Some costs of flaunting but flunking Contracts

The following contribution to our arbitration symposium is by Lawrence Cunningham, who teaches Contracts and Corporations at George Washington University. His writings include the forthcoming Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press); the international best-seller, The Essays of Warren Buffett: Lessons for Corporate America (Carolina Academic Press); and a seven-year stint as editor of Corbin on Contracts. The following is adapted from his forthcoming article, Rhetoric and Reality and Supreme Court Arbitration Jurisprudence: How the Court Flaunts and Flunks Contracts

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Scholarly debate concerning federal arbitration jurisprudence is dominated by disagreement about the comparative efficacy of arbitration compared to litigation.  What’s at stake is the fairness and efficiency of the process. But federal arbitration jurisprudence is plagued by a hidden problem that raises an entirely different set of concerns: the Court always says its arbitration jurisprudence is a matter of contract and contract law, yet the law it develops and applies has so little to do with actual contract law that a large gap emerges between the Court’s rhetoric and the reality. This rhetoric-reality gap raises a series of troubling questions and poses a considerable number of significant costs.

Any gap between what judges or other public officials do and what they say creates risk to the legitimacy of the official and the official’s actions.  The rhetoric-reality gap in federal arbitration jurisprudence exposes several problems. The talk of freedom of contact obscures how the primary engine of this jurisprudence is the Court’s discernment of a national policy favoring arbitration. That has nothing to do with freedom of contract or the exquisitely apolitical body of contact law, but everything to do with judicial power and institutional prerogatives.

It is also by definition a national rather than state policy; the talk of deference to state contract law as a gesture to federalism not only makes the assertion hypocritical but unfairly mutes valid federalism objections to the Court’s usurpation of the field.

A related risk of perceived illegitimacy is how the Court’s pronouncements may provoke state defiance. The Supreme Court faces rebuke from state courts, which thumb their noses at the Court or state legislatures, which sometimes leave on the books statutes that would be illegal under its precedents. Obviously, such state objections to federal invasion may exist even if the Court’s rhetoric were faithful to its applications.

But it seems likely that the gap between rhetoric and reality fortifies state objections; it invites states to explain why, under contract law as state officials know it, unlike how the Supreme Court develops it, the state is correct and the Court wrong. State officials may have a duty to resist usurpations of constitutionally protected state prerogatives, including those that federal law under the FAA purports to preempt.

On the other hand, some states simply knuckle under, declaring the Court’s opinions the law of the land and withdrawing contrary state opinions after being rebuked. Though not all states defy the federal regime, those following it often cause the problem of distortion. Before Prima Paint Corp. v. Flood & Conklin Mfg., most state courts held that defenses asserting fraud in the inducement were for courts to decide, not arbitrators.

Among these was New York, leader in contract law, including in arbitration cases. The grounds were straightforward principles of contract law: the arbitration clause was not severable from the principal contract. Similar results and reasoning appeared elsewhere. Prima Paint led New York to switch and follow the federal rule. The grounds were a more adventuresome principle of arbitration policy: following contract law “defeats . . . two of arbitration’s primary virtues, speed and finality.”

The Court’s jurisprudence has prompted the distortion of state law in other states too, including California. Its high court likewise construed the California arbitration statute to distinguish sharply between arbitration clauses and the broader contracts of which they usually are part. Its rationale was the same, putting arbitration policy above freedom of contract. Dissenting, Justice Mosk declared that approach to put the cart before the horse, showing “resupination: logic and procedure turned upside down.”

Mosk was more persuaded by the “irrefutable dissent” in Prima Paint and the few state courts that held out against the sweep of the federal rule, including Montana and Louisiana. Mosk stressed that, if arbitration is really a matter of contract, then courts must take seriously, and not merely rhetorically, basic principles, including that “one of the essential elements of a contract [is] that the parties enter into it knowingly and consensually, not through fraud, duress, menace, undue influence, or mistake.”

The gap and challenges to jurisprudential legitimacy pose additional practical problems of doctrinal incoherence, both within federal jurisprudence and collaterally on the law of contracts. The Court’s jurisprudence is often confusing, especially concerning questions such as “who decides” and what “clear and unmistakable” means. The confusion is likely at least a partial product of assertions that contract and contract law dominate with applications showing that a national federal policy favoring arbitration dominates.

Indeed, the Court’s concept of “clear and unmistakable,” a central piston in its arbitration cases, simply does not appear as an interpretive principle or presumption anywhere in the law of contracts. Worse, other courts are nevertheless tempted by the Supreme Court’s lead to adapt statements of presumptions about contractual intent from the arbitration context to the general context of contracts.

A cumulative variation of all these problems is the problem of misperception. The Court’s rhetoric, taken literally, gives contract law a bad name. For example, Professor Linda Mullenix wrote: “the supremacy of contract law over long-established jurisdictional doctrines has significantly eroded certain fundamental litigation rights.”

This lays the blame for infirmities in the Court’s jurisprudence on contract law. But it is not the “supremacy of contract law” that is responsible for any such infirmities that may exist. It is the rhetorical invocation of notions of contracts while really using a different batch of arbitration jurisprudence.

The Justices may be deliberately forging a rhetoric-reality gap for parochial purposes, to advance their agenda favoring arbitration. If so, they would do well to find a more legitimate way of describing what they are doing than pretending it is all about people’s freedom of contract and traditional contract law. If the Justices actually believe what they have written, that they are merely applying contract law, there is another cost to add to the tally: embarrassment.