Alex Silverman

Eighth Circuit Finds Contract Formation Challenges to Be Decided by the Court, Affirms Order Denying Motion to Compel Arbitration

July 10, 2022 by Alex Silverman

Defendant Litong Capital LLC appealed from an order of the U.S. District Court for the Western District of Missouri. The district court denied Litong’s motion to compel arbitration of claims asserted by GP3 II LLC, having determined there was never a valid contract between them. The Eighth Circuit affirmed.

Litong argued initially that disputes involving the entirety of a contract containing an arbitration clause are to be decided by the arbitrator, not the court, in the first instance, citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006). As the Eighth Circuit explained, however, the Supreme Court in Buckeye distinguished “validity of the contract as a whole” disputes from those involving contract formation. In Buckeye, the Supreme Court noted that its ruling “does not speak to the issue … [of] whether the signor lacked authority to commit the alleged principal.” In a later decision, the Supreme Court reaffirmed that disputes involving contract formation, such as the GP3/Litong dispute, are “generally for courts to decide.”

The Eighth Circuit also agreed with the district court that Litong failed to establish, under Missouri law, that the person who purportedly signed the contract for GP3 had apparent authority to do so. Because Litong already conceded that the purported signor did not have actual authority to bind GP3, the court affirmed the district court order denying Litong’s motion to compel.

GP3 II, LLC v. Litong Capital, LLC, No. 21-1443 (8th Cir. June 3, 2022).

Eighth Circuit Finds “Entire Contract” Challenge Must Be Decided by Arbitrator, Reverses Order Denying Motion to Compel Arbitration

July 8, 2022 by Alex Silverman

The Eighth Circuit Court of Appeals reversed and remanded a decision by the U.S. District Court for the District of Minnesota denying defendant SUNZ Insurance Co.’s motion to compel arbitration of crossclaims asserted by Payday Inc. The district court held without further analysis that it was “not convinced” whether Payday’s crossclaims fell within the scope of a valid arbitration clause. On appeal, the Eighth Circuit explained that Payday did not oppose SUNZ’s motion to compel on the ground that the arbitration clause itself was invalid; rather, it contended the contract containing the arbitration clause was superseded by a subsequent contract, thus purportedly voiding the arbitration clause. Citing the U.S. Supreme Court’s decision in Buckeye Check Cashing Inc. v. Cardegna, 546 U.S. 440 (2006), the Eighth Circuit held that a challenge to the validity of an entire contract is to be decided by an arbitrator in the first instance, whereas a challenge to the validity of an arbitration clause is to be decided by the court. Because Payday’s challenge was to the contract as a whole, not to the arbitration clause, the Eighth Circuit found the district court erred in denying SUNZ’s motion to compel arbitration.

Benchmark Insurance Co. v. SUNZ Insurance Co., No. 21-1679 (8th Cir. June 6, 2022).

Delaware Federal Court Confirms Arbitration Award, Holds Arbitrator Did Not Exceed Authority in Finding Unambiguous Contract Provision Was Unconscionable

May 26, 2022 by Alex Silverman

QAD Inc. petitioned the Delaware federal court to confirm an arbitration award it obtained against Block & Company Inc. Block cross-moved to vacate the award. The arbitrator awarded QAD more than $740,000 in connection with a contract dispute between the parties. In moving to vacate the award, Block claimed the arbitrator exceeded his authority in declaring that a limit of liability provision in the contract was unconscionable, despite also finding the contract language itself was unambiguous. Block argued that QAD drafted the provision, and there was no evidence of a gross imbalance between the two sophisticated parties in negotiating the term. The court nonetheless confirmed the award, and denied Block’s motion to vacate, finding Block had not satisfied its “heavy burden” under FAA section 10(a)(4) to show that the award was not “rationally derived from the agreement or supported by the record.” Even if the arbitrator had erred in his interpretation of the case law on unconscionability, the court explained that its power to vacate the award would be constrained because “[e]xceeding one’s powers … is not synonymous with making a mistake.” Because the arbitrator based his assessment of unconscionability on the facts on the record and applicable law, the court held that it could not re-litigate the merits of the unconscionability ruling, regardless of whether the arbitrator reached the correct decision.

QAD, Inc. v. Block & Co., Inc., No. 1:21-mc-00370 (D. Del. Apr. 25, 2022).

Virginia Supreme Court Declines to Enforce Arbitration Clause in a Trust, Agrees Trusts Aren’t “Contracts” Under FAA and Virginia Law

May 24, 2022 by Alex Silverman

Linda Anderson sued Sarah Boyle alleging that Boyle breached her duties as trustee of an irrevocable trust to which Anderson and Boyle were beneficiaries. Boyle moved to compel arbitration, citing an arbitration clause in the trust. The lower court denied the motion and Boyle appealed.

The Virginia Supreme Court granted the appeal solely to decide whether the Virginia Uniform Arbitration Act (VUAA) or the Federal Arbitration Act (FAA), each of which requires arbitration for “contracts,” compels enforcement of an arbitration provision in a trust. The court explained that a trust is, in general, a “donative instrument,” not an “agreement between two or more persons which creates an obligation to do or not to do a particular thing.” As such, the court held that a trust is not a “contract,” as required to fall within the ambit of both the VUAA and the FAA. While the VUAA also compels arbitration for certain “written agreements,” the court disagreed with Boyle that a trust qualifies as an “agreement.” Further, even if it did, the court noted that an arbitration clause would not be enforceable under the VUAA as it relates to claims between a trustee and a beneficiary, the latter of whom is not a party to any “written agreement to submit any existing controversy to arbitration.” The court therefore affirmed the lower court order denying Boyle’s motion, agreeing that neither the VUAA nor the FAA compels arbitration.

Boyle v. Anderson, No. 210382 (Va. Apr. 14, 2022).

Texas Supreme Court Finds Erotic Dancer and Club Had “Meeting of the Minds” to Enforce Arbitration Agreement

April 7, 2022 by Alex Silverman

Stephanie Sotero Hernandez was killed in a car accident after leaving work at Baby Dolls Topless Saloons Inc. Hernandez’s estate filed a wrongful death suit against the club alleging it continued serving alcohol to Hernandez’s co-worker, the driver of the car, after knowing she was intoxicated. The club moved to compel arbitration based on the arbitration clause in its contract with Hernandez. A Texas court of appeals affirmed a trial court order denying the club’s motion, finding the terminology in the contract was “uncertain” and lacked “definiteness,” thus invalidating any agreement to arbitrate. The Texas Supreme Court reversed.

Hernandez’s estate argued the motion should be denied because there was never a “meeting of the minds” between Hernandez and the club. The court disagreed, finding that to conclude otherwise, as did the court of appeals, ignores that Hernandez and the club operated under the contract on a weekly basis for nearly two years before her untimely death. The court therefore rejected the notion that the parties never entered a valid contract. Hernandez’s estate also argued that the arbitration clause itself was limited in scope and inapplicable, but the court again disagreed, emphasizing the bolded and capitalized clause in the contract explicitly delegating gateway arbitrability issues of this sort to the arbitrator. The court thus reversed and remanded with instruction to grant the club’s motion to compel arbitration.

Baby Dolls Topless Saloons, Inc. v. Sotero, No. 20-0782 (Tex. Mar. 18, 2022).