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Whether brought in federal or state court, a challenge mounted against the validity of a contract as a whole, rather than just the arbitration clause, must be heard by the arbitrator, the Supreme Court has held.
In Buckeye Check Cashing, Inc. v. Cardegna, 126 S. Ct. 1204 (2006), Cardegna brought a putative class action against Buckeye Check Cashing, alleging that Buckeye charged usurious interest rates in connection with check cashing loans, and that Buckeye's loan agreements violated several Florida lending and consumer protection laws.
Buckeye moved to compel arbitration based upon the arbitration clause contained in Buckeye and Cardegna's agreement. Cardegna argued that the entire contract was void for illegality, and that the arbitration clause was therefore also void.
On appeal, the Florida Supreme Court sided with Cardegna, holding that enforcing agreements to arbitrate in a contract challenged as unlawful “could breathe life into a contract that not only violates state law, but also is criminal in nature.”
On grant of certiorari, the Supreme Court reversed, holding that Cardegna's challenge to the contract “must go to the arbitrator.” In its opinion, the Court reaffirmed its holding in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) (Westlaw registration required, noting that the decision established three propositions. First, an arbitration provision is severable from the rest of the contract. Second, unless the challenge is to the arbitration clause itself, the validity of a contract is for the arbitrator to decide. And finally, substantive federal arbitration law applies in both state and federal courts. Southland Corp. v. Keating, 465 U. S. 1, 12 (1984) (Westlaw registration required).
The Court found that the lower court improperly relied on the distinction between void and voidable contracts. Under Florida law, parts of a contract cannot be severed from a void contract. But the Supreme Court found that because Prima Paint rejected the application of state severability rules to arbitration agreements that Florida state law is irrelevant. In so holding, the Supreme Court relied on the established body of federal substantive law relating to arbitration that is applicable to both federal and state courts. It is this federal law that preempts state law from governing arbitrations.
The Court also rejected Cardegna's argument that the Federal Arbitration Act only applies to contracts, and since void contracts under state law are not contracts, the FAA does not apply. To counter Cardegna's argument, the Court pointed to the final clause of Section 2 of the FAA, allowing for a challenge to an arbitration clause “upon such grounds as exist at law or in equity for the revocation of any contract.” (Emphasis in original)
“There can be no doubt,” the Court said, “that ‘contract' as used this last time must include contracts that later prove to be void.” Otherwise, an arbitration agreement could implausibly be challenged as voidable but not void. Therefore, the Court held, the Act applies to contracts that might later turn out to be void.
Justice Scalia explained why the Court could not agree with Cardegna: “It is true, as respondents assert, that the Prima Paint rule permits a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void. But it is equally true that respondents' approach permits a court to deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable.”
The Court clearly resolved this tension in favor of arbitration, finding that whether the challenge is brought in state or federal court, the challenge to a contract's validity must go to the arbitrator. The Buckeye decision continues the precedent established in other recent Supreme Court decisions which extended the authority to arbitrators to decide disputed issues. In both PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401 (2003) and Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), the Supreme Court vested the authority to resolve disputes in arbitrators and not judges.
This 7-1 Buckeye decision is clear, convincing, and conclusive support for arbitration by this country's highest court. The Supreme Court Justices trust the judgment of arbitrators to decide disputes, and more and more parties and their lawyers will similarly entrust arbitrators to do justice.
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