NEWS - Press Release

OCTOBER 24, 2006

DISPUTES OVER CONTRACTS CONTAINING ARBITRATION CLAUSES MUST FIRST BE HEARD BY ARBITRATORS, NOT COURTS


The U.S. Supreme court has ruled that legal challenges to contracts containing arbitration clauses must initially be heard by arbitrators, unless the challenge is to the validity of the arbitration clause itself.

In the case of Buckeye Checking, Inc. v. Cardegna et.al, respondents John Cardegna and Donna Reuter entered into various deferred-payment transactions with petitioner Buckeye Check Cashing, in which they received cash in exchange for a personal check in the amount of the cash plus a finance charge. For each separate transaction they signed a "Deferred Deposit and Disclosure Agreement" which contained a provision requiring binding arbitration in the event of a dispute.

The respondents subsequently brought a class action suit in a Florida state court, alleging that Buckeye charged usurious interest rates and that the Agreement violated various lending and consumer-protection laws, rendering it criminal. Buckeye moved to compel arbitration. The trial court denied the motion, holding that a court rather than an arbitrator should initially resolve a claim that a contract is illegal and void.

The District Court of Appeal of Florida for the Forth District reversed the decision, holding that because the respondents did not challenge the arbitration provision itself, but instead claimed that the entire contract was void, the agreement to arbitrate was enforceable and the question of the contract's legality should go to the arbitrator.

The respondents appealed and the Florida Supreme Court reversed, reasoning that to enforce an agreement to arbitrate in a contract challenged as unlawful “could breathe life into a contract that not only violates state law, but also is criminal in nature.”

However, the U.S. Supreme Court reversed the state's highest court, stating that unless the challenge is to the actual arbitration clause, an arbitrator must be the first to consider the validity of the contract being challenged and that under the Federal Arbitration Act, the rule is applicable in both state and federal courts.

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