The United States Supreme Court Revisits and Reaffirms Rule That Arbitrators, Not Courts, Should Ordinarily Decide Whether Contract is Valid

On February 21 2006, the United States Supreme Court issued a pro-arbitration ruling that answered an important question:  who decides whether a contract is void – the arbitrator, as provided in the contract itself, or the court, upon being requested to compel arbitration?  In Buckeye Check Cashing, Inc. v Cardegna, No. 04-1264, 2006 U.S. LEXIS 1814, (Feb. 21, 2006), the United States Supreme Court held that the arbitrator decides, even if that means that a court may enforce the arbitration provision of a contract (by compelling arbitration) that an arbitrator later determines to otherwise be void. 

In Buckeye, the plaintiffs brought a putative class action against Buckeye Check Cashing, claiming that Buckeye allegedly made illegal usurious loans disguised as check cashing transactions.  When the defendant sought to compel arbitration, the plaintiffs argued that the contract was void and that the arbitration clause contained therein should therefore not be enforced.  The Florida Supreme Court decided that 'if the underlying contract is held entirely void as a matter of law, all of its provisions, including the arbitration clause, would be nullified as well.' The Florida Supreme Court reasoned that 'contracts which are determined to be against public policy and void should not be enforced' – and distinguished it from circumstances where the arbitration clause could be severed if the entire contract was merely 'voidable' (eg, under a theory of fraud in the inducement of the entire contract).

Justice Scalia, writing for the majority of the United States Supreme Court, held that the Florida Supreme Court had failed to adhere to the teachings of the Supreme Court in the Prima Paint and Southland cases.  See Prima Paint v. Flood Conklin Mfg. Co., 388 U.S. 395 (1967) (holding that arbitration clauses are severable and arguments that the contract is void should be decided by the arbitrator); Southland Corp. v. Keating, 465 U.S.1 (1984) (holding that the Federal Arbitration Act is substantive federal law and applicable in state and federal courts).

The United States Supreme Court in Buckeye thus concluded that 'regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.'