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Who Decides the Validity of Your Contract?

By Peter J.W. Sherwin and Kenneth E. Aldous
May 30, 2006

Who do you turn to if you believe that an agreement is invalid? Should it make a difference if the agreement contains an arbitration clause? If it does have such a clause, can you nonetheless walk into court and have a judge decide? Or must the dispute go to arbitration? The Catch-22 is this: If an arbitrator were to determine that the agreement is invalid, the arbitrator logically would seem to have no jurisdiction over the matter to start with, because the arbitration clause therein should be invalid too. But if you were to litigate that dispute in court, and a judge determined that the agreement is valid, then an arbitrator should have resolved all disputes pursuant to the arbitration clause therein.

Although the inclusion of arbitration clauses in commercial contracts is a long-standing and prevalent business practice, both state and federal courts in the United States have struggled for some time to determine precisely how, and by whom, those clauses and contracts should be interpreted and enforced. Recently, in Buckeye Check Cashing, Inc. v. Cardegna, the United States Supreme Court stepped into the fray. __ U.S. __, 126 S. Ct. 1204 (Feb. 21, 2006) (Scalia, J.). In a 7-to-1 decision (Justice Alito took no part), the Court ruled that, under the Federal Arbitration Act, 9 U.S.C. ”1-16 (FAA), a general challenge to the validity of a contract as a whole, as opposed to a specific challenge to an arbitration clause within it, has to be decided by an arbitrator and not a court. The Court also held that the ruling applies in state court too, as long as interstate commerce is implicated.

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