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The judiciary’s historic animus toward arbitration may have stymied consenting adults from deciding how to enforce their contracts, but it also ensured an element of stability when things broke down — the parties could at least be certain that a judge would decide their dispute. In the new age of arbitration, by contrast, a dispute may leave even the forum in doubt. If a party contends that a contract is invalid, can that party be compelled to submit to arbitration on the strength of a clause in that very contract? A recent 6th U.S. Circuit Court of Appeals case, Burden v. Check into Cash of Kentucky LLC, No. 00-5807, highlights the different ways the circuits have answered that question. A 1967 U.S. Supreme Court decision, Prima Paint Corp. v. Flood & Conklin Mfg. Co., sets the terms of the debate. In that case, Prima Paint accused its opponent of making false statements about its financial health during contract negotiations. Because “fraud in the inducement” rendered the entire contract invalid, Prima Paint argued, the company could not be held to an arbitration clause within that contract. Disagreeing, the Supreme Court held that Congress’ directive to the courts to honor arbitration clauses, as embodied in the Federal Arbitration Act, meant that an arbitrator would have to resolve the entire dispute, including the issue of whether the contract containing the arbitration clause was valid. In effect, the Court severed the arbitration clause from the rest of the contract, treating it as a free-standing contract. Because Prima Paint never alleged that Flood & Conklin used fraud to get Prima Paint’s consent to the arbitration clause, the clause would stand. Prima Paint did not exhaust all of the permutations, though. What if a party claimed not only that a contract was invalid, but that he had never signed it? Last year, in a 3rd Circuit case, Sandvik A.B. v. Advent Int’l Corp., Advent simultaneously argued that the agent who put the company’s name to a contract had no authority to do so and that the contract’s arbitration clause should be severed and enforced nonetheless. The 3rd Circuit refused to enforce the clause, holding that a contract that never actually existed could confer no authority on an arbitrator. As the 7th Circuit put it when seconding that holding in a recent opinion, Sphere Drake Ins. Ltd. v. All American Ins. Co.: “No contract, no power.” Three other circuits, the 8th, 9th and 11th, have also held that Prima Paint severance did not apply to a contract that never existed. Two of those circuits — the 3rd and the 9th — have suggested that arbitration clauses can be severed only if the contract is “voidable” (valid unless challenged), but not if it is “void” from its inception. Under that formulation, a contract that both parties acknowledge signing would not yield a severable arbitration clause if, for example, the contract as a whole violated public policy and was deemed “void ab initio.” In a 1986 case, Mesa Operating L.P. v. Louisiana Intrastate Gas Corp., the 5th Circuit rejected that reasoning, holding that Prima Paint applied even to a gas sales contract that would be deemed void because it violated a state statute. However, that court has not considered the watershed situation found compelling by other courts — a contract that is void because of a defect in its making. In its first take on this issue in 1990, the 6th Circuit questioned the utility of the void/voidable distinction and ruled instead that arbitration clauses should be severed so long as there was no allegation of a defect in their making, such as a missing signature, a lack of authorization or a fraudulent inducement of the clause itself. Oddly enough, in the Burden decision, the 6th Circuit seemed poised to reverse itself. Without deciding the issue, the court said that it was now inclined toward the view that a void contract conferred no authority on an arbitrator, regardless of whether the defect was in the making. Oddly, a case arising out of the Alabama Supreme Court, rather than one of the circuits, presented the high court with the opportunity to resolve questions about the scope of Prima Paint. However, the U.S. Supreme Court denied certiorari for American Gen. Finance Inc. v. Branch, no. 1990887, on Oct. 9.

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