Monday, April 17, 2006, 1:32 PM

Issue Of Contract's Validity To Be Considered By Arbitrator

Many distribution and franchise agreements contain arbitration clauses. What happens when a plaintiff seeks to avoid arbitration on the grounds that the underlying agreement is void, illegal, invalid or unenforceable? A recent Supreme Court decision, Buckeye Check Cashing, Inc. v. Cardegna, answers that question in favor of arbitration.

Buckeye, a class action in Florida state courts, involved contracts which contained a standard arbitration clause but also allegedly charged usurious interest. The trial court denied the motion to compel arbitration because the contract was void ab initio. The Florida Supreme Court agreed stating that to enforce an arbitration clause in an illegal agreement "would breathe life into a contract that not only violates state law, but also is criminal in nature."

The United States Supreme Court, however, reversed based on the Federal Arbitration Act and the "rule of severability" from Prima Paint Corp. v. Flood & Conklin Mfg. Co, 388 U.S. 395 (1967). Under Prima Paint, the arbitration agreement is to be treated as a separate agreement; thus "unless the challenge is to the arbitration clause itself, the issue of a contract's validity is considered by the arbitrator in the first instance." The Buckeye Court emphasized that this rule of severabiltiy is part of federal substantive law and applies in state courts when an agreement is subject to the Federal Arbitration Act.

As a law clerk for the 11th Circuit Court of Appeals, I worked on a similar case. See John B. Goodman, Ltd v. THF Construction, Inc, 321 F.3d 1094 (11th Cir. 2003). In that case, the 11th Circuit held that the arbitrator should decide whether a construction contract (containing an arbitration clause) was void ab initio because it was performed by an unlicensed contractor. The Supreme Court's recent decision in Buckeye reaffirms the Eleventh Circuit's analysis in John B. Goodman and strengthens the enforceability of arbitration agreements in state courts.

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