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First American Title Arbitration Decision: Tenth Circuit Says Nonsignatory Escrow Agent Can’t Compel Arbitration

September 23rd, 2025 Appellate Practice, Application to Compel Arbitration, Application to Stay Arbitration, Arbitrability, Arbitrability - Equitable Estoppel, Arbitrability - Nonsignatories, Arbitrability | Existence of Arbitration Agreement, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Challenging Arbitration Agreements, Drafting Arbitration Agreements, Estoppel, Existence of Arbitration Agreement, FAA Chapter 1, FAA Section 1, FAA Section 2, FAA Section 3, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, First Principle - Consent not Coercion, Formation of Arbitration Agreement, Intended Beneficiaries, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Rights and Obligations of Nonsignatories, Section 2, Section 3 Stay of Litigation, Section 4, Stay of Litigation Pending Arbitration, Third-Party Beneficiaries, United States Court of Appeals for the Tenth Circuit, Waiver of Arbitration No Comments » By Philip J. Loree Jr.

First American Title Arbitration DecisionThe Tenth Circuit’s First American Title arbitration decision, Fucci v. First Am. Title Ins. Co., 24-4051, slip op. (10th Cir. Sep 10, 2025), clarifies the limits of arbitration enforcement by nonsignatories under Florida and Ohio law, and recognizes that the arbitration agreement itself may further restrict that enforcement.

As the Supreme Court recognized in Arthur Andersen LLP v. Carlisle, 556 U. S. 624, 631 (2009), and as we discussed in a 2009 post, “traditional principles of state law allow a contract to be enforced by or against nonparties to the contract through assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, [and] waiver and estoppel.” 556 U.S. at 631. The First American Title arbitration decision’s nonsignatories argued for enforcement of the arbitration agreement on the ground they were allegedly parties, third-party beneficiaries, or agents. They also sought enforcement under equitable estoppel principles. But the Court rejected all of their  arguments and affirmed the district court’s denial of the motion for an order staying litigation and compelling arbitration.

The First American Title Arbitration Decision: Background

Real estate investors bought interests in Ohio and Florida event-center projects through Purchase and Sale Agreements (“PSAs”) Continue Reading »

Sixth Circuit Says Employee Physician Assistant Gets to Litigate Her Religious Discrimination Claims Because the Employer Defendants were Guilty of Section 3 Arbitration Default

September 18th, 2025 American Arbitration Association, Amicus Brief Submissions, Appellate Practice, Applicability of Federal Arbitration Act, Applicability of the FAA, Application to Compel Arbitration, Application to Stay Litigation, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Arbitration Providers, Challenging Arbitration Agreements, Charles Bennett, Default in Proceeding with Arbitration, Enforcing Arbitration Agreements, FAA Chapter 1, FAA Section 3, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Forfeiture, Practice and Procedure, Richard D. Faulkner, Section 3 Default, Section 3 Stay of Litigation, Section 4, Stay of Litigation, Stay of Litigation Pending Arbitration, United States Court of Appeals for the Sixth Circuit, Waiver of Arbitration No Comments » By Philip J. Loree Jr.

Section 3 Arbitration Default | Kloosterman Introduction

Does Section 3 arbitration default result from moving to dismiss the entire case on the merits? The Sixth Circuit says yes.

Since Morgan v. Sundance, 596 U. S. 411 (2022), most of the cases concerning loss of arbitration rights by litigation conduct have focused not on prejudice—Morgan nixed the requirement that arbitration opponents show prejudice to establish forfeiture or waiver, 596 U.S. at 1-2—but on what type and degree of inconsistent-with-arbitration conduct results in a loss of arbitration rights.

But on August 27, 2025, the U.S. Court of Appeals for the Sixth Circuit, took a slightly different tack on Section 3 arbitration default. In Kloosterman v. Metropolitan Hospital, No. 24-1398, slip op. (6th Cir. Aug. 27, 2025), the Court reversed a district court order that had compelled arbitration of a physician assistant (“PA”)’s religious discrimination claims. The Sixth Circuit made two significant rulings bearing on loss of arbitration rights by litigation conduct.

First, the Court held— in an opinion written by Circuit Judge Eric Continue Reading »

Flores Second Circuit Arbitration Decision Rejects the NFL’s Constitution’s “Arbitration” Provision, Saying it is “Arbitration in Name Only”

August 29th, 2025 Applicability of the FAA, Application to Compel Arbitration, Arbitrability, Arbitrability | Existence of Arbitration Agreement, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Disinterestedness, Effective Vindication Doctrine, Evident Partiality, FAA Section 10, Federal Arbitration Act Section 10, Grounds for Vacatur, Independence, LMRA Section 301, Questions of Arbitrability, Section 10, Section 4, Sports Arbitration, Unconscionability, United States Court of Appeals for the Second Circuit, Vacate Award | 10(a)(2), Vacate Award | Evident Partiality 1 Comment » By Philip J. Loree Jr.

Flores Second Circuit Arbitration Decision

The Flores Second Circuit Arbitration Decision and the Scope of the FAA

Introduction

The Flores Second Circuit arbitration decision, Flores v. N.Y. Football Giants, Inc., No. 23-1185-cv, slip op. (2d Cir. Aug. 14, 2025), may be a watershed moment in federal arbitration law. In rejecting the National Foot Ball League (“NFL”)’s attempt to compel arbitration, the court held that the league’s dispute resolution provision—vesting unilateral authority in the Commissioner, an executive officer of one of the arbitration opponent’s adversaries —was “arbitration in name only” and thus unprotected by the Federal Arbitration Act (FAA). Beyond its immediate implications for Brian Flores’s racial discrimination claims, the ruling could (and should) reshape how courts evaluate the independence, neutrality, and fundamental fairness of dispute resolution agreements that are alleged to be FAA-governed arbitration agreements, particularly in employment and sports law contexts.

The Flores Second Circuit decision, authored by United States Senior Circuit Judge José A. Cabranes, may have far reaching consequences concerning the scope of the Federal Arbitration Act, the enforceability of  dispute resolution agreements, and the viability and applicability of the “effective vindication” doctrine. It also has the potential to—and should—change for the better the legal landscape governing post-award evident partiality challenges. (For discussions of evident partiality see here, here, here, here, and here.)

In Flores the Court held NFL coach Brian Flores was not required to arbitrate his 42 U.S.C. § 1981 racial discrimination claims against the NFL, the New York Football Giants, the Denver  Broncos, and the Houston Texans. Flores agreed to the NFL’s dispute resolution scheme, which was set forth in  Constitution and Bylaws of the National Football League (the “NFL Constitution”) and incorporated by reference into two of Flores’s club-specific employment agreements.

That NFL dispute resolution scheme purported to designate the NFL Commissioner— who runs the league and works for the franchise owners Flores accused of race discrimination—as the arbitrator.  The Second Circuit held that “Flores’s agreement under Continue Reading »

Eleventh Circuit: Arbitration Provider’s Decision not to Administer Means Arbitration is no Longer Required 

July 1st, 2025 American Arbitration Association, Application to Compel Arbitration, Application to Stay Litigation, Arbitration Fees, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Arbitration Risks, Challenging Arbitration Agreements, Charles Bennett, FAA Section 3, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Petition to Compel Arbitration, Practice and Procedure, Richard D. Faulkner, Section 3 Default, Section 3 Stay of Litigation, Section 4, Section 4 "Aggrieved" Requirement, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, Stay of Litigation, United States Court of Appeals for the Eleventh Circuit, Waiver of Arbitration Comments Off on Eleventh Circuit: Arbitration Provider’s Decision not to Administer Means Arbitration is no Longer Required  By Philip J. Loree Jr.

Introduction

Section 3 Default | Section 4 AggrievedFrom time-to-time, arbitration providers may decline to administer an arbitration. What happens then according to Federal Arbitration Act “FAA”) Section 3 and Section 4? Must the parties arbitrate before an alternative provider or can a party insist on litigating the dispute in court?

If FAA Section 3 and Section 4, as applied to the parties’ agreement and the facts, authorize an order compelling arbitration and staying litigation, arbitration will (or at least should) ordinarily proceed. But as the U.S. Court of Appeals for the Eleventh Circuit’s decision in Merritt Island Woodwerx, LLC v. Space Coast Credit Union, No. 24-10019, slip op. (11th Cir. May 21, 2025) shows, if arbitration cannot be compelled, and litigation stayed—and the agreement can be legitimately construed as not to require further arbitration—then one or more parties can insist on Court resolution of their dispute, including, in an appropriate case, by jury trial.

That’s a big “if,” and an equally big “and,” but if all conditions are satisfied, then an arbitration opponent may have a solid basis for seeking judicial resolution of its dispute. That is ordinarily a big win, and one that is not otherwise easy to come by.

Understanding Merritt Island Woodwerx—and cases of like ilk—can help you identify opportunities to argue that a provider’s decision to proceed no further means arbitration proceed no further. Successfully taking advantage of those opportunities is the key, but if you do not spot them at the outset, then you may lose them.

If you’re an arbitration proponent, then understanding Merritt Island Woodwerx—and how to avoid or mitigate its consequences—is equally  important. The stakes are big: loss of arbitration rights a arbitration proponent had or should have can be an expensive and unwelcome proposition.

Background: What Transpired in Merritt Island Woodwerx?

The dispute was between a credit union (the “Arbitration Proponent”) Continue Reading »

New York’s Highest Court Rules that Arbitrator’s Statutory Treble Damages Award against Town Should have been Vacated

April 7th, 2025 Appellate Jurisdiction, Appellate Practice, Application to Confirm, Application to Vacate, Arbitrability, Arbitration Agreements, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Award Vacated, Challenging Arbitration Awards, CPLR Article 75, Enforcing Arbitration Agreements, New York Appellate Division, New York Court of Appeals, New York State Courts, Petition to Vacate Award, Policy, Public Policy, Punitive Damages, Questions of Arbitrability, Remedies, Sovereign Immunity, Substantive Arbitrability, Treble Damages, Uncategorized, Vacate, Vacate Award | Arbitrability, Vacate Award | Exceeding Powers, Vacate Award | Public Policy Comments Off on New York’s Highest Court Rules that Arbitrator’s Statutory Treble Damages Award against Town Should have been Vacated By Philip J. Loree Jr.

Introduction

Treble Damages | Punitive Damages | Public Policy Under New York law, can an arbitrator lawfully award statutory treble damages against the State or its political subdivisions?

New York prohibits punitive damage awards in suits against the State and its political subdivisions, including of course, towns. See Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 N.Y.2d 382, 386 (1987). Public funds are available only to compensate for damages suffered because the key “justifications for punitive damages—punishment and deterrence—are hardly advanced when applied to a governmental unit.” Sharapata v Town of Islip, 56 N.Y.2d 332, 338 (1982).

This prohibition on punitive damage awards is also based on the precept that the sovereign’s liability extends no farther than its waiver of immunity. As the New York Court of Appeals—New York’s highest Court—said in Sharapata, “we hold today that the waiver of sovereign immunity effected by section 8 of the Court of Claims Act does not permit punitive damages to be assessed against the State or its political subdivisions.” 56 N.Y.2d at 334.

But assuming treble damages are punitive in nature, can an arbitrator’s award imposing punitive damages be vacated because it violates New York public policy? Recently before the Court, in Matter of Rosbaugh v. Town of Lodi, 2025 NY Slip Op 01406 at *1 (N.Y. Mar. 13, 2025), was the question whether an arbitrator’s treble damages award against the Town of Lodi (the “Town”), made under New York Real Property Actions and Proceedings Law (“RPAPL”) § 861, was punitive in nature and thus contrary to New York public policy. The Court said the answer is yes and held the award must be vacated.

One might expect that Rosbaugh would have discussed briefly New York arbitration law authorizing vacatur of awards that violate public policy but it did not. The focus of the decision was instead on whether the Court could, without violating New York public policy, impose on and enforce against the Town any  judgment imposing an RPAPL 861 treble damage remedy, irrespective of whether the judgment resulted or would result from: (a) a plenary, judicial trial on the merits; or (b) a summary proceeding to enter judgment on an arbitration award imposing that remedy. Because the prohibition applies to any suit against the state or its subdivisions, whether on the merits or to confirm an arbitration award, it was arbitration neutral and it did not necessarily require a meaningful discussion of arbitration law to hold that the award had to be vacated.

But perhaps the Court downplayed the arbitration law aspects of the decision because it thought doing otherwise might inadvertently encourage more public-policy challenges to the confirmation of arbitration awards than the law warrants. The line between what may be an egregious mistake of law—which is ordinarily not subject to New York Civ. Prac. L. & R. (“CPLR”) Article 75 review—and a violation of an important New York public policy—which can be a basis for vacatur of an award, see Associated Teachers of Huntington, Inc. v. Bd. of Educ., 33 N.Y.2d 229, 235-36 (1973)— can sometimes be blurry. The Court may have wanted to downplay arbitration law to avoid encouraging award challengers from unnecessarily, and erroneously,  seeking vacatur of awards based on unreviewable legal errors which, while serious, do not amount to violations of “so strong a public policy as to require vacating an award. . . .” 33 N.Y.2d at 231-32.

Also left undiscussed was how New York arbitration law provided an independent, alternative ground on which the courts might have vacated the award. Under New York arbitration law—but not the Federal Arbitration Act—arbitrators to not have the power, and cannot be empowered by agreement, to award punitive damages. See Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 357, 359-60 (1976); see also Mastrobuono v. Shearson Lehman Hutton Inc., 514 U.S. 52, 62-64 (1995) (discussing difference between New York law and the FAA concerning arbitrability of punitive damages).

In Rosbaugh, the party who challenged the treble damage award was a municipality, which had a strong, sovereign-immunity-based public policy argument against the assessment of punitive damages.  But had the Town been a private person, then it would, it seems to the author, have had at least a  basis to argue that for the reasons explained by the Court in Rosbaugh, the treble-damage award had to be vacated under Garrity because of its punitive nature.

Background and Procedural History

Plaintiffs were landowners who owned land abutting one side of a dirt road in upstate New York. They had trees on their property, some of which apparently overhung the road, which was owned and maintained by the Town. The Town claimed that the trees were interfering with the right-of-way.

Presumably concluding that the trees were within the right-of-way, the Town proceeded to hire a tree service company to remove or trim them The company trimmed or cut down 55 trees that were on the plaintiff’s property.  Plaintiff sued the Town and the company seeking, among other remedies, treble damages under RPAPL 861(1).

Ultimately the parties agreed to submit their dispute to arbitration.  The arbitrator found for the plaintiffs, awarding three-times the “‘stumpage value’ of the damaged or destroyed trees.” 2025 NY Slip Op 01406 at *1 (quotations in original). The trial court upheld the award and a divided panel of the Appellate Division, Fourth Department, affirmed.

New York’s highest court said “[t]he sole issue on appeal is whether treble damages under RPAPL 861 are punitive in nature , making them unavailable in a suit against a municipality.” 2025 NY Slip Op 01406 at *1. It concluded that they were punitive and that the award had to be vacated. See 2025 NY Slip Op 01406 at *3.

Whether Statutory Treble Damages are Punitive Depends on the Intent of the Legislature

As a general rule, treble damages are considered to be punitive but the Continue Reading »

Some Things to Consider Seriously Before You Agree to Arbitrate: An Arbitration Award may Direct You to Pay Your Adversary’s Attorney’s Fees

March 7th, 2025 Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Fees, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Arbitration Risks, Attorney Fee Shifting, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Bad Faith, Charles Bennett, Drafting Arbitration Agreements, Judicial Review of Arbitration Awards, Outcome Risk, Practice and Procedure, Richard D. Faulkner, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, Uncategorized Comments Off on Some Things to Consider Seriously Before You Agree to Arbitrate: An Arbitration Award may Direct You to Pay Your Adversary’s Attorney’s Fees By Philip J. Loree Jr.

Attorney's Fees in ArbitrationThose who agree to arbitration expose themselves to potential awards of attorney’s fees in cases where courts would likely not award fees.

If you’re a small business or an individual there’s a good chance you’re not fully familiar with certain of the risks associated with arbitration. Clients frequently consult with me when they find themselves saddled with unfavorable awards, and some of these persons are ones who, through no fault of their own, did not appreciate the risks involved and might  consequently have missed opportunities to better manage them. In many instances these persons were represented by attorneys who understood that subject matter of the arbitrated disputes, and who were skilled courtroom litigators, but who were not necessarily as well-versed in arbitration-law as are arbitration and arbitration-law practitioners.

This is more than simply an anecdotal observation. My good friends, colleagues, and sometimes co-counsel, Richard D. Faulkner and Charles (“Chuck”) Bennett, who also practice in this field, tell me they share this view and that their experiences are aligned with my own. (Here is a post concerning a Federalist-Society-sponsored webinar Rick, Chuck, and I participated in last year.) Other arbitration attorneys with whom I have spoken also agree.

Readers armed with some practical knowledge may be better able to avoid, mitigate or otherwise manage arbitration risks. It is in that spirit that we discuss a risk that tends to be more severe in arbitration than it is in court litigation:  your exposure to an award of attorney’s fees. As always, nothing we say here is or should be construed as legal advice. If you require legal advice you should engage and consult with an attorney.

Exposure to Liability for Your Adversary’s Legal Fees

A commonly overlooked risk associated with agreeing to arbitrate is that, if you lose, you might be on the wrong end of an award that requires you to reimburse your adversary for some or all of the fees it incurred in the arbitration. To be sure, there is a risk that in court litigation, the court may assess attorney’s fees against a losing party, but as we’ll see, the risk is generally higher in arbitration than it is in court litigation. Worse yet, in arbitration the ability to challenge meaningfully  such an award (or any other award) in court is extremely circumscribed under the Federal Arbitration Act (“FAA”). The same is generally so where state arbitration law applies.

No one likes paying attorney fees but they are a necessary incident of dispute resolution, especially resolution of high-dollar disputes. But imagine not only having to pay your own attorney’s fees, but also those of your adversary, an adversary who, in effect, is reimbursed for the fees it incurred in making your life miserable. Continue Reading »

Modern Perfection, LLC v. Bank of America: Fourth Circuit Says Arbitrator gets to Decide which of Two Contracts’ Conflicting Dispute Resolution Provisions Applies

January 27th, 2025 Application to Stay Litigation, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreement Invalid, Arbitration Agreements, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Challenging Arbitration Agreements, Clear and Unmistakable Rule, Delegation Provision, Existence of Arbitration Agreement, FAA Chapter 1, FAA Section 2, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Federal Subject Matter Jurisdiction, Motion to Compel Arbitration, Practice and Procedure, Richard D. Faulkner, Section 2, Section 3 Stay of Litigation, Section 4, Stay of Litigation, Stay of Litigation Pending Arbitration, United States Court of Appeals for the Fourth Circuit, United States Supreme Court Comments Off on Modern Perfection, LLC v. Bank of America: Fourth Circuit Says Arbitrator gets to Decide which of Two Contracts’ Conflicting Dispute Resolution Provisions Applies By Philip J. Loree Jr.

Introduction: Delegation Provisions and Modern Perfection

Delegation Provisions | Arbitrability ChallengeDelegation provisions clearly and unmistakably assign arbitrability determinations to arbitrators, which means they provide for arbitrators to decide arbitrability-related disputes.

Coinbase v. Suski, 602 U.S. 143 (2024) set forth the allocation of power between courts and arbitrators for four “orders” of arbitrability-related disputes:

  1. A “first order” dispute is “[a] contest over the merits of the dispute[,]” the determination of which “depends on the applicable law and relevant facts.” 602 U.S. at 148 (quotation omitted).
  2. A “second order dispute” concerns “whether [the parties] agreed to arbitrate the merits” of the first order dispute. 602 U.S. at 148 (quotation omitted).
  3. A “third order dispute” concerns “who should have the primary power to decide” a second order dispute.” 602 U.S. at 149.
  4. A “fourth order” dispute is one where there are “multiple agreements that conflict as to the third-order question of who decides arbitrability.” 602 U.S. at 149.

Coinbase held that fourth-order disputes are for the courts, which are to decide them based on “traditional contract principles.” 602 U.S. at 149.

In a recent U.S. Court of Appeals for the Fourth Circuit decision, Modern Perfection, LLC v. Bank of America, No. 23-1965, slip op. (4th Cir. Jan. 13, 2025), the Court was faced with what appeared to be a “fourth-order” dispute as defined by Suski. The question was who gets to decide arbitrability questions when one contract contained a broad arbitration agreement and a delegation provision and the other a clause that expressly contemplated judicial resolution of disputes.

The problem was that Suski was not decided until briefing in both the district court and the Fourth Circuit was complete, and the arbitration challengers’ argument centered on the scope of the delegation provisions, not on whether the contracts contemplating judicial resolution of disputes superseded the delegation provisions.

The Suski fourth-order dispute issue was first raised in a Fed. R. App. P. 28(j) letter the challenger submitted once Suski was decided.  Because the argument had not been raised in the parties’ appellate briefs, the Court would not hear it, and ruled that, under the terms of the delegation provisions, the arbitrator gets to decide whether the dispute was arbitrable.

Background

Over a five-year period a bank issued to each of six plaintiffs two Continue Reading »

Transfer of Venue under 28 U.S.C. Section 1404(a) in an Arbitration Conducted Virtually: An Arbitration Award is Made at the Arbitral Seat, Which is Determined by the Parties’ Agreement

January 9th, 2025 1404(a) Transfer of Venue, Application to Confirm, Application to Vacate, Arbitral Seat, Arbitration Law, Arbitration Practice and Procedure, Arbitration Situs, Awards, Confirmation of Awards, Consent to Confirmation, FAA Chapter 1, FAA Section 9, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 9, Federal Courts, Federal Rules of Civil Procedure, Federal Subject Matter Jurisdiction, Petition or Application to Confirm Award, Petition to Vacate Award, Section 9, United States Court of Appeals for the Second Circuit, United States District Court for the Southern District of New York, Venue 2 Comments » By Philip J. Loree Jr.

1404(a) transfer of venue; virtual hearings Questions about venue transfer under 28 U.S.C. Section 1404(a) of Section 9 or 10 petitions to confirm or vacate arbitration awards may require determination of where the award was made.

Particularly in today’s world of virtual hearings, determining where an arbitration award is made can raise questions. In Citizens Bank v. Magleby, 24 Civ. 4827 (AKH), slip op. at 4 (S.D.N.Y. Jan. 6, 2025), the Court, following existing precedent, held that an award is made at the location where the parties agree the arbitration will take place, even if the arbitration hearings are held in another place or virtually. That rule may not be perfect but it simplifies resolution of what otherwise could be a vexing question.

Background

In Citizen’s Bank, the question arose on a 28 U.S.C. § 1404(a) motion to transfer a petition to confirm an arbitration award from the Southern District of New York to Las Vegas, Nevada. The Continue Reading »

Unlawful Limitations Period Provision Renders Arbitration Agreement Unenforceable Says South Carolina Supreme Court

January 2nd, 2025 Contract Defenses, Enforcing Arbitration Agreements, FAA Chapter 1, FAA Section 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, Petition to Compel Arbitration, Policy, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Public Policy, Section 2, Section 4, Severability, South Carolina Supreme Court, State Courts Comments Off on Unlawful Limitations Period Provision Renders Arbitration Agreement Unenforceable Says South Carolina Supreme Court By Philip J. Loree Jr.

Severability of Limitations Provision: Introduction

Limitations

One defense to a motion to compel arbitration is that the arbitration agreement on which the movant relies is, as a matter of arbitration-neutral state law, void or unenforceable on public policy grounds. (See, e.g., here.) But if only one term or provision of an arbitration agreement is unenforceable on public policy grounds, can that offending provision simply be removed from the contract and the rest of the arbitration agreement enforced?

In Huskins v. Mungo Homes, LLC, No. 28245, slip op. (S.C. Sup. Ct. December 11, 2024), the South Carolina Supreme Court said the answer depends principally on the intent of the parties. And as respects the adhesive, “take-it-or-leave-it” home sale contract before it, the Court said the answer was no.

By statute South Carolina prohibits and deems void contractual provisions that purport to shorten the statute of limitations. S.C. Code Ann. § 15-3-140 (2005).  In Mungo Homes, the defendant sold the plaintiff a new home, the contract of sale for which contained an arbitration agreement that said: “Each and every demand for arbitration shall be made within ninety (90) days after the claim, dispute or other matter in question has arisen, except that any claim, dispute or matter in question not asserted within said time periods shall be deemed waived and forever barred.” Slip op. at 2 (quotation omitted). The parties agreed that provision violated Section 15-3-140.

The question before South Carolina’s highest court was whether the provision could be severed from the contract, leaving intact the rest of the arbitration agreement, and the contract containing it (the “container contract”), or whether that unlawful provision rendered invalid and unenforceable the entire arbitration agreement. In Huskins the Court held that the limitations period provision could not be severed and the arbitration agreement was accordingly unenforceable on public policy grounds. The container contract was not affected by the Court’s decision. Slip op. at 6.

Discussion

Severability of Limitations Provision: Party Intent and Relevance of not Including a Severability Clause in the Agreement

The Court said “[t]he only question we are left with is whether we should sever the illegal term and let the remainder of the arbitration agreement stand.” Slip op. at 3. The touchstone for answering that question was party intent: “whether an agreement can be modified so its remaining provisions survive [generally] depends upon what the parties intended.” Slip op. at 2.

The Court observed that the parties did not include in their contract a severability provision and the contract otherwise did not suggest the parties intended the arbitration agreement to survive if any part of it, including the limitations provision, was deemed void. Slip op. at 2.

The Court explained that the absence of a severability clause, in and of itself, may be grounds for not severing an unenforceable clause from a contract. For courts are not supposed to “rewrite contracts” but (subject to certain exceptions) enforce them according to their terms. Slip op. at 2.

But the Court decided not to rest its decision solely on the parties’ decision not to include a severability clause in their contract. The Court explained that, in the absence of a severability clause, Courts are reluctant to impose severability on the parties. Slip op. at 2-3. Yet “devotion to that principle[,]” said the Court, “can work a cost to other interests. It can exact a needless forfeiture or cause unjust enrichment, tossing out the essence of a bargained for exchange over a trivial technicality.” Slip op. at 3 (citation omitted).

Severability of the Limitations Provision: Common Law, South Carolina Law, and the Restatement (Second) of Contracts

The Court briefly discussed pertinent English common law, and U.S. and South Carolina precedent on the severability issue, explaining how courts have “stricken illegal parts from contracts and upheld the legal parts, as long as the central purpose of the parties’ agreement did not depend on the illegal part.” Slip op at 3. South Carolina, said the Court, “followed this main current and interpreted contracts as severable if consistent with the parties’ intent.” Slip op. at 3 (citations omitted).

The Restatement (Second) of Contracts, said the Court, “takes the further view that if only part of a contract term is unenforceable on the grounds of public policy, a court may enforce the rest of the term as long as 1) ‘the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange’ and 2) the party seeking to enforce the term ‘obtained it in good faith and in accordance with reasonable standards of fair dealing.’” Slip op. at 3-4 (quoting Restatement (Second) of Contracts § 184). Restatement (Second) Section 184’s comments, in turn, “emphasize that ‘a court will not aid a party who has taken advantage of his dominant bargaining power to extract from the other party a promise that is clearly so broad as to offend public policy by redrafting the agreement so as to make a part of the promise enforceable.’” Slip op. at 4 (quoting Restatement (Second) § 184, comment b).

No Question of Fact that the Parties did not Intend to Permit Severability of the Limitations Provision

The Court determined that, although party intent is often a question of fact, there were three reasons why there was no such question concerning party intent not to allow severability:

  1. The parties did not agree to a severability clause;
  2. The contract’s merger clause states that the “contract ‘embodies the entire agreement’ and that it can only ‘be amended or modified’ by a writing executed by both the Huskins and Mungo[;]” and
  3. Mungo conceded that the contract was an adhesion contract.

Slip op. at 4.

The Court found that the contract was offered on a “‘take it or leave it’” basis, drafted by Mungo, deemed nonnegotiable, and not editable by the Huskins. Slip op. at 4. “This forceful proof,” said the Court, “of Mungo’s intent that the contract could not be tinkered with convinces us we should not rewrite it now.” Slip op. at 4.

The Court further concluded that the illegal provision in the arbitration agreement was material because it would be outcome determinative of many disputes. Slip op. at 4. The Court viewed the provision not as a “mere ‘ancillary logistical concern’ of the arbitration agreement” but  “a brash push to accomplish through arbitration something our statutory law forbids.” Slip op. at 4 (citation omitted). Were the Court to to “lift[] out the clause, the legal statute limitations period (which in most cases allows claims to be filed within three years of their reasonable discovery) would drop in.” Slip op. at 4 (parenthetical material in original). That “would rewrite arbitration agreement to expand the statute of limitations by several orders of magnitude.” Slip op. at 4.

Arbitration, said the Court, is designed “to provide an alternative way to resolve disputes in a fair an efficient manner[,]” but “Mungo designed its arbitration provision not to streamline the resolution of disputes but to reduce their number” by greatly reducing the limitation period for bring those disputes. Slip op. at 4. The Court “conclud[ed] Mungo’s manipulative skirting of South Carolina public policy goes to the core of the arbitration agreement and weighs heavily against severance.” Slip op. at 4-5 (citations omitted)

The Court ruled that it would not save the arbitration agreement by severing the offending limitations provision, finding that because this was an “adhesion contract” it was “highly doubtful that the parties truly intended for severance to apply.” Slip op. at 5 (citation omitted). The contract was a consumer home-purchase agreement, triggering the “public policy concerns that [Damico v. Lennar Carolinas, LLC, 437 S.C. 596, 619-20 (2022)] eloquently addressed.” Slip op. at 5.

Permitting Severance would Provide a Perverse Incentive for Dominant Parties to Include in Adhesion Contracts Illegal Contract Provisions

“We have[,]” said the Court, been steadfast in protecting home buyers from unscrupulous and overreaching terms, and applying severance here would erode that laudable public policy.” Slip op. at 5 (citation omitted). Mungo wanted an “adhesion contract so its terms could not be varied and would stick[,]” and, now, “Mungo was stuck with its choice.” Slip op. at 5. Finding otherwise would ensure there was “no downside to throwing in blatantly illegal terms, betting they will go unchallenged or, at worst, that courts will throw them out and enforce the rest.” Slip op. at 5 (citations omitted).

The Court thus did not sever the offending contract provision and held that the arbitration agreement was therefore unenforceable. Slip op. at 6. It further found that the container contract contract was not affected by the Court’s ruling. Slip op. at 6.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

 Photo Acknowledgment

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

 

Overturning Arbitration Awards based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part IV): Will the Seventh Circuit Reverse the UpHealth District Court?

November 14th, 2024 Appellate Practice, Application to Vacate, Arbitration Agreements, Authority of Arbitrators, Award Fails to Draw Essence from the Agreement, Award Vacated, Awards, Challenging Arbitration Awards, Exceeding Powers, FAA Section 10, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, Outcome Review, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Standard of Review, United States Court of Appeals for the Seventh Circuit, United States District Court for the Northern District of Illinois, United States Supreme Court, Vacate, Vacate Award | 10(a)(4), Vacate Award | Manifest Disregard of the Law, Vacatur for Conceded Nonfact or Clear Mistake of Historical Fact Comments Off on Overturning Arbitration Awards based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part IV): Will the Seventh Circuit Reverse the UpHealth District Court? By Philip J. Loree Jr.

Seventh CircuitWill the Seventh Circuit reverse the judgment in the UpHealth case?

In our October 7, 2024, post, “Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact?”, we discudssed UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), which granted partial vacatur of an arbitration award because it was, said the Court, based on a “nonfact.” Our October 18, 2024 post, Overturning Arbitration Awards based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part I), identified five questions relating to UpHealth designed to shed further light on the case and the arbitration award vacatur standard on which the Court relied.

The first four of those questions were answered in our October 18, October 21, and November 12, 2024, posts. This November 14, 2024, post answers the fifth question: “If there is a [United States Court of Appeals for the] Seventh Circuit appeal of the UpHealth decision, is it likely the decision will be overturned on appeal, and if so, on what grounds?”

We explained in our November 12, 2024, post that UpHealth has appealed the district court decision to the Seventh Circuit. And if you’ve been reading our prior UpHealth posts, then you’ve probably already guessed that the answer is “yes,” it seems likely the Seventh Circuit will reverse the UpHealth decision.

In terms of the grounds, for such a reversal, we think the Seventh Circuit will probably conclude that the only forms of outcome review the Seventh Circuit recognizes is manifest disregard of the contract and violation of public policy, and that UpHealth involves neither of those grounds. That is all the more so where, as here, there is no agreement or concession concerning the allegedly mistaken fact. (See November 12, 2024, post.)

We think the Seventh Circuit may also conclude that recognizing vacatur based on a clear mistake of historical fact or a conceded nonfact would embroil courts in review of the arbitrator’s fact findings, including the sufficiency of evidence. Under Seventh Circuit and U.S. Supreme Court authority, the FAA does not authorize such review.  Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 566-70 (2013); Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671-72, 676-77 (2010). Major League Baseball Players Assoc. v. Garvey, 532 U.S. 504, 509-10, 511 (2001); Hill v. Norfolk & Western Ry., 814 F.2d 1192, 1194-95 (7th Cir. 1987) (citations omitted) (Posner, J.); American Zurich Ins. Co. v. Sun Holdings, Inc., 103 F.4th 475, 477-78 (7th Cir. 2024) (Easterbrook, J.); Affymax, Inc. v. Ortho-McNeil-Janssen Pharms., Inc., 660 F.3d 281, 284 (7th Cir. 2011) (citing George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577 (7th Cir.2001); Eljer Mfg., Inc. v. Kowin Development Corp., 14 F.3d 1250, 1254, 1256 (7th Cir. 1994).

We discussed all of these shortcomings in the UpHealth Court’s analysis in our October 7, 18, 21, and November 12, 2024, posts. We believe that the Seventh Circuit will probably also conclude that the UpHealth court erred by vacating the award in part, particularly since the Seventh Circuit recognizes outcome review in extremely narrow circumstances only and none of those circumstances are present here—where the district court has, for intents and purposes, second-guessed the arbitrator’s fact finding.

It will be interesting to see how the appellee (Damodaran) attempts to square the district court’s decision with Seventh Circuit and Supreme Court authority. We will continue to watch the appeal and report on significant developments.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

The image featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.