A Murder Contract’s Arbitration Clause

A client, Mary, recently told a lawyer she breached a written promise to kill the enemy of her boyfriend, Paul, an interstate narcotics dealer. Paul said the value of getting rid of the enemy was at least $200,000 and that he’d pay Mary $100,000 to do the hit. Paul and Mary’s contract was unusually formal, spelling out details and containing an arbitration clause—saying the two couldn’t fight any dispute in court but only by using an arbitrator.

Mary got cold feet and can’t do the killing; Paul started arbitration, seeking $200,000 in damages. Which of the following seems most likely?  (a) Mary’s lawyer can go to court to get the agreement declared unenforceable as a matter of law and halt the arbitration proceedings; (b) Paul can get the court to stay any lawsuit Mary files and an order that she proceed to the arbitration Paul began; (c) the arbitrator can grant Paul the damages he claims, $200,000; (d) a court would enforce such an award (or vacate it).

Following the exuberantly expansive wave of US Supreme Court opinions of the past couple of decades making arbitration agreements hallowed ground above all else, it seems disturbingly more likely that Mary’s lawsuit would be stayed, a court would order her to go to arbitration, the arbitrator could order that Mary pay Paul $200,000 for breach, and a court would enforce the award.

Under Supreme Court precedents, the obvious public policy objections to these outcomes work surprisingly weakly concerning the questions of stay and specific performance and boundaries of what arbitrators can do; they are only a bit stronger in possibly allowing a court to vacate the award as against public policy. The best prediction is that a court would simply defy all the Supreme Court’s precedents and prevent the whole charade from beginning in the first place.

But that doesn’t seem like a good legal system and the Supreme Court’s precedents in this area need revamping. Details on the current state of case law supporting the predicted absurd results follow. I’m beginning to think how to contribute some ideas to the vast literature on this unruly body of law.  One tentative suggestion: the Court and the literature insist that the entire body of law is all about contract law; the more this statement is repeated, the less it seems to be true. 

The Court reads the Federal Arbitration Act to require all courts in the country, federal or state, to stay proceedings when a contract involving interstate commerce (broadly conceived) contains a written clause calling for disputes to be resolved by arbitration (with an exception for certain lines of employment, narrowly conceived). Paul and Mary’s written contract involves interstate commerce and not employment, within that interpretative framework.

The Court sees the FAA to require courts to order specific performance of arbitration clauses when a party breaches by resisting or to stay judicial proceedings brought by someone subject to such a clause. Mary can’t proceed with her lawsuit and a judge is supposed to order her to participate in the arbitration as Paul requests.

The Court says the FAA renders invalid by preemption any state law purporting to interfere selectively with arbitration clauses–only valid to police such clauses are state laws that apply to all contracts. That preempts as invalid state laws that police arbitration clauses by type of claim (like for medical malpractice), transaction type (like involving franchises), or feature (like for conspicuousness).  Any law that might render invalid arbitration clauses like this one, just because contained in a contract for murder, are preempted.

The Court also says that the arbitration clause itself must be separated from the rest of the contract for purposes of analyzing its validity and effect. It doesn’t matter whether the contract as a whole is invalid because it violates a state’s public policies or laws, whether against usury, discrimination, or, presumably, murder. So long as there’s nothing invalid or illegal about the arbitration clause, courts must stay lawsuits and order arbitration.   There’s nothing objectionable about the Mary-Paul arbitration clause.

The Court’s opinions mean that the only other way to empower a court to evaluate the enforceability of an arbitration clause is to assert that no contract was formed between the parties.  Mary has no grounds to suggest that she and Paul didn’t form a contract—they mutually assented to a bargained for exchange with consideration. 

The Court has said that all questions about the validity of a contract—whether it is the product of fraud, mistake, duress, undue influence, incapacity, illegality and so on—are questions an arbitration clause makes an exclusive subject for an arbitrator to decide. Mary’s objection that her contract with Paul is invalid as an illegal bargain, involving murder-for-hire, would thus go to arbitration, not court.

The Court defers to arbitrators to determine what damages to award, in accordance with the party’s contract, not with state law. A state might prohibit arbitrators from awarding punitive damages for breach of contract, for example; but if parties say or imply they want punitive damages to be a potential remedy, the Court says the party’s wishes control. An arbitrator awarding Paul $200,000 for Mary’s breach of the contract for murder would merely be awarding compensatory damages anyway.

The Court recognizes that judges are empowered to vacate arbitration awards, when enforcing them would be against public policy. But even here the Court is circumspect, deferring to one arbitrator’s decision to ignore criminal drug use in an employment dispute. To recognize such a public policy ground to vacate an award also confounds the many cases where the Court has denounced public policy (whether concerning usury, discrimination, protecting franchisees and so on) as a basis to deny effect to an arbitration clause or contract in the first place.

The way around these absurd results is what many states have done since and despite the Supreme Court taking expansive stances making arbitration clauses sacrosanct: defying the Court. Despite what the Court says, many state statutes contain laws, that are enforced, applying special standards to arbitration agreements in many settings.  That tension doesn’t bode well for orderly administration of justice.  Something must give.

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22 Responses

  1. Ken Rhodes says:

    Fun, but no real problem.

    When Mary’s lawyer goes to court in your possibility (a), it is not to claim that the agreement is unenforceable. Rather, it is to show that there is no contract, merely a piece of paper they both signed which has no legal standing.

    One of the essential elements of a contract is absent: a legal purpose. Thus there is no contract. Thus the words about arbitration are just words on a piece of paper, not part of a legal contract.

  2. Jaundiced Eye says:

    Isn’t this the “Highwayman’s Case?” Would not he court refuse to get involved including not ordering arbitration?

  3. A.J. Sutter says:

    Ken, there’s a flaw in your reasoning if the arbitrators have the exclusive power to decide on invalidity of the contract, and if the analysis of the validity of the arbitration clause is severed from that of the validity of the rest of the contract. Whatever Mary’s lawyers might argue, Paul’s would argue as this post suggests.

  4. Ken Rhodes says:

    AJ, the arbitrators’ exclusive jurisdiction would derive, not from a point of law, but from the agreement embodied in the “contract.” If, on the other hand, it is not a contract, but simply a piece of paper rendered non-binding by virtue of its fatal flaw, then the court has to declare it as such, negating all its elements, not just the one that’s missing.

  5. Lawrence Cunningham says:

    The Ken/AJ exchange underscores the problems with SCOTUS arbitration jurisprudence. It holds that: (a) courts decide whether a contract has been formed and (b) arbitrators decide whether an excuse from performance exists. The Court thinks there is a clear distinction between (a) formation and (b) excuse, treating formation as concerning consideration and assent, and classifying as excuses doctrines like fraud, mistake, incapcity, duress, and . . . illegality.

    But these two categories aren’t so distinct: (x) a promise to murder may be invalid consideration (a point about formation), but that’s because murder is illegal (a point about excuse); and (y) doctrines like fraud, mistake, incapcity and duress are excuses, but that’s because they indicate lack of assent (a point about formation).

    This is one of a dozen examples of problems with SCOTUS arbitration jurisprudence arising from the endless assertion that such cases are ultimately and simply matters of contract law. In fact, SCOTUS arbitration jurisprudence defies contract law in at least a dozen different ways.

    The broadest example of this is how SCOTUS calls preempted and invalid any state law applied to an arbitration agreement that isn’t equally applicable to every other contract that can be formed. No special rules are allowed. That defies the reality that contract law contains innumerable special rules that apply to particular contract types. Thus for several hundred years, contract law has special rules that apply to transactions in goods, to deals between family members, to subjects listed in the statute of frauds, and so on.

    The jurisprudence simply ignores the well-known possibility that the law of contracts isn’t a singular monolithic batch of general doctrine always applicable to every contract but a richly delineated body of law with vast capacity for tailoring to particular transactions and settings: goods, families, real property, leases, lending, service, construction, . . . . There are general principles like consideration, assent, excuse–but they are particularized in distinct settings.

  6. TJ says:

    Or to phrase Lawrence’s concluding remarks more simply, the problem with Ken’s position is that it could be used to take anything out of arbitration if taken seriously. Pretty much every defect in a contract that can be urged as a legal defense (fraud, duress, unconscionability, impossibility, mistake etc.) can be reframed as saying there was “no contract” in some sense, since there was no “meeting of the minds”.

    I think the real objection to Lawrence’s hypo is that we all know that, in a real case (if an arbitrator actually enforced the contract), the Court would find some excuse to wiggle out of the conundrum. But that is just the legal realist point that doctrine is often flexible despite purporting not to be, and in such cases it is intuition and policy judgment that dictate how the discretion is exercised.

  7. Lawrence Cunningham says:

    TJ-Thanks for the nice points. Though the murder case is stark as extreme, SCOTUS opinions don’t offer a principled way to justify the wiggle room you mention, having explicitly denied such treatment to claims of fraud and the illegality of usury. The common law of contracts has for hundreds of years refused to enforce a recgonzied category of illegal bargains, containing both murder and usury. It may be desirable under the arbitration statute for the reason you mention to essentially ignore that, but then it seems wrong for the Court and analysts to say its arbitration jurisprudence is just an application of contract law. At minimum, that doesn’t seem good for contract law.

  8. Royal Lea says:

    Lawrence, if, as you say, the current state of arbitration law is not really all about contract, despite what the Court says, then what is it really about? What is driving all of this? Are you saying that a body of arbitration law as a distinct set of principles has somehow just gone too far? Or that the business of the Court is business and that the Court is concocting what it says about contract law in arbitration cases to reach the business oriented results it prefers? Or something else?

  9. A.J. Sutter says:

    Or that there is a Zeitgeist (neoliberal-ish) favoring “private ordering,” perhaps?

  10. Lawrence Cunningham says:

    Royal and AJ: That’s one problem with such covert jurisprudence: it’s difficult to know what’s really driving something. That raises questions of legitimacy, in addition to defects of doctrinal incoherence. An additional hypothesis: the Court and its clerks have a comparative advantage in constitutional law and similar federal questions that verge on the political; they just aren’t very good at contract law, due to lack of experience or expertise, and lack understanding that it is primary an apolitical body of law.

  11. Alan Rau says:

    I’m afraid this case strikes me as fairly easy: No award for the plaintiff is likely to escape a public policy challenge: In the rather stark terms in which the problem is posed, the plaintiff is seeking to impose liability for the defendant’s failure to commit a crime. A court would properly deem it futile to refer a case to arbitration where there are no circumstances in which it could possibly enforce the resulting award.

    There is a sharp distinction between this and cases where there is deference to the arbitrator’s judgment as to whether or not the law has been violated. See CVN Group v. Delgado, 95 S.W.2d 234 (Tex. 2002)(“a debt that indisputably arises from gambling should have no greater claim to judicial enforcement by confirmation of an arbitration award than by litigation. On the other hand, it is no more against policy to arbitrate whether a debt has arisen from gambling or some other activity rendering it unenrforceable . . than it is to litigate the same issue”); see also Easterbrook in Baxter Int’l v. Abbott Labs, 315 F.3d 829 (7th Cir. 2003)(whether the tribunal’s construction of the agreement has the effect of ordering a violation of positive law “was a question put to, and resolved by, the arbitrators.”).

    In my article called “Everything You Need to Know About Separability in Seventeen Simple Propositions,” 14 Amer. Rev. of Int’l Arb. 1 (2003), I say, “if there is a case just over the boundary, it must be one where the futility of waiting upon post award review is uncommonly self-evident—perhaps blended with the extra-added ingredient of a transaction malum per se.” That’s your case: Doctrine here, as in most cases, is perfectly capable of dealing with the problem if properly understood.

  12. Joe says:

    Please tell me this isn’t based on a real-life case.

  13. Lawrence Cunningham says:

    Prof. Rau–Thanks for the good points. They make clear that the overwhelming population of disputes don’t cross the boundary and arbitrators have unbridled power to determine whether a claim arises from an illegal bargain.

    Everything turns on notions like “indisputable” and “self-evident.” To many courts, it’s self-evident that money loaned at usurious rates is indisputably an illegal and unenforceable bargain. Yet SCOTUS, and cases like Delgado, make that an issue for an arbitrator to decide.

    Add a clearly legal promise by Mary to Paul to this fact pattern so that someone has to judge how much of the consideration is for murder. That decision, under the principle you mention and the cases you cite, is for the arbitrator alone. Judges aren’t allowed to review the resulting award. That may be fine, but we’re not in contract law any more.

  14. Alan Rau says:

    Lawrence: The “public policy” question is whether the agreement, as interpreted by the arbitrator, is an agreement that the parties themselves could have made. (“We must treat the arbitrator’s award as if it represented an agreement between [the parties,”] Eastern Associated Coal, 531 U.S. 57 (2000). But arbitral construction as to meaning is conclusive: So arbitrators can’t say that “a loan contract providing for 20% interest is OK” where the statutory maximum is less. They can’t say, to use Posner’s example, “to hell with Wisconsin law.” But they can say that “this contract is really not a loan at all but a lease,” or that “the proper calculation reveals that the effective interest rate charged is only 5%.” They can’t say, that “it’s OK to discriminate on the basis of race,” but they can say that “the employer did not discriminate here,” and their findings will be deferred to.

    So: I certainly didn’t say that there may not be hard cases. I merely said that your case, as posed, on the terms stated, was, doctrinally, very easy—not problematic.

  15. Jason Yackee says:

    To my mind the problem with the hypo is that the criminal illegality of the contract’s object is much too clear. It’s not at all like the famous Mitsubishi case, where there may–or may not–have been a Sherman Act violation, and where Blackmun said, very forcefully, that whether there was a violation or not was a question properly placed before the arbitrators, at least in the first instance. In the hypo, there is absolutely no question that the object of the contract is criminal. We should not exaggerate the extent to which the Court’s arbitrability doctrine “requires” it to submit the resolution of perfectly obvious questions to arbitration. I think it would be trivially easy to dispose of this case without even mentioning arbitrability. The Court could simply announce a perfectly reasonable rule saying something like “where a contract containing an otherwise enforceable arbitration agreement has as its central purpose a manifestly criminal transaction, it is obvious that the arbitration agreement is void as against public policy”.

  16. Lawrence Cunningham says:

    Prof. Yackee: I hope you and Prof. Rau are right, but see nothing in the Court’s separability opinions to support the hope. Here’s an excerpt from oral argument before the Court’s 2006 Buckeye opinion, reaffirming its 1967 Prima Paint opinion, both holding, without limitation, that questions of a contract’s validity, whether challenged as fraudulent or illegal, are for arbitrators, not courts, in the first instance.

    CHIEF JUSTICE ROBERTS: [W]hat’s wrong with the argument that when you’re dealing with a void contract . . . that the State policy is that you don’t enforce any aspect of it? [I]f you and I had . . . a contract for murder and it had an arbitration clause, it’s pretty strange to send that to an arbitrator and enforce part of that contract as opposed to saying that the contract as a whole is void.
    MR. LANDAU: Not really, Your Honor, in the sense that the . . . insight of Prima Paint . . . is that you treat the arbitration clause as separate from the underlying contract. . . .
    CHIEF JUSTICE ROBERTS: Do we usually ask arbitrators to enforce broader notions of public policy as opposed to the specific agreements of the party? . . . [I]f the reason the contract is void . . . has do with broad State public policy, . . . what’s . . . the best case you have for the notion that arbitrators enforce those types of constraints . . . ?
    MR. LANDAU: . . . the Mitsubishi case . . . all the cases that sent statutory [issues] to arbitrators . . . [T]he insight of the cases, really over the last 30 years in this Court, is that arbitrators are perfectly able and certainly have to be presumed to be able to decide legal and public policy questions. . . . So going back to your hypothetical, Mr. Chief Justice, if the — if the contract were to be, let’s say, for murder . . . that does not mean that a contract for murder gets enforced. That means that the arbitrator will decide whether the contract for murder is — is valid under State law . . . .

    http://www.supremecourt.gov/oral_arguments/argument_transcripts/04-1264.pdf

    Mr. Landau then explained that if an arbitrator did say a murder contract was valid, the other side would be able to file a lawsuit seeking to vacate it as being in manifest disregard of law.

    The Buckeye opinion doesn’t qualify, in any respect, the scope of its holding that challenges to a contract’s validity are for arbitrators in the first instance; it makes no distinctions among types of illegality, whether because of state laws against usury, as in that case, or murder, as in the Chief Justice’s question.

  17. Ken Rhodes says:

    CHIEF JUSTICE ROBERTS: [W]hat’s wrong with the argument that when you’re dealing with a void contract . . . that the State policy is that you don’t enforce any aspect of it? [I]f you and I had . . . a contract for murder and it had an arbitration clause, it’s pretty strange to send that to an arbitrator and enforce part of that contract as opposed to saying that the contract as a whole is void.
    —–
    I am delighted that, unbeknownst to me, the Chief Justice said the identical words four years ago that I wrote in comment number four. But now it seems from this thread that perhaps the Chief Justice and I were both wrong, and that the subject of “separability” has overruled what seems to us like simple logic.

    Professor Cunningham, could you add a comment here for all of us non-lawyers addressing this question:

    It seemed to Chief justice Roberts (and me) that a piece of paper is only a valid contract under certain circumstances and that, lacking those requirements, is merely a piece of paper. So in this hypothetical, I present a piece of paper purporting to be a contract. One of the key elements of a contract–a legal purpose–is absent. Elsewhere on the piece of paper it says any disputes will be settled by arbitration. How is it that the paper fails to meet the test of a valid contract, yet something that is written on the paper prevents the court from so ruling, instead requiring that the piecce of paper be referred to an arbitrator to discover that it is not a valid contract?

    I suppose what I’m asking for is a brief explanation of the logic in the Buckeye opinion that overruled the logic implied in Chief Justice Roberts’ question.

  18. Ken Rhodes says:

    Professor Cunningham, I think I have found the answer to my specific question above, and also to the more general issue raised by your post.

    http://www.lawmemo.com/arbitrationblog/2006/02/buckeye_v_carde.html

    Specifically, SCOTUS ruled that:

    First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Prima Paint.

    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. Prima Paint.

    Third, this arbitration law applies in state as well as federal courts. Southland.

    So the answer lies in “substantive Federal arbitration law” which delineates “severability,” wherein the arbitration clause survives the challenge to the validity of the remainder of the piece of paper, and becomes (in effect) a separate and valid contract in itself. And the terms of *that* contract specify that the remainder of the “piece of paper” be adjuticated by an arbitrator, not a court.

    Also, BTW, that ruling was essentially unanimous. The only dissent in the 7-1 decision was Justice Thomas’ view regarding jurisdiction, that the Federal Arbitration Law did not apply in state courts.

  19. Lawrence Cunningham says:

    Ken: The question is who decides whether the piece of paper is a valid contract. A judge is a good answer, as your comment, CJ Roberts’ question and longstanding history suggest; an arbitator is an alternative answer, and the one the Supreme Court repeatedly gives, including in Buckeye.

    The Buckeye logic is based on a 1925 federal law designed to make judges accept that arbitrators can be as good as judges at making those decisions. As other comments above indicate, the rationale of the Court’s stance is how almost any objection to a contract can be seen to say it’s invalid. If all those objections had to be decided by a judge, the place for arbitators would diminish dramatically, which the Court thinks the federal law was designed to prevent.

    The fighting issue is whether there is any class of cases where that decision must be entrusted to a judge, not an arbitrator. Comments by Profs. Rau and Yackee are confident that there is such a class, and it includes pure contracts for murder like this. They observe that the Court’s approach lets arbitrators decide a range of validity challenges, but none anywhere nearly as repugnant as the murder hypo. My concern is that, though that sounds right in principle, the Court’s written opinions express unqualified exuberance for letting arbitrators decide.

  20. Lawrence Cunningham says:

    Ken–My comment 19 replied to your comment 17, in non-technical terms; I subseuqently read your 18, which provides an excellent summary (though quite legally technical!).

  21. AF says:

    This is an excellent hypothetical. It does seem that, under existing precedents, the arbitrator would determine arbitrability.

    However, you lose credibility when you assert that a court would enforce the award. Obviously, that is not the case. Despite the extreme deference given to arbitrators, their discretion does not include the discretion to enforce a contract to perform murder and no court would hold that it does. And there would be nothing in such a opinion covert or inconsistent with existing law. As you ackowledge, existing law states that courts can refuse to enforce arbitration awards in extreme cases.

  22. Lawrence Cunningham says:

    AF: Thanks. Supporting your first point, that’s probably been so since at least 1990, when the DC Circuit in a dispute between Amtrak and Conrail (892 F.2d 1066, 1071) wrote:

    “Amtrak asks us to ‘[s]uppose two private parties enter into an agreement, including an arbitration clause, to commit some illegal or immoral act (e.g., a contract for money-laundering or murder.)’ Although it assures us that it would be absurd for a court to compel the arbitration of a dispute arising from such a contract, we do not think it would be at all out of the ordinary.”

    Supporting your second point, the court added:

    “If the arbitrator construes the contract so as to require someone to commit an illegal act, a court can then refuse to enforce the arbitrator’s decision.”

    Defending the post’s credibility, it’s worth wondering whether it’s a good idea to have arbitrators instead of judges make those decisions and worth noting that there’s nothing inevitable about judicial review after an arbitrator makes a decision.