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According to a federal district court in Michigan, a choice of law provision in an arbitration agreement does not require the application of state procedural law without that intent being clearly expressed in the agreement, especially when arbitration would be completely denied once state procedural law is applied.
In Mechanical Power Conversion, L.L.C. v. Cobasys, L.L.C., Civ. No. 07-12325, 2007 WL 2335507 (E.D. Mich. Aug. 16, 2007), Mechanical Power Conversion (MPC) agreed to provide goods and services to Cobasys through several purchase orders. A dispute arose over Cobasys's alleged failure to provide certain software to a third-party contractor. This led Cobasys to cancel one of the purchase orders with MPC.
MPC later sought reimbursement due to Cobasys's cancellation of the order. The parties initially agreed to arbitrate the dispute in accordance with an arbitration clause in the purchase orders. However, while arbitration was pending, MPC sued seeking damages for breach of contract and tortuous interference with a contract due to Cobasys's cancellation.
Cobasys responded with a motion to compel arbitration. MPC opposed the motion, arguing that the clause did not compel binding arbitration, but only common law arbitration, which MPC could refuse at any time before an award is rendered. MPC also argued that the clause was unenforceable due to a lack of mutuality in the obligation to arbitrate.
First, the Court quickly disposed of MPC's mutuality argument, observing that a non-mutual obligation in an arbitration agreement does not render the agreement unenforceable if there is valid consideration for the contract as a whole.
The Court then held that the agreement required binding arbitration under the Federal Arbitration Act (FAA), and not common law arbitration under Michigan law. Since the contract "involved commerce," federal arbitration law was clearly invoked. Once the FAA was invoked, it preempted state common law arbitration requirements contrary to federal law, including the permissible grounds for revocation of the contract.
Finally, the Court rejected MPC's contention that a choice of law provision within the agreement required the application of Michigan procedural law to the arbitration. Instead, the Court interpreted the choice of law provision as only requiring the application of Michigan's substantive law to the dispute. The Court distinguished MPC's challenge from that in Volt Info. Sys., Inc. v. Bd. of Trs. of the Leland Stanford Junior Univ., 489 U.S. 468 (1989), noting that the application of California procedural law in Volt only delayed arbitration proceedings, while application of Michigan procedural law would deny arbitration altogether. According to the Court, without a clear indication in the agreement that state procedural law was to apply to the arbitration proceedings, the strong federal presumption to compel arbitration should control.
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