February 19, 2014

A Win for Arbitration Clauses in North Carolina

art by Todd Berman / flickr
Arbitration clauses in consumer contracts are now more likely to be enforced in North Carolina, thanks to a a pair of opinions issued a few days ago by the North Carolina Court of Appeals.  The companion cases are Torrence v. Nationwide Budget Finance and Knox v. First Southern Cash Advance.

Arbitration clauses are used in contracts to limit the delay and expense often associated with traditional litigation in the judicial system.  Generally speaking, they serve to streamline the dispute resolution process.  Consumer advocates, however, have long objected to their use in consumer contracts, believing they weaken the ability of consumers to obtain remedies for breaches and violations of law.

In Torrence, which contains the rationale for both of the Court of Appeals' recent decisions, the Court ruled that an earlier North Carolina Supreme Court decision limiting the use of arbitration clauses in consumer contracts has been preempted by subsequent decisions of the U.S. Supreme Court.  The leading case in North Carolina dealing with the invalidation of arbitration clauses is Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93 (2008).  Two cases subsequently decided by the United States Supreme Court have changed the legal landscape, however: AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), and American Express Co. v. Italian Colors Rest., 133 S.Ct. 2304 (2013).  In Concepcion, the Court held that the Federal Arbitration Act supersedes any state law (including a state court opinion) that sets aside arbitration agreements upon grounds that are exclusive to arbitration agreements (i.e., not applied to contracts generally).  In 2013, the Court decided in Italian Colors that arbitration clauses could be used to effectively prevent class-action lawsuits by consumers. 

In Torrence, the North Carolina Court of Appeals was forced to acknowledge that the North Carolina Supreme Court's decision in Tillman had been essentially overruled by the United States Supreme Court in Concepcion and Italian Colors.  The Court of Appeals explained that, despite judicial hostility to arbitration clauses, the law clearly permits them: "The United States Supreme Court has made it clear that the use of unconscionability attacks directed at the arbitration process can no longer serve as a basis to invalidate arbitration agreements."

As a result of these two recent opinions, arbitration clauses should be enforced more reliably in North Carolina.  Businesses in North Carolina may want to re-evaluate the use of arbitration clauses, or the language of arbitration clauses, in light of the recent decisions.

1 comment:

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