In promulgating a new “severability doctrine” the Court changes the standard for assessing the enforceability of an arbitration clause.

Comments Off on In promulgating a new “severability doctrine” the Court changes the standard for assessing the enforceability of an arbitration clause.

Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395 (1967)
 

Relevant Facts: Two companies entered into a contract. One sued the other for breach of contract and fraudulent representation. In the lower courts, the defending company successfully sought to compel arbitration under a broad arbitration clause in the agreement.

 

Question Before The Court: Whether arbitration clauses are severable from the contracts that contain them.

 

The Opinion: The Court found that, because the Federal Arbitration Act (FAA) specifies the manner in which federal courts are to treat questions relating to arbitration clauses, in considering whether to compel arbitration under the FAA, “a federal court may not consider a claim of fraud in the inducement of the contract generally . . . but may consider only the issues relating to the making and performance of the agreement to arbitrate.”

 

The Court distinguished this case from the Bernhardt decision, providing that in Bernhardt the Court held that the stay provisions of Section 3 “apply only to two kinds of contracts specified in Sections 1 and 2 of the Act, namely those in admiralty or evidencing transactions in ‘commerce’.” Here, the matter involved a New Jersey paint business engaging in the manufacturing and sale of paint in Maryland, squarely within the scope of the FAA.

 

With that framework in mind, the Court held that, under the FAA, arbitration clauses are severable from the contracts that contain them. In the Court’s view, Section 4 of the FAA requires courts to order arbitration once it is satisfied that the “making of the agreement to arbitrate . . . is not at issue.” The Bernhardt Court focused on the jurisdictional ability of a federal court to enforce an arbitration clause a la the Erie doctrine, but the Court here traced the FAA to Congress’ exercise of its Commerce Clause power.

 

Since the challenge in this case was to the formation of the contract, at large, rather than specifically to the arbitration clause contained within, and because there was no evidence that the parties intended to prevent this type of claim from being arbitrable, the Court ruled that the FAA demanded the claim proceed in arbitration. After this ruling, courts were required to look at challenges to arbitration clauses separately from challenges to the contracts that contain them. If a person challenges a contract at large, unless a specific challenge to the arbitration clause itself is launched, the court will compel arbitration, regardless of the possible unenforceability of the larger contract.

 

In his dissent, Justice Hugo Black made a point of delving deep into the legislative history of the FAA, recalling that in 1923 hearings on the bill, “On several occasions [members of Congress] expressed opposition to a law which would enforce even a valid arbitration provision contained in a contract between parties of unequal bargaining power. Senator Walsh [of Montana] cited insurance, employment, construction, and shipping contracts as routinely containing arbitration clauses and being offered on a take-it-or-leave-it basis to captive customers or employees. He noted that such contracts ‘are really not voluntarily [sic] things at all’ because ‘there is nothing for the man to do except to sign it; and then he surrenders his right to have his case tried by the court . . ..’ [The Senator] was emphatically assured by the supporters of the bill that it was not their intention to cover such cases.”

© 2016 Employees Rights Advocacy. All Rights Reserved.