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

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

In Stolt-Nielsen,a panel of arbitrators had reasoned that an agreement permitted classarbitration, because it did not preclude it. Stolt-Nielsen at 1766. In effect, the parties’ silence required thearbitrators 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. Whileacknowledging the power of arbitrators to craft procedural rules, generally,the Court explained that a “default rule,” allowing for class arbitration wassufficiently inconsistent with the fundamental nature of arbitration as to bebeyond the power of arbitrators. Id.at 1668-69, 1775-76 (referencing the Restatement (Second) of Contracts § 204 ondefault rules and relying on FAA § 10(a)(4) to hold that the arbitrators hadexceeded 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 torequire for a “delegation” clause, assigning jurisdictional decisions to thearbitrator). 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 assertedthey were not allowed under the arbitration agreement. Both parties agreed tosubmit the question to a sole arbitrator, who “interpreted” the parties’agreement and determined that it impliedly allowed class arbitration. Id. In affirming the arbitrator’sdecision, Justice Kagan explained that the arbitrator was merely interpretingthe actual intent-in-fact of the parties—a task clearly assigned to thearbitrator by those same parties. Id.Therefore, the arbitrator’s decision was fully within his power, even iferroneous—in fact, even if “grievously erroneous.” Id.

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

Perhaps of greater interestto those who follow the Court’s arbitration jurisprudence, Oxford Health Plans appears to continue the inexorable marchtowards a seemingly unreviewable form of contractual Kompetenz-Kompetenz, see JackGraves & Yelena Davydan, Competence-Competenceand Separability: American Style in, InternationalArbitration 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 StatutoryDefault Legal Rules, 2 William & MaryBus. 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 madeeven more seemingly absolute in OxfordHealth Care. The Court had already made abundantly clear that a decision asto whether the parties had in fact agreed to arbitrate a dispute—when thedecision was “delegated” to an arbitrator—was beyond court review, except asprovided under FAA § 10(a). In OxfordHealth Care, the Court further clarified the extraordinarily narrow scopeof FAA § 10(a)(4).

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