ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Thursday, June 13, 2013

Jack Graves on The Supreme Court, Arbitration, and Implied Contract Terms

The United States Supreme Court rarely has occasion to opine on contract law, the contours of which are largely left to state courts. However, a couple of recent arbitration cases provided the court with a unique opportunity to point out the difference between contract terms implied-in-fact and contract terms implied-in-law. As any diligent first-year Contracts student should know, the former must rest upon the actual consent of the parties (even though not clearly expressed), while the latter are given effect through default legal rules, applied, as necessary, where the parties’ agreement is silent. This distinction between the two (and between contract “interpretation” and “construction”) is, of course, not always made clear in contract cases addressing one or both. However, these two recent opinions, Stolt-Nielsen v. Animal Feeds Int’l Corp., 130 S.Ct. 1758 (2010), and Oxford Health Plans, LLC v. Sutter, 2013 WL 2459522 (U.S.) (June 10, 2013) illustrate the difference quite nicely—whatever one may think about the content of the Court’s arbitration jurisprudence animating these decisions.

In Stolt-Nielsen, a panel of arbitrators had reasoned that an agreement permitted class arbitration, because it did not preclude it. Stolt-Nielsen at 1766. In effect, the parties’ silence required the arbitrators to supply an omitted essential term—a default rule—and they did so, thereby construing the agreement as allowing for class arbitration. Id. at 1768-69 and 1781. While acknowledging the power of arbitrators to craft procedural rules, generally, the Court explained that a “default rule,” allowing for class arbitration was sufficiently inconsistent with the fundamental nature of arbitration as to be beyond the power of arbitrators.  180px-Seal_of_the_United_States_Supreme_Court.svgId. at 1668-69, 1775-76 (referencing the Restatement (Second) of Contracts § 204 on default rules and relying on FAA § 10(a)(4) to hold that the arbitrators had exceeded their powers). After Stolt-Nielsen, some might have expected that class arbitration would require some sort of “clear and unmistakable” expression of party intent (as the Court purports to require for a “delegation” clause, assigning jurisdictional decisions to the arbitrator). This is not necessarily so, however, as we learned this week in Oxford Health Plans.

In Oxford Health Plans, a claimant sought to bring class arbitration claims, and respondent asserted they were not allowed under the arbitration agreement. Both parties agreed to submit the question to a sole arbitrator, who “interpreted” the parties’ agreement and determined that it impliedly allowed class arbitration. Id. In affirming the arbitrator’s decision, Justice Kagan explained that the arbitrator was merely interpreting the actual intent-in-fact of the parties—a task clearly assigned to the arbitrator by those same parties. Id. Therefore, the arbitrator’s decision was fully within his power, even if erroneous—in fact, even if “grievously erroneous.” Id.

Thus, the Court neatly distinguished between the power of an arbitrator to determine actual, factual party intent, when assigned that task by the parties, and the power of the arbitrator to craft legal default rules (at least beyond the scope of general arbitration procedures). This distinction is of course analogous to the distinction between contract interpretation—generally an issue for the jury, if in question—and contract construction—generally an issue for the court.

Perhaps of greater interest to those who follow the Court’s arbitration jurisprudence, Oxford Health Plans appears to continue the inexorable march towards a seemingly unreviewable form of contractual Kompetenz-Kompetenz, see Jack Graves & Yelena Davydan, Competence-Competence and Separability: American Style in, International Arbitration And International Commercial Law: Synergy, Convergence and Evolution (Kluwer 2011) (Part 2) and Jack Graves, Arbitration as Contract:  The Need for a Fully Developed and Comprehensive Set of Statutory Default Legal Rules, 2 William & Mary Bus. L. Rev. 225, 276-85 (2011), initially announced in First Options, Inc. v. Kaplan, 115 S.Ct. 1920 (1995), further expounded upon in Rent-A-Center, West, Inc. v. Jackson, 130 S.C t. 2772 (2010), and made even more seemingly absolute in Oxford Health Care. The Court had already made abundantly clear that a decision as to whether the parties had in fact agreed to arbitrate a dispute—when the decision was “delegated” to an arbitrator—was beyond court review, except as provided under FAA § 10(a). In Oxford Health Care, the Court further clarified the extraordinarily narrow scope of FAA § 10(a)(4).

[posted by Meredith R. Miller on behalf of Jack Graves]

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