An Invalid Contract May Still Contain a Valid Arbitration Agreement

Buckeye Check Cashing, Inc. v. Cardegna

The Cardegnas entered into various contracts with Buckeye Check Cashing, which they now challenge as usurious, and thus, illegal from the outset. These contracts included a clause mandating arbitration of disputes. The case worked its way up the court system over the question of whether a court or an arbitrator should determine the legality of the contract.

The Federal Arbitration Act (FAA) “embodies the national policy favoring arbitration, and places arbitration agreements on equal footing with all other contracts,” and mandates that a written provision or an agreement in writing to submit existing controversies arising out of a contract to arbitration “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” These challenges on the grounds of law or equity, the Court reasons, can be divided into those that challenge the validity of the agreement to arbitrate, and those that challenge the contract as a whole, and that this case is one of the second type.

In Prima Paint Corp. v Flood & Conklin the Court held: “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. Where the Florida court found that its contract law and public policy do not allow for severable and salvageable parts of an illegal contract, the Court rejects the argument that “enforceability of the arbitration agreement should turn on ‘Florida public policy and contract law.’” The Court then rests its argument that controversies arising under contracts void ab initio (from the start) are still controversies arising under a contract, because the statutory language uses the word to apply to “contracts that later prove to be void” (see FAA, above).

Justice Thomas “remain[s] of the view that the Federal Arbitration Act … does not apply to proceedings in state courts."