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).
11. Contracts: 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.
12. What’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.