BY CRAIG TOMPKINS — The Florida Supreme Court, along with several other state supreme courts, over the past twenty years, has attempted to push back against the Supreme Court of the United States’ (“SCOTUS”) precedent on arbitration clauses. As a preliminary matter, the Federal Arbitration Act (“FAA”), as decided by SCOTUS over 40 years ago, mandates that arbitration clauses in contracts are enforceable, regardless of whether the entire contract itself is enforceable due to fraud, illegality, or some other contractual defense. The FAA must be applied whenever a party seeks to enforce an arbitration provision that appears in a contract involving interstate commerce.
However, in 2005, the Florida Supreme Court heard Cardegna v. Buckeye Check Cashing, Inc., a case where a Florida plaintiff sued a foreign company that had provided payday-loan and check-cashing services. The plaintiff alleged that the fees charged by the defendant were in violation of Florida’s usury laws. Not only did this case clearly involve interstate commerce, but the arbitration clause in the contract itself also expressly stated that the contract was to be governed by the FAA. Nevertheless, when the defendant moved to compel arbitration pursuant to the FAA and relevant SCOTUS precedent, the Florida Supreme Court applied Florida contract law in holding “that where a party sufficiently alleges that a contract is void for violation of Florida’s usury laws, the Florida courts, and not an arbitrator, must first determine the contract’s legality before a party may be required to submit to arbitration under a provision of the contract.” This holding was directly contradictory to SCOTUS’ 1967 decision in Prima Paint Corp. v. Flood & Conklin Manufacturing.
The Florida Supreme Court, quoting an earlier Florida Fifth District Court of Appeal decision, explained its discomfort with enforcing part of a contract—the arbitration provision—when a plaintiff has alleged that the entire contract was illegal and thus void: “A court’s failure to first determine whether the contract violates Florida’s usury laws could breathe life into a contract that not only violates state law, but also is criminal in nature, by use of an arbitration provision. This would lead to an absurd result.” The Florida Supreme Court’s ultimate conclusion was that despite the strong indications that the FAA applied in this case, it should be able to apply Florida contract law to this dispute, saying, “We conclude that Florida public policy and contract law prohibit breathing life into a potentially illegal contract by enforcing the included arbitration clause of the void contract.”
SCOTUS did not buy this argument. In a 7-1 decision, SCOTUS overruled the Florida Supreme Court in Buckeye Check Cashing v. Cardegna and held that “regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.” As such, while the Florida Supreme Court’s aim was seemingly noble—i.e., not putting a stamp of approval on a potentially illegal contract by enforcing the arbitration provision in that contract— SCOTUS perhaps feared that affirming such a ruling would metaphorically open a can of worms. That is, if affirmed, it would allow every state to make its own determination of when the FAA did and did not apply, and thus allow litigants to avoid arbitration by merely alleging the contract was void, regardless of the merits of the claim.
More recently, in early 2013, the Florida Supreme Court got another opportunity to implement its own policy in a case where a defendant was seeking to enforce an arbitration provision that was governed by state law, not federal law, and where interstate commerce was not a factor. Ironically, however, the Florida Supreme Court made a ruling where the result was as if the FAA did apply, albeit using a slightly different rationale than would be required by SCOTUS if the FAA governed the contract. It was as if the Florida Supreme Court was saying to SCOTUS, “Don’t tase me (again), bro.”
That case was Jackson v. Shakespeare Foundation, Inc., which involved a claim for fraud in the inducement of a real estate sale. In Jackson, the defendant posted an advertisement listing the subject property for sale. That advertisement stated, “Wetlands study verifies No Wetlands.” However, after the transaction closed, the buyer discovered that the property was actually 26% wetlands. Moreover, the buyer alleged that the seller knew of this fact, based on a written report in his possession when he placed the advertisement and sold the property.
When the buyer sued, seeking to rescind the contract, the defendant-seller moved to compel arbitration of the matter. The contract’s arbitration clause read, in pertinent part: “This Contract will be construed under Florida law. All controversies, claims, and other matters in question arising out of or relating to this transaction or this Contract or its breach will be settled through arbitration.” In a surprising change of course from its previous resistance of the FAA displayed in the Buckeye Check Cashing case, the Florida Supreme Court held that an arbitrator must decide whether this sale was procured by fraud and thus voidable. That is, the court held that an arbitrator must decide whether the very contract that gives him the power to arbitrate the dispute is voidable.
In reaching its decision, the court used a “contractual nexus” test. That is, if the dispute between contracting parties is related to the contract itself (e.g., not a suit for an assault that occurred weeks after the contract was executed), and the arbitration provision is broad enough to cover this type of dispute, courts must compel arbitration. In Jackson, the court held that the alleged fraud in the inducement through use of the false advertisement was sufficiently related to the contract to pass the “contractual nexus” test, and that the language “all controversies, claims, and other matters” in the arbitration provision was broad enough to cover such a claim. However, the court did not stop there. It proceeded to cite the SCOTUS case Prima Paint, and interpreted the FAA to mandate that an arbitrator determine fraud in the inducement claims.
So, after many years of deciding cases contradictory to the SCOTUS line of cases on arbitrability, the Florida Supreme Court has seemingly decided to toe the line. To be fair, there is a distinguishing element in the Buckeye Check Cashing case and the Jackson case: a finding that the contract in Buckeye was illegal would have rendered the entire contract void, as if it never existed. On the other hand, if the court held that the contract in Jackson was procured through fraud in the inducement, it would merely be voidable, that is, there would be other possible remedies than a cancellation of the contract. The buyer could wind up keeping the property but receive money damages from the seller for the difference in its value. The court may have decided that this added element of deciding what the proper remedy is may be better served through arbitration.
Another possible theory as to what the Florida Supreme Court was aiming for in its recent ruling is to encourage contracting parties to write more specific arbitration clauses in the event that they do not actually intend to arbitrate any and all claims arising out the contract. Based on the Jackson holding, fraud in the inducement meets the “contractual nexus” test of whether an issue is arbitrable, but if the parties agreed to write a more narrowly tailored arbitration clause, specifically stating that fraud in the inducement is not an arbitrable claim, a court would have to hold that the provision is not broad enough to cover such claims.
To that end, a savvy buyer of real estate may well recognize the need to craft a carefully worded arbitration clause so that he does not wind up in the same position as the buyers in the Jackson case. Still, the average consumer purchasing a home may not recognize the potential hazards that lie in the broad arbitration clause in Section 16 of the standard Florida Contract for a Residential Real Estate Sale and Purchase. This clause is nearly identical to the one used in Jackson, meaning the unwitting homebuyer, by executing the standard form contract used in most Florida residential real estate transactions, may be forced into arbitrating a subsequent fraud in the inducement claim.
For further discussion of the impact the Jackson v. Shakespeare Foundation, Inc. case may have on Florida residents purchasing a home, see What Does Jackson v. Shakespeare Foundation, Inc. Mean for Florida Residents who are Defrauded in the Purchase of Their Home?