Fifth Circuit Dances On Head of Arbitration Pin

by Stinson Leonard Street - Arbitration Nation
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Demonstrating just how difficult it can be to separate questions about the “formation” of an arbitration agreement from the “validity” of that agreement, the Fifth Circuit found this month that when an argument was applied to two of the parties’ three agreements, it related to their formation, but when the same argument was applied to the third agreement, it related to its validity.

In Lefoldt v. Horne, 2017 WL 1326241 (5th Cir. April 11, 2017), the plaintiff, a community hospital, had engaged the defendant to provide auditing services.  The parties signed contracts in 2009, 2010, and 2012.  However, only the 2009 agreement was reflected in the minutes of the hospital’s board.  In 2014, the hospital filed for bankruptcy, and its trustee sued the auditor for professional malpractice.  In response, the auditor moved to compel arbitration, based on arbitration provisions in all three contracts.

In order to determine whether the dispute was arbitrable, the Fifth Circuit had to confront two confounding rules. First was Mississippi’s “minutes rule,” which the hospital raised as a defense to arbitrability.  The “minutes rule” appears to require  that a public board reflect actions taken in the minutes of its meetings, and, if an agreement to contract is not reflected in those minutes, the contract is not enforceable.  The second issue the Fifth Circuit had to address was the first footnote in SCOTUS’s Buckeye Check Cashing decision, which distinguished disputes over a contract’s validity from those over “whether any agreement between the alleged obligor and oblige was ever concluded.”  That matters because issues of validity can be sent to an arbitrator, which those over formation generally cannot.

The court found the issue of whether Mississippi’s “minutes rule” was one about formation or validity “a close question.” However, it concluded that the minutes rule raised an issue of the very formation of the 2010 and 2012 service contracts.  That decision allowed the court to decide whether those contracts were formed, and it found they were not validly formed, so the trustee did not have to arbitrate issues under those two contracts.

However, the court found that because the hospital board recorded the auditing contract in its 2009 minutes, the application of the “minutes rule” in that instance involved the validity of the 2009 contract. The court found an arbitrator should decide “whether and how the minutes rule applies to the 2009 engagement letter and the scope of the arbitration clause,” unless the district court finds a delegation clause on remand.

This case is a great example of how the current arbitration jurisprudence may have gotten off course.  Should it be this difficult for a court to decide whether a particular argument should be heard by a court or an arbitrator?  See my post from five years ago (has it really been that long?!) on the thin line between formation and validity.

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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