"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Monday, July 5, 2010

Rent-a-Center v Jackson- The Dissent

One of us had, in the Lex Arbitri blog, written a guest post on the US Supreme Court's decision in Rent-a-Center v Jackson. We had noted that the majority (MAJ) had held that unless an agreement to arbitrate a gateway issue (A gateway issue here refers to issues pertaining to arbitrability of the dispute, whether as a matter of law or as a matter of the scope of arbitration agreement) is specifically challenged, decision on such issues would go to the arbitrators.

To get a grasp of what the court held, we suggest perusal of the at least the summary contained in the said post, if not the judgement.

This purpose of this post would be to analyse the minority decision, which we'll call DIS. Both judgements are equally convincing. Here, we will summarize the DIS but we will attempt to point out where both judgements have disagreed in a subsequent post.

1. The arbitration agreement (AA) between Rent-a-Center (RC) and Jackson (J) is a part of the broader service contract between RC and J.

2. Since arbitration is a "matter of contract", courts usually intervene less and enforce the agreement of the parties to arbitrate. However certain conditions precedent ("necessary antecedents") of arbitration, known as gateway issues or questions of arbitrability, are assigned to the courts by the Federal Arbitration Act (FAA). Such questions include the questions relating to the existence and validity or the scope of the arbitration agreement. This case is on the question relating to the existence and validity of the arbitration agreement.

3. The 'Who decides the arbitrability?' question is governed by two series of cases:
[We have summarized this aspect in the order in which the court has dealt it with. We suggest readers first read 3(b) and then read 3(a). That way, this makes a lot of sense]

      a) One line of cases suggests that gateway questions can be delegated to the arbitrator provided there is a clear and unmistakable intent on the parties to do so. In order to assess the clear and unmistakable intent on the parties to delegate gateway issues to the arbitrator, the courts should generally apply ordinary state law principles that govern the formation of contract. Thus, decision on whether such clear and unmistakable intent exists is for the court to determine. 

     b) The second series of cases govern the law on who should decide challenges to the validity of the arbitration agreement. Two kinds of challenges are contemplated:

                i)  Challenge as to the validity of the arbitration agreement specifically
                ii) Indirect challenge to the arbitration agreement by challenging the entire contract

As per the prevailing cases, challenges in the nature of b(i) go to the court and challenges in the nature of b(ii) goes to the arbitrator.

 4. The simple question in this case is whether there was a clear and unmistakable intent of the parties to delegate gateway issues to the arbitrator.

5. J's contention that the AA was unconscionable shows that J never clearly or unmistakably intended to arbitrate the gateway issues. It may be noted that a more rigorous standard applies when such a question arises. This was recognised in First Options of Chicago v. Kaplan 514 US 938 (1995) [First Options] as a reverse presumption, that is, a presumption in favour of reference of the matter to the court as against the usual presumption in favour of arbitration.

[Readers may note that Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) was prior to First Options]

6. A contention of unconscionability is a contention as to the existence of the clear and unmistakable intent to arbitrate gateway issues.Such a question is to be decided as per state law. J here has claimed he never "meaningfully" assented to the AA in the first place. Thus,

"when a party raises a good-faith validity challenge to the arbitration agreement itself, that issue must be resolved before a court can say that he clearly and unmistakably intended to arbitrate that very validity question."

To decide whether there was a valid AA under § 2 FAA, the District Court should have decided whether there was a valid arbitration agreement to refer threshold issues to the arbitrator in the first place. § 2 FAA reads:

"Section 2. Validity, irrevocability, and enforcement of agreements to arbitrate:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."

7. Therefore, the judgement of the Court of Appeals is affirmed, and the matter remanded to the District Court to decide on whether the AA was invalid for unconscionability.

[Sections III and IV of the DIS deal with an analysis of the MAJ. We will defer analysis of this aspect to a future post, where we would compare the MAJ and the DIS.] 

No comments: