Authority To Enter Into Contract Is Issue For Courts, Not Arbitrators Third Circuit just issued a decision that tries to divine the dividing line between challenges to the formation of contracts containing arbitration clauses (which are presumptively for courts), and challenges to the validity of contracts containing arbitration clauses (which are presumptively for arbitrators, if the challenge is to the contract as a whole).  It held that an allegation that a contract is void because the signatory was not authorized to enter into that contract “must be decided by a court.”  SBRMCOA, LLC v. Bayside Resort, Inc., __ F.3d __, 2013 WL 491254 (3d Cir. Feb. 11, 2013).

The case involved claims by a condominium association on the island of St. Thomas against the developer.  A relevant agreement between the parties contained an arbitration clause, so the defendants moved to compel arbitration.  In response, the association argued that its Board did not have authority to enter into that agreement, making the arbitration clause unenforceable (along with the rest of the agreement).  The district court compelled arbitration, finding that an arbitrator should determine whether the Board had authority to execute the agreement.

The Third Circuit vacated the district court’s opinion, holding that the district court must decide the ultra vires argument on the merits.  It noted that the majority of federal appellate courts have concluded that courts should decide whether parties had authority to contract (the 11th, 2nd, 5th, 7th, 9th, and 3d Circuits), while only the Sixth Circuit has issued a contrary decision.  The court also found that additional discovery is warranted regarding the authority of the Board.

In contrast, the Third Circuit found that the association’s alternative claim, that it was coerced into executing the agreement, was arbitrable because it is a challenge to the validity of the agreement, instead of the formation of the agreement.

So, if the contract is void because the Board did not have authority to sign it, that stays in court.  But if the contract is void because the Board was coerced into signing it, that issue is punted to the arbitrator.  That is the result under Buckeye Check Cashing.  Whether that result makes sense is a question for another day.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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