is a general severability statute which says that if part of an act can be construed unconstitutional and the rest of it can be construed separately, the rest shall remain constitutional. He asked Representative Gara whether he would consider adding to the end of the new subsection (b), as proposed in Amendment 1, something to the effect of, "If this subsection is declared unconstitutional, the remainder of the Act shall not be". Number 1562 REPRESENTATIVE GARA replied, "It's a thorny question for not such a big change in the law." In large part, he opined, there is not a constitutional problem; in the areas for which the Alaska Act applies and the FAA doesn't, Alaska can do what it wishes. Thus the only point at which the constitutional issue will arise is when either the FAA or the state arbitration Act could be followed. In that area of intersection, he remarked, the courts will look to our current statute, which says essentially that if a part of a statute is held unconstitutional, the court should strive to hold as much of the rest of the statute as valid as possible. He opined that the current statute on this issue will be adequate; it will tell the courts that if only a portion of HB 83 is found to be unconstitutional, the rest of the Act would still be enforceable. Thus the courts would leave [HB 83] in effect with regard to Alaska arbitrations. REPRESENTATIVE GRUENBERG said that this information comforts him, and noted that AS 01.10.030 reads: Any law heretofore or hereafter enacted by the Alaska legislature which lacks a severability clause shall be construed as though it contained the clause in the following language: "If any provision of this Act, or the application thereof to any person or circumstance is held invalid, the remainder of this Act and the application to other persons or circumstances shall not be affected thereby." CHAIR McGUIRE remarked that there are a variety of reasons that companies do business in Alaska, and that a large part of how Alaskans do business is via contracts; thus it is important to consider the practical implications of HB 83. She offered the comment that businesses generally prefer arbitration as a means of resolving differences because it is easier, cheaper, and less time consuming. She relayed that one view of the issue raised by the language in question holds that "if there is fraud in the inducement of the contract as a whole, [then] you ought not get to hold in one part of it." She surmised that many companies draft contracts under the assumption that arbitration will be available, and said she wonders whether companies will change the way they do business based upon the knowledge that federal law is "more favorable toward keeping arbitration clauses in." Number 1407 REPRESENTATIVE GARA said: As we stand here today - I can tell you this because I've litigated the issue - nobody in this state knows, in state arbitrations, whether or not the Prima Paint rule applies or doesn't; or at least they didn't as of about four years ago when I litigated this issue. So people weren't fleeing from the state based on this uncertainty; nobody knew, nobody really cared. The reality of this situation is, you get form contracts drafted by a larger, more powerful party, [and] the other side signs on. If the bigger, more powerful party includes an arbitration provision, dupes you into a contract, why give them the benefit of saying, "Okay, well, I duped [you] into it and at least I get to take you to arbitration"? ... So, they sort of have unclean hands, and I don't think that anybody who ... engages in fraud would have any expectation that they should get any benefit out of what they did. REPRESENTATIVE GARA then paraphrased from a portion of Justice Black's dissent in the Prima Paint case: Fraud, of course, is one of the most common grounds for revoking a contract. If the contract was procured by fraud, then, unless the defrauded party elects to affirm it, there is absolutely no contract, nothing to be arbitrated. REPRESENTATIVE GARA relayed that Justice Black called the majority's view, "fantastic," adding that he feels the same way. CHAIR McGUIRE said she did not disagree, mentioning that particularly with adhesion contracts, it is a bigger, more powerful party that gets to set the terms. Remarking that she is inclined to support [Amendment 1], she cautioned that the committee also needs to consider the ramifications, particularly with regard to interstate/federal issues. REPRESENTATIVE GRUENBERG, referring to a brief written by Representative Gara, mentioned that there is some question regarding whether Prima Paint has been overruled. "So, I gather, ... it may no longer even be good law." REPRESENTATIVE GARA offered that there is probably a 75 percent chance that the U.S. Supreme Court has not overruled Prima Paint. Number 1266 REPRESENTATIVE GRUENBERG sought confirmation that the dissenting opinion agrees with the [American Law Institute's Restatement (Second) of Contracts ("Restatement")], noting that Restatements of Law are general doctrines that many attorneys and courts refer to as the rule of law regarding certain issues. REPRESENTATIVE GARA replied that according to the Restatement and common law in other states, including Alaska, if there is fraud in entering into a contract, the contract is simply invalid. "That's what the dissent relied upon in Prima Paint, that's the basis for my view, why we should adopt this rule in our arbitration Act," he added, noting, however, that there are other states which follow the Prima Paint rule. He posited that this issue is merely a policy call for the legislature to make. REPRESENTATIVE GRUENBERG asked whether the language in Amendment 1 "closely tracks" the language in the Restatement. REPRESENTATIVE GARA relayed that the Restatement does not address the issue of arbitration; it merely addresses contracts in general. CHAIR McGUIRE mentioned that some have referred to arbitration as a lesser form of justice. In contrast to this view, she added, arbitrators take what they do very seriously and view arbitration as a fair and equitable way to work out a dispute. She suggested the possibility that going contrary to Prima Paint might imply "something other than that." REPRESENTATIVE SAMUELS asked whether it would be possible to insert a clause in HB 83 to the effect that if there is a conflict between state and federal law, that the state would defer to federal law. REPRESENTATIVE GARA said that although that would be possible, his intention is to have the courts determine, on a case-by-case basis, when either federal law or state law could apply, whether following the state law would undermine a federal policy and is therefore unconstitutional; if it is determined so, then the federal law would apply. He surmised that doing as Representative Samuels suggests would essentially "give up the farm" in that area without even asking the courts to make a determination. "My intention is not to give in, in that area of joint jurisdiction, because I think there's a fair chance the courts would say we're allowed to have a different law than the federal law," he said, adding that the courts haven't decided this issue yet. Number 0988 REPRESENTATIVE GRUENBERG added: There's a very, very significant development in the U.S. Supreme Court today, called state's rights, and they are giving much greater deference to the state's right to enact legislation in areas that the feds have ... recently occupied. And it is a very fast-evolving area, and it may be that the current [U.S.] Supreme Court would uphold Alaska, where the court five, ten years ago wouldn't. And we can't predict what's going to happen and ..., in this particular case, I think it's something that might very well help Alaska. REPRESENTATIVE COGHILL surmised that [Amendment 1] would "kick" the question into the courts sooner. REPRESENTATIVE GARA replied: It will only kick it into the courts if this issue arises: whether or not somebody was defrauded into a contract. If that issue arises, just that one issue goes to the court .... So if the court finds, "No, you weren't defrauded into the contract," it goes back to the arbiter. If the court finds, "Yes, you were defrauded into the contract," then it never gets to the arbiter because there's no arbitration agreement. But you're right: by giving somebody this additional right to get out of the contract because of fraud, you're giving them the right to go to court to do that. REPRESENTATIVE COGHILL raised the issue of "discovery," and said he was trying to envision "what that would look like." REPRESENTATIVE GARA replied: It would be more expensive. Under Alaska law, ... if you really were defrauded into a contract, well, I think you should have that right to go to court and say, "I don't want to be bound by this arbitration agreement." If you weren't defrauded by a contract, and you run to the court and ... say, "I was defrauded, I was defrauded," ... you're taking the risk that you're going to have [attorney] fees ... [and] costs imposed against you. I think it would be a pretty dumb thing for somebody to do, but they might do it. Hopefully, that will keep some of those folks out of court. And then there's the rule that says if you make a frivolous claim in court, you have to pay the other side's full [attorney] fees. Those are the only protections we have .... Number 0822 REPRESENTATIVE COGHILL said that if there was at least some hope that going to court would bring swift action, he would tend to favor [Amendment 1]. CHAIR McGUIRE turned members' attention to page 17 of the Uniform Arbitration Act (UAA), which contains the following commentary regarding the Prima Paint case: There the plaintiff filed a diversity suit in federal court to rescind an agreement for fraud in the inducement and to enjoin arbitration. The alleged fraud was in inducing assent to the underlying agreement and not to the arbitration clause itself. The Supreme Court, applying the FAA to the case, determined that the arbitration clause was separable from the contract in which it was made. So long as no party claimed that only the arbitration clause was induced by fraud, a broad arbitration clause encompassed arbitration of a claim alleging that the underlying contract was induced by fraud. Thus, if a disputed issue is within the scope of the arbitration clause, challenges to the enforceability of the underlying contract on grounds such as fraud, illegality, mutual mistake, duress, unconscionability, ultra vires and the like are to be decided by the arbitrator and not the court. CHAIR McGUIRE remarked that Representative Gara makes a compelling argument to the contrary, that if a contract is found to be invalid, then there is no contract and, thus, no arbitration clause. Number 0666 CHAIR McGUIRE then withdrew her objection to adopting Amendment 1. There being no further objection, Amendment 1 was adopted. Number 0634 REPRESENTATIVE SAMUELS moved to report HB 83, as amended, out of committee with individual recommendations and the accompanying [zero] fiscal notes. There being no objection, CSHB 83(JUD) was reported from the House Judiciary Standing Committee.
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