Source: https://www.vedderprice.com/should-a-dispute-under-a-letter-of-intent-be-arbitrated-10-12-2011
Timestamp: 2019-04-24 12:36:27+00:00

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One can have a binding arbitration agreement embedded in a non-binding LOI because in determining whether there is a binding agreement to arbitrate, the arbitration clause will generally be treated as a separate contract.1 Suppose the Offeror sends a non-binding LOI that includes an arbitration clause and the Offeree does not strike or object to it, but instead provides comments to other provisions in the LOI, pays the deposit to the Offeror and proceeds with negotiations for the definitive documents before the deal collapses with each side blaming the other.2 Although these facts, without more, should not give rise to an enforceable arbitration agreement, the result may not be certain and there could be a question of whether the existence of a binding arbitration agreement will be decided by an arbitrator. The party receiving a draft containing an arbitration clause should strike or otherwise indicate its rejection of the clause if it does not want to arbitrate LOI disputes. At least by so doing, the issue of arbitration can be discussed along with the other business terms at the LOI stage.
Under New York and U.S. federal law, absent a contrary agreement, the question whether a binding arbitration contract exists is a question of law to be decided by the court, not by an arbitrator.3 However, absent a contrary agreement, the specification in the arbitration clause of the tribunal selected to act as arbitrator invokes the rules of that tribunal and may result in the arbitrator deciding the question whether a binding arbitration agreement exists.4 Article 15 of the International Dispute Resolution Procedures of the ICDR provides that “[t]he Tribunal shall have the power to rule on its own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” To the same effect are Rule 8(a) of the AAA Commercial Arbitration Rules, Article 23 of the Rules of the London Court of International Arbitration, and Article 6.2 of the Rules of Arbitration of the International Chamber of Commerce.
1 Rent-A-Center, West, Inc. v. Antonio Jackson, ___ U.S. ___, 130 S. Ct. 2772 (2010) (U.S. federal law); 5 N.Y. Jur. 2d., § 89 (New York law).
2 The same question arises if the Offeror sends an LOI without an arbitration clause and the Offeree sends a marked-up draft of the LOI back to the Offeror that adds an arbitration clause. A discussion of the extent, if any, to which Section 2-207 of the Uniform Commercial Code (the so-called battle of the forms section relating to sales of goods) applies to a determination under these facts of whether there is a binding arbitration agreement is beyond the scope of this article.
3 See Three Valleys Municipal Water District v. E.F. Hutton & Company, Inc., 925 F.2d 1136 (9th Cir. 1991) (U.S. federal law); 5 N.Y. Jur. 2d., §§ 69–70 (New York law). The Federal Arbitration Act of the United States (9 U.S.C. § 1 et seq.) governs arbitration of disputes arising inter alia under contracts affecting interstate commerce and preempts more restrictive state law. See, e.g., 5 N.Y. Jur. 2d., § 69. Almost any finance, lease or sale transaction relating to an aircraft will be deemed to “affect interstate commerce.” But since there is no inconsistency between New York State and federal law on this issue, there should be no federal preemption.
4 Apollo Computer, Inc. v. Helge Berg, et al., 886 F.2d 469 (1st Cir. 1989); In re Application of RD Mgmt. Corp., 196 Misc. 2d 579, 766 N.Y.S. 2d 304 (Sup. 2003) (relating to the scope, not existence, of an arbitration agreement). The party opposing arbitration will probably not want to have the dispute resolved by an arbitrator who gets paid only when there is a controversy to arbitrate, and who is not necessarily bound to follow governing law. But even court decisions are often based on a policy that strongly favors arbitration.
Vedder Thinking | Articles Should a Dispute Under a Letter of Intent Be Arbitrated?

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