Eleventh Circuit Draws a Thin Line Between Formation and Validity Challenges for Arbitration Clauses

The first question a court has to resolve when considering a motion to compel arbitration is whether a valid contract containing an arbitration clause exists.  That’s not always easy because parties sometimes claim that a contract was not formed or that the arbitration clause is not valid.  The Eleventh Circuit recently addressed such issues in Solymar Investments, Ltd. v. Banco Santander S.A.

In Solymar, the plaintiffs sustained losses relating to investments in funds managed by Bernard Madoff and alleged that they had agreed to a multi-part settlement of their Madoff-related investment fraud with the defendants.  After significant negotiation, the parties contemplated execution of multiple documents simultaneously.  However, the defendants convinced plaintiffs that one of the documents, the Exchange Agreement, needed to be executed quickly, and the others would follow.  (That probably should have been a warning sign.)  To no one’s surprise, the Exchange Agreement contained an arbitration clause.

After execution of the Exchange Agreement, negotiations fell apart, and no further documents were executed.  The plaintiffs took the position that because only one of the contemplated documents was executed, there was no binding settlement and sued for breach of fiduciary duty, negligence, fraud, and securities violations.  In response, the defendants moved to compel arbitration based on the arbitration clause in the Exchange Agreement.

The district court compelled arbitration.  On appeal, the Eleventh Circuit was called to determine whether a district court, having found a valid contract containing an arbitration clause exists, is also required to consider a further challenge to that contract’s place within a larger unexecuted agreement.  In doing so, the court considered two SCOTUS cases,  Prima Paint Corp. v. Flood & Conklin Mfg. Co., in which the Court held that challenges to a contract as a whole must be sent to the arbitrator while challenges to the arbitration agreement itself are for the courts to determine; and Granite Rock Co. v. Int’l B’hood of Teamsters, in which the Court clarified that issues of contract formation are for the court, not arbitrators.  The Eleventh Circuit explained that, under Granite Rock, “arbitration of a dispute should only be ordered where ‘the court is satisfied that neither the formation of the parties’ arbitration agreement nor . . . its enforceability or applicability to the dispute is in issue.’”  But when a party “contests either or both matters, the court must resolve the disagreement.”

Having concluded that the contract was formed validly, the court determined under Prima Paint that there was no challenge to the validity of the arbitration clause separate and apart from the overall challenge to the Exchange Agreement.  Thus, the matter must be heard by an arbitrator.

Make the claimant pay
Sue in court another day
Arbitrate away
Under Granite Rock. (clap, clap)

About Bose McKinney & Evans LLP

Bose McKinney & Evans LLP is a business law firm, headquartered in Indianapolis, Indiana, serving both publicly held and privately held businesses, governmental entities and high-growth industries. Our clients include Fortune 100 companies, international manufacturers, national and regional financial institutions, agribusinesses, sports teams, university-incubated start-ups, media, utilities, cities and schools, to name a few. We strive to build strong relationships with our clients as key business advisors, to exceed expectations in the quality of our work, to be knowledgeable about our clients’ businesses and sectors, to be responsive to service needs and to continually seek to improve the delivery of client services. Our ultimate focus is on our clients.
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