The Court reaffirms that a challenge to the validity of a contract as a whole, but which fails to specifically challenge an arbitration clause within that contract, must be ordered into arbitration. This occurs even where the objecting party asserts an illegality defense claiming the entire contract is unlawful.

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Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)
 

Relevant Facts: Victims of a predatory “payday” lending trap sued the lender, a check cashing company. The documents they signed as part of the predatory loan included a forced arbitration clause. The plaintiffs filed a class action suit, alleging usurious interest rates, among other things, which made the contract illegal on its face. The check cashing company invoked the arbitration provision.

 

Question Before The Court: Whether a court or an arbitrator should consider the claim that a contract containing an arbitration provision is void for illegality.

 

The Opinion: The Court reiterated that challenges to the validity of arbitration agreements under the “savings clause” may be divided into two types. One type challenges specifically the validity of the agreement to arbitrate. “The other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid. The consumer’s claim here was of the second type, and the crux of his complaint was that the contract as a whole—including its arbitration provision—was rendered invalid by the excessive finance charge.”

 

The Court denied Mr. Cardegna’s assertion, relying on precedent to reach its holding: “First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts. The parties have not requested, and we do not undertake, reconsideration of those holdings. Applying them to this case, we conclude that because respondents challenge the agreement, but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract.”

 

Reflecting on their holding in Southland, which arose in state court, the Court recalled, “We did not ask whether the several challenges made there—fraud, misrepresentation, breach of contract, breach of fiduciary duty, and violation of the California Franchise Investment Law—would render the contract void or voidable. We simply rejected the proposition that the enforceability of the arbitration agreement turned on the state legislature’s judgment concerning the forum for enforcement of the state-law cause of action. So also here, we cannot accept the Florida Supreme Court’s conclusion that enforceability of the arbitration agreement should turn on Florida public policy and contract law.”

 

“It is true,” the Court continued, “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 [the consumers’] approach permits a court to deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable. Prima Paint resolved this conundrum—and resolved it in favor of the separate enforceability of arbitration provisions. We reaffirm today that, regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.”

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