A Dozen SCOTUS Anti-Contract Arbitration Rules

As noted in a recent post, since the 1980s, the U.S. Supreme Court in dozens of decisions has decided that the country has a national policy favoring arbitration over litigation. It discerns that policy from a 1925 statute that expresses no such national policy.

The Court’s injection of federal power into territory long the prerogative of the states has been heavily criticized for many years, especially by Prof. Schwartz.  Scholars debate the legitimacy of its jurisprudence from the perspectives of statutory interpretation, federalism, and the relative fairness or efficacy of arbitration compared to litigation.

Less attention has been given to contract law issues in the Court’s arbitration jurisprudence. True, some scholars (like Prof. Ware and Prof. Rau) identify doctrinal infirmities or puzzles in the Court’s cases. Some, especially Prof. Ware, have noted how the Court’s talk of the contractual basis of arbitration is sometimes at odds with the jurisprudence it lays down. But this contribution to the literature compared to other aspects seems both more muted and less comprehensive.

As noted in the linked post, the Court routinely announces things like “arbitration is a matter of consent, not coercion.” (Volt 1989, Rehnquist.)   But the body of rules it has established demonstrates a greater degree of federal judicial coercion than traditional consensual freedom manifest in the common law of contacts.

I’ve identified a dozen examples—general and specific—of occasions when the Court’s federal arbitration jurisprudence is at odds with the common law of contracts. The discrepancies include overt commitments the Court has made to the federal policy; covert values the Court has injected into its policy; and more narrow but surprising misstatements of the common law of contracts.

In the following sampling of differences, I use the shorthand Contracts to refer to the common law of contracts and Court to refer to the Supreme Court’s federal arbitration jurisprudence (or particular Justices when writing concurring or dissenting opinions).  Cases are cited informally, followed by principal author and year. 

1. Contracts: makes no presumptions about whether ambiguous language should be construed to favor or disfavor arbitration or litigation.

Court: requires doubts about the scope of issues covered by an arbitration clause to be resolved in favor of arbitration. Moses H. Cone Memorial Hospital (Brennan, 1983).

NB: That may be fine, but it is a statement of public policy, not private contract. See Corbin on Contracts, Section 515.

2. Contracts: takes a contextual approach to determining the effects of the invalidity of a given clause on the rest of a contract, having due regard for the manifest intentions of the parties and their course of performance.  See Farnsworth on Contracts, Sections 5.7-5-9; Restatement (Second) of Contracts, Section 184.

Court: imposes a rigid separability rule, so that the existence of an arbitration clause, even in an illegal bargain, makes disputes over the bargain’s validity a question for arbitration, not a court. Prima Paint (Fortas, 1967), Buckeye (Scalia, 2005), Rent-A-Center (Scalia, 2010).

NB: Again, that is an expression of federal judicial preferences, not contractual volition. Scholars have given considerable attention to this problematic doctrine.

3. Contracts: contains no general principles requiring intention to be manifested with any greater or lesser clarity concerning particular subjects.

Court: requires that an intention to have an arbitrator decide whether a particular matter should ultimately be decided by arbitration or trial must be shown “clearly and unmistakably.” First Options (Breyer 1995), Howsam (Breyer, 2003).

NB: This is likewise part of a framework established by the Court, not showing respect for freedom of contract. Scholars have likewise paid considerable attention to this line of cases, including wondering how it squares with the Court’s separabilty rule.

4. Contracts: treats choice of law clauses as adopting the laws of the jurisdiction named, without distinguishing among types of laws within the jurisdiction.

Court: has read such a clause to adopt some but not all of a state’s laws, leaving out those governing remedial powers arbitrators have. Mastrobouno (Stevens, 1995).

NB: The Court had in an earlier case shown respect for such choices of law more akin to the principle of freedom of contract, though even then was prepared to declare chosen state law preempted if the Court thought it did not agree with federal policy. Volt (Rehnquist, 1989).

5. Contracts: the central value of freedom of contract is reflected in a commitment to ascertain the intentions of the parties and to establish interpretive methods in accord with the contemplation of parties.

Court: expressly rejects that test by saying federal jurisprudence governs all contracts involving interstate commerce as Congress and the Court define that concept, rather than as parties to a contract may have contemplated their bargain. Allied Bruce (Breyer, 1995).

6. Contracts: is a rich and dynamic body of law applicable to the infinite variety of voluntary exchange transactions, with the result that an abundance of doctrines or rules may apply only to some contract types rather than to all contracts or any contract.

Court: reads a 1925 statutory phrase referring to “any contract” to mean that no state may have a law applicable to arbitration clauses that is not also applicable to “any contract.” Southland (Burger, 1984), Doctor’s Associates (Ginsburg, 1996).

NB: Scholars have spent considerable energy debating this statutory phrase and how it should be read; was an important sub-theme at the Court’s recent oral argument in the pending case, Concepcion v. AT&T Mobility.

7. Contracts: mutual mistake warrants rescinding a contract when parties were both mistaken about a basic assumption of their bargain

Scalia (dissenting in Allied Bruce, 1995): if the Court overrules its 1984 opinion preempting state contract law with federal arbitration law, parties with contracts made based on that law could rescind them citing mutual mistake.

NB: Scalia is correct that mutual mistakes of law can warrant rescission but just because the Court made a mistake it later wishes to correct does not remotely mean that parties making contracts based on that law were mistaken.

8. Contracts: indefiniteness of material terms can prevent a contract from being enforceable.

Court: silence on how arbitration costs would be shared treated as “plainly insufficient” to render a contract unenforceable, with no recognition of such contract law basics. Randolph (Rehnquist, 2000).

9. Contracts: gaps in incomplete contracts can be filled using default rules identified based on customary business practices, so long as consistent with manifest intentions.

Court: a clause committing to arbitration without distinguishing between bilateral or multilateral arbitration cannot be read to include multilateral. Stolt-Neilsen (Alito, 2010); cf. Bazzle (Rehnquist dissent, 2003).

10. Contracts: third party beneficiary doctrine recognizes that strangers may enforce contracts only in narrowly limited circumstances when parties to contract manifested intention to grant them such rights.

Court: professional advisors may enforce contract, to which they were not parties, between client and management company, erroneously suggesting expansive scope of third party beneficiary doctrine. Arthur Andersen (Scalia, 2009); cf. Arthur Andersen (Souter, dissenting, rightly noting that third-party beneficiary doctrine was thin basis for majority’s opinion yet still overstating doctrine’s scope).

11Contracts: people are usually free to make bargains on any terms they wish and have courts–or arbitrators–enforce those terms.

Court: people are not free to make bargains calling for disputes to be resolved by arbitration subject to judicial review for whether the arbitrator’s decision was consistent with law.  Hall Street Associates (Souter, 2008).

Upshot: People are free to agree in their contracts to arbitration–so long as the Supreme Court thinks that their agreement is consistent with what the Court thinks is the national policy.

12What’s Next?  The Court’s forthcoming opinion in the AT&T case will be interesting to read and to scour for errors or misstatements of contract law.

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2 Responses

  1. Alan Rau says:

    An interesting post: What it may not capture, though, is the extent to which default rules are already part of our regime of the “common law of contracts”; although we sometimes forget that they are omnipresent, they reflect, or ought to reflect, conscious choices that are context-dependent. Thus, we may choose a particular default rule in circumstances where we want to mimic the parties’ most likely bargain—or in circumstances where we want to put the burden on drafting parties to contract around the most efficient solution. (These usually amount to the same thing—as it is sensible to attribute to contracting parties the desire to act in such a way as to reduce costs, thereby creating gains from trade.)

    This, then, readily explains, without more, your point #2 (“Separability” is indeed a strong default rule, and can be defended as such—but there is nothing impossibly “rigid” about it—-as illustrated by the hundreds of cases dealing with so-called “narrow” arbitration clauses). It also probably explains without difficulty your points #1 and #3.(The English cases here talk about the presumed desirability for the parties of “one stop adjudication”).

    #4 is really not about “contracts” at all—but it does raise the question of what a choice of law clause is supposed to do. Such clauses discriminate horizontally among different state laws, or among co-archical national laws. Mastrobuono reflects the banal insight that such clauses in contracts are not usually thought to have anything whatever to do with the vertical choice between state and federal law.

    # 9 and #11 [Hall Street and Stolt-Nielsen] strike me, not as departures from “the common law of contract,” but as departures from the usual purposes and policies of arbitration law itself—which is why both cases are decried and objected to by proponents of arbitration with whom you seem to have little else in common.

    Thanks; I enjoyed this.

  2. Lawrence Cunningham says:

    Prof. Rau,

    Thank you! What most interests me is comparing how the Court describes its arbitration jurisprudence (heavy rhetoric stressing that it is all about contract, contract law, and consent) versus the rules it has actually developed and applied (more influenced by national policy favoring arbitration that it repeatedly asserts).

    Applying default rule theory as you suggest underscores the differences. Most contract default rules are majoritarian or tailored—what most parties or the particular parties likely would prefer based on the contract they made (e.g., expectancy damages, construing the contract as a whole, few third party beneficiaries). There are a handful of penalty defaults and immutable defaults—based on public policy (e.g., punitive damages, statute of frauds).

    In its arbitration jurisprudence, the Court used such analysis when Breyer in First Options (and Howsam) (#3) distinguished between construing ambiguity on whether an issue is within an arbitration clause to favor arbitration versus insisting on clear intent to submit the decision about that question to arbitration.

    The Court showed no such interest in party intent, real or presumed, in its original statement of the ambiguity resolution rule (Brennan in Cone)(#1) or its contemporary severability opinions (both by Scalia—Buckeye and Rent-A-Center) (#2). In those and others (#4-8, #10), the chosen default rules are based more on what the Court sees as a national policy than actual or presumed intent.

    My primary interest in the rhetoric-application gap points to a feature of both the jurisprudence and literature that you suggest when referencing Hall Street and Stolt-Neilsen (#9 & #11): both seem to pivot more on opinions about arbitration versus litigation than about what parties to contracts contemplate or intend. That may be fine, but if true it is a curiosity that the Court’s rhetoric so emphatically and repeatedly asserts it is doing nothing but contract analysis when, in fact, it is doing social control.

    Your article, Fear of Freedom, used a pithy quotation that is relevant here:

    “One keeps saying the same thing, but the fact that one has to say it is eerie.” Elias Canetti, The Human Province 246 (1978).

    I can add two others:

    “It is always a matter of the highest interest when courts—like people generally—say one thing while doing its opposite.” –Grant Gilmore, The Death of Contract (1970), p. 2.

    “The [Court] doth protest too much, methinks.” Hamlet, Act III, scene 2.