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 Berhardt the Court held that the stay provisions of §3 “apply only to two kinds of contracts specified in §§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, §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 submitted to arbitration, the Court ruled that the FAA demanded the claim proceed in arbitration. After this ruling, courts are 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.