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Dreher Tomkies LLP
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SUPREME COURT HOLDS ARBITRATOR, NOT COURT, SHOULD DETERMINE VALIDITY OF ARBITRATION PROVISION

On February 21, 2006, the United States Supreme Court held that a claim that a purportedly usurious contract containing an arbitration provision was void for illegality should be determined by an arbitrator and not a court. Buckeye Check Cashing, Inc. v. Cardegna, No. 04-1264, 2006 WL 386362 (Feb. 21, 2006). In that case, borrowers entered into various deferred-payment transactions with Buckeye Check Cashing. The signed written agreements governing the transactions provided for arbitration of disputes. The borrowers brought a class action in Florida state court against Buckeye, alleging that it charged usurious interest and that the agreements violated various Florida lending and consumer protection laws, and thus were criminal on their face. Buckeye moved to compel arbitration, however, the trial court denied the motion holding that a court, rather than an arbitrator, should resolve a claim that a contract is illegal and void ab initio. The Florida court of appeals reversed, holding that because the borrowers did not challenge the arbitration provision itself, but instead claimed that the entire contract was void, the agreement to arbitrate was enforceable and the question of the contract legality should go to the arbitrator. The Florida Supreme Court reversed because, according to the court, to enforce an agreement to arbitrate in a contract challenged as unlawful could breathe life into a contract that not only violates state law, but also is criminal in nature.

The United States Supreme Court indicated that prior Supreme Court precedent established three propositions that were determinative of whether a court or an arbitrator should consider the claim. 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 Supreme Court indicated that because the borrowers challenged the agreement as a whole, the arbitration clause is enforceable apart from the remainder of the contract, and thus the borrowers’ challenge should be considered by an arbitrator and not a court.

Margaret M. Stolar and Charles V. Gall