Enforceability of Arbitration Clauses

ENFORCEABILITY OF ARBITRATION CLAUSES AFTER SOUTHLAND V. KEATING

This research paper deals with the enforceability of clauses in private agreements providing for the binding arbitration of disputes or pre-dispute arbitration agreements ("PDAAs") as a result of the Supreme Court's holding in Southland Corporation v. Keating, 465 U.S. 1 (1984) and subsequently decided cases.

Pre-Southland v. Keating Uncertainties

At common law, state and federal courts generally refused to enforce PDAAs because they would "oust the jurisdiction of the courts." In order to relieve congestion in the federal courts, Congress enacted the Federal Arbitration Act ("FAA") in 1925 (9 U.S.C. secs. 1-14 (1982)), sec. 2 of which provides that PDAAs "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Sec. 2 limits the application of the Act to maritime transactions and "a contract evidencing a transaction involving commerce," which Sec. 1 defines "as among the several States or with foreign nations." Sec. 2 also excludes from the application of the statute most employment agreements.

In Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1963), the Court said at 24-25 that sec. 2 of the FAA created "a body of federal substantive law of arbitrability, applicable to any arbitration agreement" covered by that Act and ruled that doubts concerning arbitrability were to be resolved in favor of arb

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used to compel arbitration because the California Franchise Investment Law ("FIL") contained a provision preventing waiver of compliance with its provisions. The Court of Appeal reversed and in turn was reversed by the California Supreme Court. The U.S. Supreme Court ruled that the California Supreme Court's interpretation of FIL "directly conflicts with sec. 2 of the [FAA] and violates the Supremacy Clause." It reasoned as follows: (1) Congress by enacting FAA declared a national policy in favor of arbitration and "withdrew the power of the states" to adjudicate claims which the parties had agreed to submit to arbitration; and (2) FAA rested on the "substantive authority of Congress to enact substantive rules under the Commerce Clause" which pre-empted state limitations on arbitrations covered by the Act because the Congress intended "to foreclose state legislative attempts to undercut the enforceability of arbitration agreements" and did not intend "to limit [FAA] to disputes subject only to federal court jurisdiction." Justice Paul Stevens concurred in part but dissented on the issue of the enforceability of the PDAA, stating that "it is by no means clear that Congress intended entirely to displace state authority in thi

Category: Government - E