Arbitration

In an effort to reduce lender liability risk many lenders have sought to resolve such claims through alternative dispute resolution. One of the more popular methods is that of arbitration. If a lender chooses this methos, the loan documents will include a provision which provides for the binding arbitration of such claims by a neutral third party.

United States Arbitration Act

Due to the sometimes unsympathetic approach to arbitration under state laws most lenders will claim the jurisdiction of the United States Arbitration Act (9 USC Sec 1 et seq.) This Act renders such provisions enforceable and has been found to be supportive of public policy by the federal courts.

Allied-Bruce Terminix Cos. v. Dobson, 1995 US LEXIS 689 (1995)

The difficulties which a lender or other party may have in enforcing an arbitration provision is illustrated by the Allied-Dobson Terminix Cos v. Dobson case out of Alabama. In tha case a homeowner challenged the enforceability of an arbitration provision found in a termite prevention contract. The trial court and the Alabama Supreme Court found that the provision was unenforceable due to an Alabama law which held that pre-dispute arbitration provisions are unenforceable. Likewise, the federal Act was unavailable due to the fact that the parties had not contemplated that their activites would involve substantial interstate commerce.

Interstate Commerce Requirement

The United States Supreme Court rejected that interpretation of the interstate commerce requirement. The court held that the correct way to read the statute was whether the activites involved interstate commerce in fact and not whether the parties contemplated substantial involvement.

Risk Minimization

While enforceability was upheld the lesson to be learned is that simply including alternative dispute provisions in standard contracts will not automatically provide lenders with the relief they seek. Lenders must pay attention to state law as well as state court disposition since many actions will first arise in the state courts as a collection matter or foreclosure and not in federal court.

Return to Main Menu


Copyright (C) 1995, Gerald Blanchard
All rights reserved.