Arbitration Agreements: Who Decides Legality of Arbitration Clause?
On February 21, 2006, the United States Supreme Court addressed “whether a court or an arbitrator should consider the claim that a contract containing an arbitration provision is void for illegality.” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. ___, 126 S.Ct. 1204, 1207 (2006). Plaintiffs filed a putative class action alleging that the interest rates in various deferred-payment transactions with Buckeye Check Cashing “in which they received cash in exchange for a personal check in the amount of the cash plus a finance charge” were usurious. Plaintiffs also alleged that the Deferred Deposit and Disclosure Agreement (“Agreement”) violated Florida lending and consumer-protection statutes. Id.
The Agreement contained an arbitration clause. Nonetheless, the trial court denied Buckeye’s motion to compel arbitration, “holding that a court rather than an arbitrator should resolve a claim that a contract is illegal and void ab initio.” The Florida appellate court reversed on the ground that plaintiffs challenged the Agreement in its entirety, not the arbitration clause alone, so “the agreement to arbitrate was enforceable, and the question of the contract’s legality should go to the arbitrator.” The Florida Supreme Court in turn reversed the appellate court, and the United States Supreme Court granted certiorari. Buckeye, at 1207.
The Supreme Court observed that there is a strong policy in favor of arbitration, and that Congress enacted the Federal Arbitration Act to “overcome judicial resistance to arbitration.” Buckeye, at 1207. The Court explained that legal challenges to arbitration provisions fall into two general categories: (1) a specific challenge to the arbitration clause itself; and (2) a challenge to the legality of the contract as a whole. The Buckeye complaint falls into the second category.
The Supreme Court reviewed prior opinions and enunciated three broad propositions: “First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts.” Buckeye, at 1209 (italics added). To hold otherwise, the Court concluded, would create the possibility that the trial court may “deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable.” Id., at 1210.
Apparently concerned with remaining “judicial resistance to arbitration,” the Supreme Court summarized its decision in very broad terms: “We reaffirm today that, regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.” Buckeye, at 1210.
NOTE: The Supreme Court expressly reserved the question of whether a court or an arbitrator should resolve “the issue of whether any agreement between the alleged obligor and obligee was ever concluded.” Buckeye, at 1208 n.1.