Your Arbitration Agreement Is Governed by Federal Law? Maybe Not.

When lawyers draft contracts, they usually include provisions that specify which laws will govern those contracts. A lawyer who is knowledgeable about arbitration agreements and includes one in a broader agreement will usually provide that the Federal Arbitration Act governs the parts of the agreement dealing with arbitration.

The lawyer will likely elect the FAA as governing law because there are many federal and state court decisions that have created a body of precedent that is generally favorable toward those attempting to enforce arbitration agreements.

But does the drafter’s election of the FAA mean that there is no room for the operation of state law? A recent Connecticut case answered that question in the negative.

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The Service Contract Is Required

James and Julie St. Paul bought a car on credit from A Better Way Wholesale Autos Inc. The financing agreement included an arbitration agreement that specified that the FAA, not state law, governed any arbitration between the parties.

Several months after the purchase, the St. Pauls demanded arbitration against BWWA. They claimed the dealership required the purchase of an oil change contract and a service contract as a condition of financing, in violation of the federal Truth in Lending Act and the Connecticut Unfair Trade Practices Act.

The appellate court found that BBWA’s application to vacate was untimely under a provision of Connecticut’s arbitration law.

The arbitrator concluded that BWWA violated TILA when it did not disclose the cost of the ancillary products as finance charges. The arbitrator awarded the St. Pauls $8,800, including actual damages, statutory damages, and attorneys fees.

Thirty-six days after the arbitrator issued his award, BWWA applied to vacate the award. The trial court ruled that the application was untimely under Connecticut law and dismissed it.

BWWA appealed to the Appellate Court of Connecticut, which affirmed the trial court’s dismissal of BWWA’s application. The appellate court found that BBWA’s application to vacate was untimely under Conn. Gen. Stat. Section 52-420(b), a provision of Connecticut’s arbitration law.

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Jurisdictional Limits Apply

As the appellate court explained, Section 52-420(b) requires a party to arbitration to challenge the arbitrator’s award within 30 days of the issuance of the award. BWWA argued that because the parties’ arbitration agreement provided that the FAA, rather than state law, governed arbitration between the parties, the FAA’s three-month limitations period for challenging an award should apply.

The appellate court disagreed. According to the appellate court, Section 52-420(b) sets a limit on state courts’ subject-matter jurisdiction to consider challenges to arbitration awards. Caselaw from Connecticut’s highest court held that the limit was jurisdictional, and the state legislature acquiesced in that interpretation when it chose not to amend the law.

When dealing with the enforcement of an arbitration agreement, don’t ignore your state’s law.

The appellate court concluded that the parties could not confer subject-matter jurisdiction on a Connecticut state court by choosing to apply law other than Connecticut law to their contract.

The lesson here for dealers and their lawyers? When dealing with the enforcement of an arbitration agreement, don’t ignore your state’s law, particularly its laws and rules regulating court procedure. Those requirements may constitute a trap for the unwary, so don’t be unwary!

Eric D. Mulligan Esq. is an associate in the Maryland office of Hudson Cook LLP.

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