Opinion ID: 2632961
Heading Depth: 3
Heading Rank: 3

Heading: The Superior Court Erred When It Adjudicated the Validity of the Underlying Contract.

Text: After determining that it had jurisdiction to decide arbitrability, the superior court ruled that the marketing agreement became impossible to perform when Gnugnoli began employment with CP Leasing because performance would require Gnugnoli to breach a fiduciary duty to CP Leasing. Reasoning that an agreement to breach a fiduciary duty would be unenforceable on public policy grounds, the court concluded that it would be improper to enforce the arbitration clause of an unenforceable agreement and granted summary judgment to Goldbelt Eagle. Lexington argues that the superior court erred when it addressed the validity of the underlying contract. Because federal and state arbitration law do not allow courts deciding arbitrability to adjudicate the validity of the underlying contract, we agree. [9]
The United States Supreme Court has emphasized that the Federal Arbitration Act (FAA) reflects a liberal federal policy favoring arbitration agreements and has directed that any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. [10] This policy favoring arbitration, coupled with the statutory language, has led the United States Supreme Court to interpret the FAA to forbid courts determining arbitrability from adjudicating the validity of the underlying contract. In Prima Paint Corp. v. Conklin Manufacturing Co., Prima Paint filed suit in federal district court seeking rescission on fraudulent inducement grounds of a contract under which Flood & Conklin agreed to provide consulting services. [11] Flood & Conklin moved to stay the proceedings pending arbitration on the grounds that the consulting contract contained a valid arbitration clause. [12] The case required the United States Supreme Court to interpret 9 U.S.C. § 2, which states that arbitration provisions shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract, [13] and 9 U.S.C. § 4, which the Court noted requires a court to order arbitration once it is satisfied that the making of the agreement for arbitration or the failure to comply (with the arbitration agreement) is not in issue. [14] The Court concluded that in passing upon [an FAA] application for a stay while the parties arbitrate, a federal court may consider only issues relating to the making and performance of the agreement to arbitrate. [15] Because Prima Paint's fraudulent inducement claims related to the entire contract, rather than merely the arbitration clause itself, the Court concluded that the claims should be adjudicated by arbitrators. [16] In Southland Corp. v. Keating, [17] the Supreme Court fortified the Prima Paint holding and clarified that it applies equally to state courts considering arbitrability under the FAA. The Court emphasized: We discern only two limitations on the enforceability of arbitration provisions governed by the Federal Arbitration Act: they must be part of a written contract evidencing a transaction involving commerce and such clauses may be revoked upon grounds as exist at law or in equity for the revocation of any contract. [18] The Court then concluded that the FAA created a substantive rule in both federal and state courts, foreclosing state legislative attempts to undercut the enforceability of arbitration agreements. [19] The United States Supreme Court recently reaffirmed this rule in Buckeye Check Cashing, Inc. v. Cardegna, a decision issued after the superior court's ruling in the case now before us. [20] In Buckeye, John Cardegna brought a class action in state court against Buckeye Check Cashing, alleging that Buckeye charged usurious interest rates in violation of state laws. [21] In response, Buckeye moved to compel arbitration on the ground that the loan agreements contained an arbitration clause providing that [a]ny claim, dispute, or controversy . . . arising from or relating to this Agreement . . . or the validity, enforceability, or scope of this Arbitration Provision or the entire Agreement . . . shall be resolved . . . by binding arbitration. [22] The Florida Supreme Court upheld a denial of a motion to compel arbitration on the grounds that (1) the underlying contract was illegal, and (2) an arbitration clause in an illegal contract could not be enforced. [23] The United States Supreme Court reversed. The Supreme Court rejected the Florida court's conclusion that enforceability of the arbitration clause could turn on application of state public policy to the underlying contract [24] and held that a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator. [25] The Court emphasized that under federal law, the arbitration agreement is to be considered separately from the remainder of the contract in determining arbitrability. [26] The Buckeye decision makes it clear that courts may consider challenges of illegality to arbitration agreements but not to the underlying contracts. [27] Goldbelt Eagle attempts to distinguish Buckeye by arguing that the arbitration clause in Buckeye was more exhaustive than the clause at issue in this case. Although Goldbelt Eagle is correct that this arbitration agreement is drafted differently from the clause at issue in Buckeye, the Supreme Court's holding in Buckeye was broad. It was not predicated on a close reading of the agreement at issue in that case; the Court did not parse the language of the agreement, nor did it refer back to the language of the clause after initially quoting it. Instead, the Court relied on several broad principles: (1) an arbitration provision is severable from the remainder of the contract; (2) the issue of the contract's validity is considered by the arbitrator in the first instance; and (3) this arbitration law applies in state as well as federal courts. [28] Thus, regardless of whether the arbitration agreement at issue is identical to the agreement before the Court in Buckeye, the Court's holding applies. Buckeye does not change the basic rule that courts determining arbitrability must interpret the agreement and determine whether it governs the dispute at issue. However, where the parties have agreed to submit a dispute to arbitration, federal law does not permit a court to refuse to compel arbitration based on a holding that the entire contract is void for public policy. [29]
Lexington also argues that the superior court erred under state law when it declared the underlying contract void. We agree. Based on both the statutory language and the policy behind Alaska's Arbitration Act, we hold that state arbitration law aligns with federal law and does not permit a court determining arbitrability to consider the validity of the underlying agreement. The language of the state statute supports our holding that state arbitration law does not permit adjudication on the merits of the underlying agreement. The text of AS 09.43.010(a), which mirrors FAA § 2, suggests that a court may only resolve public policy challenges when such claims are directed at the arbitration clause itself. Buckeye [30] and Prima Paint [31] have interpreted the analogous federal provision to require a court to enforce the arbitration clause unless a party asserts standard contract defenses, such as fraudulent inducement or void for public policy, against the arbitration clause itself. Alaska Statute 09.43.010(a) provides: [A] provision in a written contract to submit to arbitration a subsequent controversy between the parties is valid, enforceable, and irrevocable, except upon grounds that exist at law or in equity for the revocation of a contract. [32] This provision does not provide that the arbitration agreement is not enforceable if grounds exist for revocation of the contract that underlies the agreement. Instead, it dictates that the agreement is not enforceable if grounds . . . exist . . . for revocation . . . of a contract. [33] In other words, under AS 09.43.010, a court may properly adjudicate claims that the arbitration clause itself is void, but not claims that the entire contract is void. Alaska Statute 09.43.020 also indicates that courts deciding arbitrability should not adjudicate the enforceability of the underlying contract. Subsection (a) indicates that courts should address arbitration provisions separately from the underlying contract. The statute mirrors FAA § 4 and states that if the opposing party denies the existence of the agreement to arbitrate, the court shall proceed summarily to the determination of the issue and if the agreement is found to exist shall order arbitration. [34] Similarly, under subsection (b) of the statute, the court may stay an arbitration proceeding commenced or threatened on a showing that there is no agreement to arbitrate.  [35] Like FAA § 4, this provision provides for the court to decide issues related to the arbitration agreement itself, but does not provide jurisdiction to decide separate issues relating to the validity of the underlying contract. These provisions support the view that arbitration clauses are severable from the entire contract and thus may be properly enforced even when it is claimed that the underlying contract is void. Strong public policy rationales support this position. Like federal law, state law strongly favors arbitrability. We have previously recognized the strong public policy in favor of arbitration. [36] Given this policy, we have indicated that we . . . allow ambiguous contract terms to be construed in favor of arbitrability where such construction is not obviously contrary to the parties' intent. [37] Forbidding courts from examining the merits of a dispute or the validity of the underlying contract furthers the primary benefit of arbitrationexpeditious and inexpensive dispute resolution for the parties. [38] This policy would be frustrated if parties could avoid arbitration by challenging the validity of the underlying agreement. Although the superior court noted the state's strong presumption in favor of arbitrability, it reasoned that it would be illogical to refer the case to an arbitrator simply so that the arbitrator could decide that he or she lacked the power (or jurisdiction) to arbitrate. However, arbitrability is a matter of contract, and there is no reason to assume that submitting the validity of the underlying contract to the arbitrator is not appropriate where the parties so intended. [39] The superior court relied on our decision in Willis Flooring, Inc. v. Howard S. Lease Construction Co. & Associates. [40] In Willis, we held that an arbitration provision was not unenforceable for lack of mutuality where arbitration was the sole option of one party. [41] Our holding was premised upon the notion that an arbitration clause does not require separate consideration so long as the underlying contract is supported by consideration because the contract and arbitration clause constitute a unitary, integrated contract, not a series of independent agreements. [42] But this notion is consistent with the Prima Paint and Buckeye rule that courts deciding arbitrability are not to adjudicate the validity of the underlying agreement. As several courts have reasoned, interpreting Prima Paint to require separate consideration for an arbitration clause runs contrary to the strong federal policy in favor of arbitration. [43] Our holding in Willis is therefore consistent with federal law and with our ruling today. Alaska's arbitration law closely follows federal arbitration law, [44] and federal law has clarified that arbitration clauses are severable from the underlying contracts for purposes of challenges to the validity of the underlying agreement. Determinations as to the validity of the underlying contract are a matter for the arbitrator to decide. We therefore hold that state arbitration law, like federal law, did not permit the superior court's finding that the underlying contract was unenforceable.
Our conclusion that the superior court erred under federal and state arbitration laws when it declared the underlying contract void does not end the matter. Because arbitration is a matter of contract, parties can only be compelled to arbitrate a matter where they have agreed to do so. [45] Thus, we are required to decide whether the arbitration clause covers this dispute. Goldbelt Eagle argues the superior court correctly concluded that the dispute did not arise under the agreement and was therefore not arbitrable under the terms of the arbitration clause. We disagree. Although Goldbelt Eagle is correct that arbitration is a matter of contract and a particular dispute is not arbitrable unless the parties have agreed to arbitrate it, we hold that this dispute falls easily within the terms of the arbitration clause. Although the superior court concluded that the dispute did not arise under the contract, its ruling was predicated on its finding that the contract was void for public policy reasons. The superior court reasoned that  [s]ince the agreement for marketing services for commission was unenforceable following Gnugnoli's CP Leasing employ, no claims could `arise' under the agreement thereafter. (Emphasis added.) The court concluded that no disputes could arise under a void contract. As explained above, this conclusion is precluded under both federal and state law, which forbid courts from determining arbitrability based on the validity of the underlying contract. Lexington contends that its claim arise[s] directly under the contract and fall[s] within the disputes that are subject to the arbitration provisions. Goldbelt Eagle argues that the arbitration clause at issue is narrow and did not extend to the dispute at issue. Goldbelt Eagle suggests that the agreement is narrow because it extends only to all disputes arising under and does not include disputes as to the validity of the agreement or related to or in connection with the agreement. But Goldbelt Eagle cites no Alaska or federal cases declaring that clauses that require arbitration of all disputes or claims arising under the agreement must be narrowly read. And several federal courts have declared that clauses referring to arbitration disputes arising under or arising hereunder are broad. [46] Moreover, regardless of whether the clause is narrow or broad, as a matter of contract interpretation, the arbitration clause applies to this dispute. Goldbelt Eagle suggests that the superior court properly concluded that the parties are disputing whether the underlying contract was void. It reasons that such a dispute revolves around a collateral matter. But Lexington is seeking payment of a commission for services it contends were provided under the contract. Thus, Lexington's claim for payment arises under the contract: it is seeking payment for services it argues were provided under the terms of the agreement. Arbitration of such a claim falls squarely within the arbitration clause's agreement to submit [a]ll disputes or claims arising under this Agreement to arbitration. (Emphasis added.) In light of our strong policy favoring arbitration and our rule of construction allowing even ambiguous contract terms to be construed in favor of arbitrability, [47] this dispute would be arbitrable even if the contract term was ambiguous. Here, the contract term is not ambiguous, and arbitration is consistent with the parties' intent to arbitrate claims arising under the agreement. We therefore hold that Lexington's claim falls within the scope of the arbitration clause. Because we hold that the superior court erred in declining to order arbitration based on its finding that the underlying contract was void, we do not address Lexington's argument that the court erred in granting summary judgment because parol evidence was in conflict.