The Missouri Supreme Court recently ruled on a case that could potentially affect the way companies view arbitration agreements. The good news for businesses is that arbitration agreements are here to stay. In fact, the Court’s ruling goes a long way to reinforcing them, overturning an opinion from the Court of Appeals that had raised some doubts.
Specifically, in two cases that both involved Bridgecrest Acceptance Corporation, the Supreme Court addressed several concerns about when arbitration agreements should be enforced. These included when the agreements should be considered part of a contract, when they were unconscionable and when they ran afoul of collateral estoppel.
The facts of the matter
As the Supreme Court noted, the two cases against Bridgecrest were nearly identical. Both involved people who bought and financed their cars through DriveTime Car Sales Company, LLC. The car buyers all signed installment contracts that referenced an arbitration agreement. They also signed the arbitration agreement referenced by the installment contract. In turn, it referenced back to the installment contract.
After DriveTime sold the vehicles, it assigned its interest in the contracts and arbitration agreements to Bridgecrest. When the buyers later failed to make their payments, Bridgecrest repossessed the vehicles. Bridgecrest then sold the vehicles to recoup part of their losses and sued the buyers for the remainder.
In turn, the buyers filed countersuits, claiming that Bridgecrest had employed “unlawful and deceptive business practices.” In response, Bridgecrest sought to dismiss or stay the countersuits by moving the action to arbitration, per the arbitration agreements. The trial court denied the move to arbitration. Bridgecrest appealed. The court of appeals denied the move. Bridgecrest appealed again, and the Supreme Court reversed the trial and appellate court’s findings.
The Supreme Court’s opinion on arbitration agreements
The Court noted the buyers did not challenge the existence of the arbitration agreements in the circuit court. Instead, they only challenged the legality of them. Bridgecrest argued the arbitration agreements were valid because they met three key tests:
- They contained adequate consideration
- They were conscionable
- There was no collateral estoppel to get in the way
These were, in turn, the issues the Court considered in its opinion. It noted that Missouri arbitration agreements needed to follow Missouri contract law. Accordingly, they needed “the three essential elements” of a valid contract:
- Bargained for consideration
Because they need to adhere to contract law, arbitration agreements are also subject to contract challenges like lack of consideration and unconscionability. The buyers claimed the arbitration agreements were not valid because they lacked consideration. Or, if they had showed consideration, they were still unconscionable.
The Court disagreed, noting the key points for both these topics, as well as the issue of collateral estoppel.
First, the Court clarified that the idea of “consideration” applies to the whole contract. The law says that businesses and buyers need to review the whole contract to determine if it shows a “promise […] or the transfer or giving up of something of value to the other party.”
In other words, the buyers were wrong to try to evaluate consideration for the arbitration agreement on its own. It could only be evaluated in the larger context of the whole contract.
The Court also referenced several Supreme Court cases that held arbitration agreements were severable. The buyers suggested these cases showed the Court should evaluate the consideration for the arbitration agreements separate from the rest of the contract. Instead, the Court said the key point of those rulings was that courts could enforce the “severable” arbitration agreements, even if parts of the larger contract were faulty.
The Court closed the matter of consideration by arguing that judges should not look to at each promise within a contract to see if it is counterbalanced elsewhere. Instead, each part of the contract should be seen as a part of “a collection of promises […] given in exchange for a collection of promises.”
Arbitration agreements are often an important part of a contract
This appears to be a good ruling for business owners. As the American Bar Association notes, arbitration can provide a variety of benefits. It tends to be less expensive and faster. It also offers greater privacy and flexibility. It can even prove useful in certain cross-border disputes for international businesses.
The Supreme Court’s opinion helps keep these benefits on the table. It reinforces the fact that arbitration agreements should be reviewed within the larger context of the whole contract. Accordingly, it raises the bar for challenges on the basis of consideration.
We will look at the matters of conscionability and collateral estoppel in a future blog.