Pop Quiz on Contracts and Arbitration
This is a pop quiz, suitable for any lawyer plus students and teachers of contracts and arbitration–and anyone interested in the immense power and discretion of the United States Supreme Court. The facts are:
Buyer and Seller sign a contract for the sale of goods. It says “any disputes arising under the contract shall be submitted to arbitration.” To finance its business, Seller transfers the contract to Bank, saying Seller “assigns the contract” to Bank. Buyer pays Bank the purchase price and later finds the goods defective. It files a claim in arbitration against Bank, which Bank resists.
Who wins the dispute over arbitration, Bank or Buyer, under: (a) New York contract law, (b) general contract law applicable in many states, as set forth in the Restatement (Second) of Contracts, and (c) federal arbitration law?
(a) Under New York contract law, Bank wins. Bank is not bound to the arbitration clause because, under century-old New York contract law applicable to assignments, assignees assume only such duties as they expressly accept. The language of assignment, “assigns the contract,” does not manifest that Bank intended to accept any duties, including any duty to arbitrate.
(b) Under the Restatement (Second) of Contracts, Buyer wins. It has long stated the presumption opposite that of New York: ambiguous contractual expressions of assignment, such as “assigns the contract,” are deemed both an assignment of rights and an assumption of duties. (A caveat applies to land sale contracts, which nods to the New York law presumption requiring express assumption of duties.)
(c) Under federal arbitration law,
the case is more complicated, but Buyer probably ultimately wins, even if New York contract law applies. A threshold issue is whether the arbitration dispute itself should be resolved by an arbitrator or a court. For 15 years, the US Supreme Court has said such threshold matters are for a court to decide (unless the parties “clearly and unmistakably” say otherwise). So the court will make that call.
But for nearly 30 years, the Court has said that ambiguities about such scope questions are resolved in favor of arbitration. That, of course, would be consistent with the contract law stance staked out in the Restatement but would contradict New York law.
Another two-generation old SCOTUS rule holds that no state is allowed to have any legal principle applicable to arbitration clauses that is not applicable to “any contract.” The Court has so far taken a literal approach to that phrase, though doing so in easy cases, such as a law that was only applicable to arbitration clauses. This case shows coming problems for the Court, which it may be grappling with as it writes its opinion in the pending case, AT&T Mobile v. Concepcion.
Here, the issue is whether New York contract law of assignments applies to “any contract.” If so, it is valid and Bank wins; if not, it is preempted and Buyer wins. Of course, the answer is both yes and no. The answer is “no,” the New York law does not apply to “any contract,” because it only applies to contracts that have been assigned using language ambiguous about whether parties intended to assign rights only or also delegate and assume duties. The answer is “yes,” the rule applies to “any contract,” because it potentially applies to any contract that is assigned in that manner.
Though this appears to be a thorny issue, it is easy to predict the Court’s bottom line. Its jurisprudence in this field invariably favors arbitration over anything else, including state contract law or party intent. It would conclude that the arbitrator should decide and therefore the Buyer should win. It would then justify that result by explaining that the law of contracts and this particular contract require that result. It would thus contribute another illustration of the great gaps in federal arbitration jurisprudence between the Court’s contract rhetoric and reality.
State Contract Law: Kaufman v. William Iselin & Co., 74 N.Y.S.2d 23 (N.Y. App. Div. 1947) (drawing on Langvel v. Betz, 164 N.E. 890 (N.Y. 1928); Gruntal & Co. v. Steinberg, 854 F. Supp. 324 (D.N.J. 1994) (applying New York law and citing Kaufman and other cases); Restatement (Second) of Contracts § 328.
Federal Arbitration Law: First Options v. Kaplan, 514 U.S. 938 (1995); Moses H. Cone Memorial Hospital, 460 U.S. 1 (1983); Perry v. Thomas, 482 U.S. 483 (1987); Doctor’s Associates, 517 U.S. 681 (1996).
Inspired by the casebook by Kathy Stone and Richard Bales, Arbitration Law (2d ed. 2010) at pp. 405-410.