First Circuit Holds that Parties Must Claim that a Contract’s Arbitration Clause is Itself Invalid in Order to Obtain Court Resolution of Contractual Disputes

First Circuit Holds that Parties Must Claim that a Contract’s Arbitration Clause is Itself Invalid in Order to Obtain Court Resolution of Contractual Disputes

By: Maria Aurora P. Deguzman

Edited by: Brooke Michiels 

Farnsworth v. Towboat Nantucket Sound, Inc., 790 F.3d 90 (1st Cir. 2015).

This case concerns a lawsuit between Rodney Farnsworth III and Towboat Nantucket Sound, Inc. (“TNS” herein). Farnsworth entered into a salvage contract with TNS and later tried to rescind the entire contract, claiming that he had entered into the contract while under duress, and disputing the sum he owed TNS.Farnsworth filed the lawsuit seeking 1) a preliminary injunction against arbitration and 2) a declaration that the salvage contract was unenforceable because he had entered into it under duress. He filed the lawsuit only after he and TNS had already submitted the dispute to a panel of three arbitrators pursuant to a binding arbitration clause in the salvage contract.Farnsworth’s justification for filing the lawsuit after he had already agreed to and commenced arbitration proceedings was that, “after he reviewed recordings of his radio conversations produced by TNS, he believe[d] [TNS] withheld, edited, or deleted unfavorable conversations pertaining to towing.” The district court found that Farnsworth’s complaint did not distinguish between the obligation to arbitrate and the merits of what TNS was owed. As such, the district court denied the motion for injunctive relief and stayed the case pending the outcome of the arbitration.The arbitration panel found unanimously in favor of TNS and ordered Farnsworth to pay a salvage award of $60,306.85. Although Farnsworth objected, the district court confirmed the award.Farnsworth appealed the district court’s decision, arguing that it erred in confirming the arbitration award without first addressing his duress claim as to the arbitration clause. The court held that the district court correctly found that the duress claim was for the arbitrator to resolve because Farnsworth did not challenge the validity of the arbitration clause specifically in his complaint, nor at any time before the conclusion of the arbitration proceedings.The First Circuit said that, “[e]ssentially, Farnsworth did too little, too late.” Farnsworth did not specifically argue that he had been coerced to agree to the arbitration clause, as opposed to the contract as a whole, until the brief he submitted in opposition to the confirmation of the arbitration award.The First Circuit reasoned that Farnsworth was required to challenge the validity of the arbitration clause specifically in his complaint in order to obtain court review of his duress challenge, and that “the arbitration clause in the salvage contract was sufficiently broad to encompass the dispute about the validity of the contract.”The First Circuit explained that the Supreme Court has differentiated between two types of challenges to the validity of arbitration agreements:

1. Challenges to the validity of an entire contract containing an arbitration clause
2. Challenges to the validity of the specific agreement to resolve the dispute through arbitration

The Supreme Court has held that challenges to the first type are for the arbitrator to decide, while challenges to the second type are for the courts to decide (if timely and properly made). This rule reflects two basic principles of arbitration law:

1. A party cannot be required to submit to arbitration any dispute which he has not agreed to submit to arbitration because arbitration is a matter of contract.
2. A written arbitration agreement “is ‘valid, irrevocable, and enforceable’ without mention of the validity of the contract in which it is contained.” Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 70 (2010) (quoting 9 U.S.C. § 2).

“The second principle means that, if a party fails to challenge the validity of the arbitration clause itself, the agreement to arbitrate is enforceable and any dispute about the validity of the contract as a whole goes to the arbitrator.” The First Circuit noted, however, that the severability doctrine only addresses the issue of whether a contract containing an arbitration clause is valid. It does not address the issue of whether a contract was ever actually formed.The First Circuit ultimately held that the case implicated the severability doctrine because the issue in the case was the contract’s validity, not its formation. To that end, Farnsworth also did not dispute that a contract was formed; he only disputed the contract’s validity.The First Circuit admitted that if Farnsworth’s duress allegation were true, the entire contract would be invalid (though it would not mean that no contract was ever formed). By challenging the validity of the contract as a whole instead of challenging the arbitration clause specifically, the duress claim had to be sent for arbitration and could not be resolved by a court of law.When the arbitration panel rendered its decision, the court must grant a party’s application to confirm the arbitration award, “unless the award is vacated, modified, or corrected as prescribed in ‘ 9 U.S.C. § 10 and § 11.’” The First Circuit found that none of the circumstances listed in § 10 or § 11 were present in the instant case and that Farnsworth did not argue otherwise. As such, the First Circuit affirmed the judgment of the district court and awarded costs against Farnsworth.