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).

Hat Tip

Inspired by the casebook by Kathy Stone and Richard Bales, Arbitration Law (2d ed. 2010) at pp. 405-410.

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8 Responses

  1. Jaundiced Eye says:

    How about UCC 2-210(5) as the relevant NY Sales law?

  2. Lawrence Cunningham says:

    Jaundiced Eye: Thanks. I should have addressed that. In New York, the referenced part of the sales law appears as 2-210(4) [NY dropped one of the sub-sections from the UCC’s model]. Like that model, it looks more like the Restatement, with an exception for cases, like this one, that involve an assignment for security in a financing transaction. So the post’s analysis remains right but should have mentioned these points. My post could have offered as a clearer example any transaction other than goods. Here is 2-210(4) in New York, applicable to transactions in goods:

    (4) An assignment of “the contract” or of “all my rights under the contract” or an assignment in similar general terms is an assignment of rights and unless the language or the circumstances (as in an assignment for security) indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. This promise is enforceable by either the assignor or the other party to the original contract.

  3. Ed says:

    A few off the cuff thoughts:

    I don’t see much of a section 2 problem here. The fact that such an interpretative rule doesn’t have application to every type of contract can’t mean that it’s use here would offend section 2. Suppose a state passed a law that applied a more consumer friendly standard for unconscionability to all contracts for the sales of goods, but left the more rigorous common law standard for all other contracts in place. I have trouble seeing 5 votes on the Supreme Court say that applying that lower unconscionability standard to an arbitration clause in a sales contract offended section 2. Also, doesn’t Arthur Anderson also say the relevant state law should be applied to decide these types of third party “nonsignatory” questions and dispel the notion of any common law of federal arbitrability? So even if there were a preemption problem here, what would a court apply as federal law– some sort of a common law federal arbitrability doctrine based on the Restatement? Look to federal case law prior to Anderson? I also don’t think it works to just say the federal law is that “any doubts about the scope of arbitrable issues is resolved in favor or arbitration.” Doesn’t the presumption only apply when the challenging party have concededly entered into an agreement to arbitrate something? Here, the bank is technically saying it never agreed to arbitrate anything with the buyer, so I don’t think that works.

    That said, I don’t see why the bank should escape arbitration here. I have no idea what NY law is, but I would think a court may very well use the doctrine of “direct benefits estoppel” to conclude that the bank had to arbitrate. Suppose the bank were sued in a plaintiff-friendly court by the buyer, and the bank then wanted to invoke the arbitration agreement, claiming that arbitration was a “benefit” or “right” that it was assigned. Should it be able to do so there? But then if buyer brings a claim against the bank in arbitration, can the bank also claim that the it was only assigned “benefits” or “rights” but not the “obligations” under the contract, and avoid arbitration? Now maybe NY doesn’t recognize that idea (or it requires the bank to bring a claim for affirmative relief) but I wouldn’t be as confident that the bank could escape arbitration simply based on the assignment law cited here. My bottom line is that regardless of whatever the legal doctrine deployed, I think we have sufficient indicia of consent on the part of the bank in taking an assignment of a K with a broad arbitration clause that’s not limited only to specific parties to conclude that it agreed to arbitrate the claims against it by the buyer.

  4. Lawrence Cunningham says:

    Ed: Thanks. Regarding estopping the bank, my concern is that where state law treats assignments as creating an option contract (as here, all rights no duties) federal arbitration law may impose duties too. This is one of a dozen examples I am documenting of a rhetoric-reality gap in federal arbitration jurisprudence: how it uses the rhetoric of contracts and contract law while in reality applying rules at odds with that.*

    Regarding not seeing five votes on SCOTUS to preempt a state law that applies unconscionabiltiy doctrine differently in consumer compared to commercial contracts, I am eagerly awaiting the Court’s opinion in AT&T Mobile v. Concepcion which should address that point (or at least state a test for making the determination).**

    Regarding Arthur Andersen, that is another example of the rhetoric-reality gap. The Court said it was applying long-settled third party beneficairy law to allow strangers to a contract to enforce it when, in fact, the sole citation for the assertion was a broad general statement in the Williston treatise about the many doctrines, mostly equitable, courts have used to deal with third-party situations. Nothing in the law of contracts supports what the Court said or did in that case, as the dissent pointed out.

    With another hat tip to the Stone & Barnes casebook, after considering the subject (at p. 418) they ask if federal arbitration jurisprudence, which does include several presumptions favoring arbitration, commands that states grant third party beneficiary status “whenever there is a colorable claim” to that standing and then ask, poignantly, “If so, what happens to the bedrock principle that arbitration is grounded in consent of the parties.” Id. My answer, in an article I am writing documenting the rhetoric-reality gap: that “bedrock principle” is more rhetorical than real.*

    * See my blog post:

    ** See my blog post:

  5. Ed says:

    Thanks, Lawrence.

    I would certainly agree that some SC arbitration opinions seem result oriented or just way off the mark (e.g., Stolt-Nielsen and Hall Street. I understand, even if I don’t agree with, the result in Stolt-Nielsen; I’m truly baffled by the court’s position in Hall Street).

    I take it from your summary of the oral argument in AT&T that you think the Concepcions are likely to win? Why do think there isn’t more support for AT&T’s position on the court given the Court’s pro-business proclivities?

    Also, a few points just for consideration.

    My understanding is that the federal arbitration case law allowing/compelling nonparties to arbitrate was a creature of federal circuit courts (and also some state courts), and didn’t really ever have a blessing from SC jurisprudence. (Indeed, if anything, wasn’t it at least arguably contrary to Perry v. Thomas?) And so it seems to me that we can’t blame the SC for the expansion of these nonsignatory doctrines even if we don’t like them, especially since the Court in Andersen went out of its way to reject the notion of a federal common law of arbitrability on the question of whether someone is bound by a particular arbitration agreement. (Wouldn’t it have been much easier and more “pro arbitration” for the SC to endorse an expansive federal common law of non-signatory arbitrability jurisprudence that the circuit courts have been engaging in for years, and which would have officially preempted state law to the contrary? Or it least not address say so specifically that it was a state law issue and leave federal circuit arbitration jurisprudence where it was?)

    So at least post-Andersen, I don’t see how there is any federal body of arbitrability on these non-signatory questions that would supersede state law. If that’s right, then the estoppel issue in this hypo would simply be how NY state law deals with this issue in your example. You might not agree with however NY law would address this issue (i.e whether it would apply the assignment canon you discuss or whether it might deploy an estoppel theory to bar the bank from being allowed to invoke or reject the arbitration clause after its been sued depending on its preferred forum), but I don’t think we can blame the SC for creating some federal body of non-signatory arbitrability that would answer that question.

    I’m also confused by the casebook discussion (is it pre-Andersen?), since I don’t see how the presumption in favor of whether issues are arbitrable can be stretched to cover the question of whether someone is bound by an arbitration clause they claim they never adopted. How can federal arbitration law can “command” third party beneficiary status if there is a “colorable” claim, after First Options, much less Andersen? Don’t we have to look purely to state law on these doctrines without putting our thumbs on the scale with any federal presumptions in favor of arbitration?

    It seems to me that the presumption of arbitration makes some sense when you’re talking about )i) whether to presume that parties intended to resolve particular disputes in the actual forum that they specified in their forum selection clause and (ii) given the prospect of having parallel litigation/arbitration over the same issues and the potential preclusion problems that would result. The presumption makes very little sense, however, in deciding whether a party is bound by a clause to which they claim they are a stranger.

  6. Lawrence Cunningham says:

    Ed—Thanks again.

    Lower federal courts may have originated the non-signatory jurisprudence and the Arthur Andersen Court did repeatedly say that state contract law on third party beneficiaries governs. But then its application of that doctrine varied markedly from the common law’s conception of it. I take this as illustrating a rhetoric-reality gap that requires explanation and assessment.

    Explanations follow from the Court’s assertion of a national policy favoring arbitration, a policy that serves the interests of federal judges. A jurisprudence stressing a national policy favoring arbitration cannot be sustained in a world of true freedom of contract and state contract law. Yet it must be tethered to contractual notions of assent, to be congruent with constitutional and civic impulses about adjudication, and tethered to state contract law, to assuage federalism objections.

    In my assignment hypothetical, I am not objecting to how New York law would apply, because my reading of that law is that it would not hold Bank duty-bound to arbitrate. But I worry about how a federal court emulating the Supreme Court could say it was applying New York contract law while deciding Bank was duty-bound, by an imaginative re-reading of that contract law to suit the national policy favoring arbitration.

    If guaranteeing maximal arbitration were the only thing at stake for a “pro-arbitration” Court, I agree with you that it would “have been much easier” for the Court “to endorse an expansive federal common law of non-signatory arbitrability . . . which would have officially preempted state law to the contrary.” But that would undermine the serious and important effort of insisting that the national policy and related federal jurisprudence is based on contractual assent in accordance with traditional contract law.

    Jurisprudential success in these terms includes inducing belief that there is no federal body of arbitration law governing these non-signatory questions. That is my take on the passage from the casebook. (It was published the same year as Andersen but does not mention it at all.) The “command” may be tacit, the “colorable” claim in third party beneficiary cases being akin to other federal arbitration jurisprudence presumptions dating to 1983’s Moses Cone case declaring that ambiguity in the scope of an arbitration clause is presumptively interpreted to favor arbitration.

    The Court’s rhetoric suggests as you do, to “look purely to state law on these doctrines without putting . . . thumbs on the scale with any federal presumptions in favor of arbitration.” Alas, the rhetoric-reality gap I am detecting contradicts that purity, creating gestures towards to state law followed by applications advancing a national policy. The examples of legitimate presumptions that you mention enable relatively ready squaring between contract/contract law and national policy/federal jurisprudence. One problem I am documenting is that current trends in the Court’s jurisprudence make the rhetoric-reality increasingly obvious and therefore increasingly unsustainable.

    Finally: AT&T is a close case, with conflicting vectors: the pro-business tilt of Alito and perhaps of Roberts explain my prediction about them; despite being pro-business, Thomas puts federalism first, Scalia is inclined to that, and Kennedy could be persuaded, once this deep into preemption of state contract law. Breyer does not like to tread there and I can see the three New Yorkers taking that tack too. But the prediction I made was based primarily on who seemed to win the oral argument that day.

  7. Ed says:

    Thanks for your thoughts.

    There’s no doubt that the courts have and will continue to conflate the ‘presumption of arbitrability’ with the threshold question of whether someone has effectively consented to the arbitration process in the first place. (Some have also failed to grasp what law should apply to that determination. See 5th Circ. in Noble Drilling v. Certex, direct benefits estoppel case issued in September of this year stating, “We note that the application of estoppel to compel Noble to arbitrate is governed by federal law in this case.” (citing Wash. Mut. Fin. Group, L.L.C. v. Bailey, 364 F.3d 260, 267 n.6 (5th Cir.2004)).

    That said, I’m still not sure how much any of this is the really the SC’s fault, and how much of it is lower courts getting confused and misapplying doctrine. And I’m not sure how much we can really blame the Andersen court for applying equitable estoppel doctrine in a different way than the common law’s conception of it. While I can’t vouch for the Williston cite, it is clear that both state and lower federal courts have been applying equitable estoppel for decades before Andersen, and so I’m not sure how much a departure from common law doctrine there really is in Andersen, especially since they left the application of it to be handled on remand. (Now perhaps the lower courts and state courts have been wrong in applying equitable and direct benefits estoppel under state or federal arbitrability law pre-Andersen, but I don’t we can ignore the fact that those decisions are out there and surely count as part of the common law. It’d be interesting to go back and look at the earliest of these estoppel cases to see what they cited. And I’m pretty sure the earliest ones were before Cone, so I don’t think they could have relied on its statement on presumptions in favor or arbitration).

    Anyway, my sense at least is that the SC went out of their way to make it state law based on at least a few of the justices federalist instincts and because the majority actually did see it as a essentially a formation question that should be addressed by state law. (It could also be because they didn’t want to see any more cert petitions asking them to how to apply these non-signatory theories as a matter of federal law.) I also think that they weren’t terribly worried for the business community as a whole on something like this since these nonsignatory cases are on the whole a small number of cases and don’t threaten to destabilize the practice of arbitration in the business community in any real way. If they did, they I think you would have been much likely to see an opinion affirming that this stuff is actually a matter of federal arbitrability law and state doctrine to the contrary is preempted. (Cf. Southland, Buckeye; Rent-a-Center).

  8. Ed says:

    Lawrence, I forgot to ask you if your upcoming article will have a discussion on Hall Street in covering the disingenuity of the court’s “freedom of contract” rhetoric. What do you think was driving the court in that case?

    Also, apropos of your murder contract post, did you see Justice Hecht of the Texas Supreme Court’s recent concurrence in the Olshan case? The underlying illegality here is obviously not as egregious, but I suppose this is a plausible way that a court might handle the scenario if there was some sort of non-laughable basis for an arbitration in your murder case.