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Supreme Court Says Binding Arbitration Provisions Can Survive Otherwise Invalid Agreement

  • March 2, 2006

The U. S. Supreme Court has taken another step to solidify the enforceability of private agreements to arbitrate disputes. In a case arising outside the employment context, the Court has ruled that a contract may be invalid in all other respects, but the arbitration provisions are severable, may survive, and may be enforced. For employers implementing pre-dispute agreements to arbitrate job-related claims, this decision indicates the strength of such provisions independent of the legal sufficiency or validity of other contract terms.

The contract under challenge resulted from the transactions of a group of plaintiffs who had used the services of a check cashing company. As part of each transaction, the plaintiffs were subject to a provision for binding arbitration of any resulting disputes. When the plaintiffs sued the company in a class action for usurious finance charges in violation of state law, the company sought to compel arbitration.

The Florida state trial court hearing the case denied the company's request to compel arbitration, finding the court the proper venue for litigating the claim that the contract was illegal and void. On appeal, a Florida appellate court reversed and ruled in the company's favor. However, a subsequent appeal to the Florida Supreme Court bounced the decision back in favor of the plaintiffs. The state high court said that enforcing an arbitration agreement in a contract being challenged as unlawful would violate state public policy and contract law.

Reversing that judgment, the U. S. Supreme Court held that a challenge to the validity of a contract, and not specifically to the contract's arbitration clause, must be decided by the arbitrator, not the court. Citing prior decisions that established the law applicable to arbitration agreements under the Federal Arbitration Act, the Court enumerated three specific and governing principles: 1) an arbitration provision is severable from the remainder of the contract; 2) unless the challenge is to the arbitration clause, the validity of the contract is to be considered first by the arbitrator; 3) these principles of arbitration law apply in state as well as federal courts.

Even if the contract as a whole is invalid under state or federal law, the arbitration provision may survive, the Court concluded. Under the FAA, the arbitration provision is separately enforceable, and the arbitrator is permitted to hear claims concerning the validity of the contract. [ Buckeye Check Cashing , Inc. v. Cardegna, No. 04-1264 ( US Sup Ct, 2/21/06).]

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