The severability doctrine of federal arbitration law tells litigants that unless they can specifically challenge the validity of the arbitration provisions of the contract, as opposed to challenging the entire contract, the courts will not address the merits of the challenge.  (See entire line of increasingly harsh cases starting with Prima Paint and continuing through Rent-A-Center.)  But, there was always one big loophole – courts would always address arguments about whether any agreement was ever concluded at all.  The federal courts have been willing to decide claims (even though not specific to the arbitration provisions) that a party’s signature was forged, or an agent lacked authority to execute the contract, or a contracting party lacked legal capacity to contract, despite the presence of arbitration clauses in those contracts.  The Supreme Court confirmed in Granite Rock that issues of contract formation are reserved for the courts, not arbitrators.  Granite Rock Co. v. Int’l B’hood of Teamsters, 130 S. Ct. 2847, 2855-56 (2010).

The Eleventh Circuit has now narrowed the types of “formation challenges” that courts in its circuit can hear.  Solymar Investments, Ltd. v. Banco Santander S.A., __ F.3d __, 2012 WL 612302 (11th Cir. Feb. 28, 2012).  In Solymar, the plaintiffs alleged that they had agreed to a multi-part settlement of their Madoff-related investment fraud with the defendants.  After significant negotiation, the parties contemplated execution of multiple documents simultaneously.  However, the defendants convinced plaintiffs that one of the documents (the Exchange Agreement) needed to be executed quickly, and the others would follow. 

After execution of the Exchange Agreement, negotiations fell apart, and no further documents were executed.  The plaintiffs took the position that because only one of the contemplated documents was executed, there was no binding settlement and initiated a lawsuit.  In response, the defendants moved to compel arbitration based on the arbitration provision in the Exchange Agreement.  The district court compelled arbitration.

The Eleventh Circuit affirmed the decision to compel arbitration based solely on the Exchange Agreement.  Using the applicable state law (Florida’s), the court found that the Exchange Agreement was a complete and final document, and because the plaintiffs did not challenge the validity of its arbitration provisions in particular, they must be enforced.  The court refused, however, to address the merits of the plaintiffs’ claims that the Exchange Agreement was invalid because it was intended to be one aspect of a broader scheme of agreements.  Without much analysis, the court found that issue was not properly characterized as “formation” but instead of “validity,” and therefore it was in the province of the arbitrator. 

Although this particular issue is not likely to arise frequently, it shows that even formation challenges may be construed very narrowly under the current Supreme Court precedent, and that the line separating formation challenges from validity challenges may not be neatly drawn.