Tcl - Determining Contract Validity and Arbitrability - April 2007 - Altrenative Dispute Resolution

• Publication year: 2007
• Pages: 15
• Citation: Vol. 36 No. 4 Pg. 15

36 Colo.Law. 15 Colorado Lawyer 2007.

2007, April, Pg. 15. TCL - Determining Contract Validity and Arbitrability - April 2007 - Altrenative Dispute Resolution

The Colorado Lawyer
April 2007
Vol. 36, No. 4 [Page 15]

Articles
Altrenative Dispute Resolution

Determining Contract Validity and Arbitrability

by Lance K. Tanaka

ADR articles are sponsored by the CBA Alternative Dispute Resolution Committee. The articles printed here describe recent developments in the evolving field of ADR with a particular focus on issues affecting Colorado attorneys and ADR providers.

Article Editors:

Jonathan Boonin of Hutchinson, Black & Cook, LLP Boulder - (303) 442-6514, boonin@hbcboulder.com; O. Russel Murray of ADRcom.com, Denver - (303) 893-1667,
orm@adrcom.com

About the Author:

Lance K. Tanaka is a Vice-President with the American Arbitration Association's Denver regional office - (303) 831-0823, tanakal@adr.org. The author is grateful to Jack E Donley for his assistance with this article.

This article reviews recent developments in case law concerning the validity and enforcement of arbitration agreements. The article also discusses some of the implications these cases may have for practitioners drafting arbitration agreements.

Parties usually agree to include arbitration clauses in their contracts based on the presumption that arbitration can provide a quick and efficient means for resolving disputes. However, if disputes involving contract validity and arbitrability are raised, getting the case to an arbitration hearing can be more costly than necessary. In the 2006 case of Buckeye Check Cashing v. Cardegna,(fn1) the U.S. Supreme Court addressed several issues related to determining the validity of arbitration agreements. The following issues were addressed by the court:

Who determines challenges to the validity of arbitration agreements and the contracts in which they are contained - arbitrators or courts?

Is there developing case law?

Can challenges to the validity of arbitration agreements be avoided?

This article discusses the Buckeye opinion and subsequent case law, and identifies some related issues of concern for practitioners drafting arbitration agreements.

U.S. Supreme Court's Buckeye Decision

On February 21, 2006, the U.S. Supreme Court issued Buckeye, a potentially far-reaching seven-to-one decision authored by Justice Scalia.(fn2) After years of uncertainty, Buckeye has helped clarify whether courts or arbitrators are to decide issues of contract validity and arbitrability. The Court found that when a challenge is made to the validity of a contract as whole, arbitrators - not courts - determine whether the contract as a whole is valid. As explained below, the Court further held that under the Federal Arbitration Act (FAA),(fn3) arbitration agreements are to be treated in the same manner as contracts in general. Therefore, the "separability doctrine" is applicable and must be uniformly applied in state court proceedings.

Case Background

In Buckeye, the plaintiffs brought a putative class action in Florida state court, alleging that the defendant charged usurious rates of interest and that the agreements used in the underlying loans were in violation of state lending and consumer protection laws. Therefore, the plaintiffs alleged, the contract was void and illegal on its face. The defendants moved to stay litigation, arguing that the arbitration agreement contained in the loan contracts was enforceable.

The state trial court held that a court, rather than an arbitrator, should determine whether a contract is illegal and void ab initio.(fn4) The state appellate court reversed(fn5) but in turn was reversed by the Florida Supreme Court, which held that enforcing the arbitration agreement would violate state public policy and contract law.(fn6)

Finding and Key Points in the Decision

The U.S. Supreme Court reversed, holding that arbitrators - not courts - should determine the validity of the contract as a whole, not specifically the arbitration clause. The majority opinion relied on two cases, Southland Corp. v. Keating(fn7) and Prima Paint Corp. v. Flood & Conklin Mfg. Co.,(fn8) as well as the Federal Arbitration Act,(fn9) which sets forth a national policy in favor of arbitration and places the enforcement of arbitration agreements on equal footing with contracts.

The court's opinion addressed three issues:

1) contract severability: "as...