West Case Update

Contract That Violated State Law Could Not Be Enforced by Arbitration

Description Appeals court held that for a contract that contains an arbitration clause to be required to go to arbitration it must be a legal contract. A contract that called for interest payments that violated state usury laws is illegal and therefore could not be enforced by an arbitrator.

Topic Alternate Dispute Resolution

Key Words Arbitration; Illegality; Usury

C A S E S U M M A R Y

Facts Party Yards received an order from Miller Brewing to make beverage containers for the 1997 Super Bowl. Needing cash to finance the production, Party Yards borrowed $160,000 from Templeton. The note stated that besides the interest and principle due in April of 1997, Templeton was to receive "commissions" on the gross revenue of all Party Yards products sold plus a percentage of the gross invoice price for twenty years. The contract contained an arbitration clause. Party Yard moved to stay arbitration. The trial court refused. Party Yard appealed.

Decision Reversed. The trial court should have determined first if the contract was illegal under the usury statute. In Florida, contracts for payment of interest above 18% per annum may well be usurious, which this contract appears to be. A usury violation arises under state law. "A claim that a contract is illegal and, as in this case, criminal in nature, is not a matter which can be determined by an arbitrator. An arbitrator cannot order a party to perform an illegal act." A trial court must determine the validity an an agreement before compelling a party to submit to arbitration.

Citation Party Yards, Inc. v. Templeton, 751 So.2d 121 (Dist. Ct. App., Fla., 2000)

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Contract That Violated State Law Could Not Be Enforced by Arbitration
Description	Appeals court held that for a contract that contains an arbitration clause to be required to go to arbitration it must be a legal contract. A contract that called for interest payments that violated state usury laws is illegal and therefore could not be enforced by an arbitrator.
Topic	Alternate Dispute Resolution
Key Words	Arbitration; Illegality; Usury
C A S E S U M M A R Y
Facts	Party Yards received an order from Miller Brewing to make beverage containers for the 1997 Super Bowl. Needing cash to finance the production, Party Yards borrowed $160,000 from Templeton. The note stated that besides the interest and principle due in April of 1997, Templeton was to receive "commissions" on the gross revenue of all Party Yards products sold plus a percentage of the gross invoice price for twenty years. The contract contained an arbitration clause. Party Yard moved to stay arbitration. The trial court refused. Party Yard appealed.
Decision	Reversed. The trial court should have determined first if the contract was illegal under the usury statute. In Florida, contracts for payment of interest above 18% per annum may well be usurious, which this contract appears to be. A usury violation arises under state law. "A claim that a contract is illegal and, as in this case, criminal in nature, is not a matter which can be determined by an arbitrator. An arbitrator cannot order a party to perform an illegal act." A trial court must determine the validity an an agreement before compelling a party to submit to arbitration.
Citation	Party Yards, Inc. v. Templeton, 751 So.2d 121 (Dist. Ct. App., Fla., 2000)