4th Circuit Decision That Arbitration Clause Fails for Want of Consideration Must Be Read in Conjunction with New Supreme Court Decision
In an unpublished per curiam opinion, Howard v. King’s Crossing, Inc., et al (06-1969)(February 19, 2008), the Fourth Circuit held that an arbitration clause could not be upheld because there was a lack of consideration. Applying Maryland law, the Court noted that Howard promised, in the arbitration clause, to arbitrate claims against Defendants and that she waived her right to pursue her claims in court. Defendants, on the other hand, reserved the right to seek specific performance in court and/or to sue Ms Howard. The Court concluded that “Defendants’ ‘promise’ is not merely illusory, it is nonexistent…[and]the arbitration clause clearly fails for want of mutual consideration.” (p.5). The Court also noted that under Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) “challenges to the validity of a contract as a whole must be considered in the first instance by an arbitrator,… challenges to an arbitration clause or agreement can be considered by the courts.” (p.3). In Howard, the plaintiff challenged the validity of the arbitration clause and therefor the court was empowered to determine this issue. Howard must be read in conjunction with Preston v. Ferrer, 552 U.S. ____(2008) (slip opinion 06-1463) decided the day after Howard. In Preston, the issue was whether the FAA overrides “state statutes that refer certain disputes initially to an adminstrative agency.” The Court held, in an opinion written by Justice Ginsburg, that “[W]hen parties agree to arbitrate all questions arising under a contract, state laws lodging primary jurisdiction in another forum, whether judicial or administrative, are superseded by the FAA.” (pp. 1-2). The Court relies upon Buckeye in making its decision.
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