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What Happens When Conflicting Contracts Create Legal Conundrums?

On Behalf of | Jun 24, 2024 | Business Litigation

The United States Supreme Court recently weighed in on a case involving the cryptocurrency exchange platform Coinbase. The question, however, had nothing to do with cryptocurrency. Instead, it had everything to do with contracts and arbitration clauses.

Specifically, in the case Coinbase, Inc. v. Suski et al, the Supreme Court explored a novel question about who decides whether a dispute should go to arbitration. Given how often businesses make use of arbitration agreements, owners would do well to pay attention.

Two Contracts in Conflict with Each Other

The dispute arose from a conflict between two different clauses in two different contracts, each of which establishes the proper forum for disputes.

  • The first clause is in the contract Coinbase users must sign to use the company’s cryptocurrency services. This contract contains a mandatory arbitration provision. Within the provision, there is a delegation clause that sends all matters about the arbitrability of cases to an arbitrator.
  • The second clause appears in a separate contract. Coinbase ran a sweepstakes that offered participants a chance to win some Dogecoin cryptocurrency. Participants in the sweepstakes had to sign this contract, and this contract had a forum selection clause. This forum selection clause said that all legal disputes would fall under California law. It said that entrants waived any other claims of jurisdiction and submitted their causes to the “jurisdiction of [California] courts.”

Accordingly, when some of the sweepstake participants filed a class action, they filed it in the U.S. District Court for the Northern District of California. Coinbase responded by trying to compel arbitration per their platform contract. The District Court denied Coinbase’s request, arguing that the dispute fell under the forum selection clause for the sweepstakes. When Coinbase appealed, the Ninth Circuit upheld the District Court’s decision.

The Supreme Court’s Decision

The U.S. Supreme Court agreed to hear the case because it presented a novel situation. It introduced a dispute between two different contracts, each of which clearly pointed to a different forum for dispute resolution.

Justice Jackson authored the Court’s opinion. Her take on the case was that it “presents the following question: When two such contracts exist, who decides the arbitrability of a contract-related dispute between the parties—an arbitrator or the court?”

Unanimously, the Court agreed that the answer is, “The courts.” While the answer and the unanimous vote are both notable, the reasoning is likely more important.

As the Supreme Court notes, “Arbitration is a matter of contract and consent.” Parties must agree in advance to arbitrate their disputes. Without any such contract, neither party can enforce mandatory arbitration. The Coinbase platform contract took the fairly routine step of clarifying that questions about arbitrability should be decided by an arbitrator. However, Justice Jackson noted that this dispute presented a new order of disagreement over arbitrability.

As Jackson noted, United States courts had already clearly defined three orders of disagreements:

  • First-order disagreements involve “the merits of the dispute.” These involve the applicable laws and relevant facts.
  • Second-order disagreements involve questions about whether the parties agreed to arbitrate the matters in dispute.
  • Third-order disagreements involve questions about “who should have the primary power” to resolve second-order disagreements.

Those orders of disagreements all flow from disputes that feature consistent language about arbitration. This case was different. It presented a new, fourth-order of disagreement: A fourth-order disagreement between two different, competing contracts. Each points to a different form of dispute resolution.

The Supreme Court ruled that the answer to this conundrum lay in “traditional contract principles.” To that end, the Court asked if the sweepstakes participants had truly agreed to arbitrate their disputes. The answer would clearly be “yes” if the sweepstakes contract had followed the same language as the Coinbase platform contract.

However, the participants had also signed the sweepstakes contract, and that pointed toward a competing dispute resolution process. The sweepstakes contract said parties must resolve their disputes under California law. Therefore, it was not clear which agreement should bind the sweepstakes participants. Simultaneously, the arbitration provision in the Coinbase platform contract did not apply to the sweepstakes contract. This means the sweepstakes contract also existed outside of the platform contract’s delegation clause.

When Can Businesses Compel Arbitration?

As the Supreme Court noted, contract laws and the terms of their contracts determine whether two parties will arbitrate their dispute. Thus, questions of arbitrability tend to follow the terms set forth in those contracts. When there are delegation clauses that send disputes about arbitrability to an arbitrator, those clauses typically bind all the parties in the dispute.

Even more, the principle of severability often tilts disputes further toward arbitration. The severability principle states that “an arbitration [or delegation] provision is severable from the remainder of the contract.” Even if the parties dispute another part of their contract, the arbitration provision should remain enforceable until someone successfully challenges it.

However, severability is not a cure-all for matters of arbitrability. Businesses must point their contracts consistently toward the same method of dispute resolution. Their contracts and arbitration provisions must also follow the standards for all legal contracts. These include standards such as consideration and consent. And, of course, their contracts must not conflict with other laws or contracts. As the Supreme Court recently ruled, if two different contracts point to two separate options for dispute resolution, only the courts may decide which is the appropriate forum.