South-Western Legal Studies in Business

Legality of a Contract under State Law to Be Determined by Arbitration
Description U.S. Supreme Court held that the only part of a contract that may be considered by a court for review is whether the arbitration clause itself is valid. If the remainder of the contract is invalid, that can be determined by the arbitrator, not court.
Topic Alternate Dispute Resolution
Key Words Arbitration; Illegal Contract
C A S E   S U M M A R Y
Facts Cardegna agreed to deferred-payment transactions with Buckeye Check Cashing. He would receive cash in exchange for a personal check in the amount of the cash plus a finance charge. The contract stated that in case of any dispute, the matter went to arbitration and was governed by the Federal Arbitration Act. Cardegna brought a class action suit against Buckeye contending it violated Florida lending and consumer-protection laws, thereby making the contract illegal. The Florida trial court held that the legality of the contract itself would be determined at trial. The Florida appeals court reversed, holding that the legality of the contract should go the arbitrator as a part of that process. The Florida high court reversed, holding that a court, not arbitrator, would rule on the legality of the contract itself. Buckeye appealed.

Reversed and remanded. In either state or federal court, unless a challenge involving a contract with an arbitration clause concerns the arbitration clause itself, the issue of the validity of the contract is considered by the arbitrator. The claim that the contract here violated state usury law and so was void for illegality, was a matter to be determined by arbitration, not the court. An arbitration clause itself can be severed from a contract and its legal considered by a court, but the remainder of the contract would be for an arbitrator to decide.

Citation Buckeye Check Cashing, Inc. v. Cardegna, 126 S.Ct. 1204 (Sup. Ct., 2006)

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