The "Separability Doctrine:" The Continuing Impact of Prima Paint in Georgia, Alabama, and the Eleventh Circuit
The "separability doctrine" was first articulated by the United States Supreme Court in Prima Paint Corporation v. Flood & Conklin Manufacturing Co., 388 U.S. 395 (1967), wherein the Court ruled that arbitration clauses can be "separable" from the contracts in which they are included. The plaintiff in Prima Paint brought an action to rescind a contract on the grounds that the contract had been fraudulently induced. Id. at 398. The defendant moved to stay the court action, invoking the contract's arbitration clause and contending that an arbitrator, and not a court, should decide whether the contract was valid. Agreeing with the defendant, the Supreme Court concluded that because the Plaintiff was challenging the underlying contract generally rather than the arbitration clause specifically, arbitration of Plaintiff's fraudulent inducement claims was required. The Court was careful to distinguish this from a claim that the arbitration clause itself had been fraudulently induced. The doctrine would not apply in situations where parties claim that they never agreed to arbitrate, or that they were fraudulently induced into signing an arbitration agreement.
The Eleventh Circuit adopted the "separability doctrine" in Chastain v. Robinson-Humphrey Co., 957 F.2d 851 (11th Cir. 1992). Specifically focusing on the "assent" of the parties in assessing the enforceability of an arbitration clause, the Chastain Court held that "[u]nder normal circumstances, an arbitration provision within a contract admittedly signed by contractual parties is sufficient to require the district court to send any controversies to arbitration. Under such circumstances, the parties have at least presumptively agreed to arbitrate any disputes, including those disputes about the validity of the contract in general." Id. at 854. However, because the Plaintiff in Chastain never even signed the underlying contract, she could not be bound by the arbitration provisions it contained.
The Eleventh Circuit recently reiterated this application of the "separability doctrine" in the construction context in John B. Goodman Limited Partnership v. THF Construction, Inc., 321 F.3d 1094 (11th Cir. 2003). The Goodman case involved a dispute between a property owner and a construction contractor relating to contracts (each of which contained an arbitration clause) for the construction of two assisted living facilities. To avoid arbitration, the owner claimed that "since the contracts were performed in part by an unlicensed contractor, [state law] rendered the contracts, and the arbitration clauses within [them], unenforceable." The Court, however, found this to be a challenge to "the performance of the contracts rather than their existence." Finding "no question" about the owner's assent to the contracts generally or the arbitration clauses specifically, the Court held that an arbitration panel, and not a court, should decide whether the construction contract was unenforceable under state law. Id. at 1096.
Georgia state courts have adopted a view of the separability doctrine that is consistent with that held by the Eleventh Circuit. In Stewart v. Favors, 590 S.E.2d 186 (Ga. App. 2003), the Court held that where a party raises a clear and specific challenge to the enforceability of the arbitration provision in addition to challenging the underlying contract generally, the issue is properly decided by the Court. Alabama courts, however, have expressly limited the application of the separability doctrine to "voidable" contracts only (e.g., a contract where a party is induced through fraud or a contract where a party is an infant). For example, Alabama courts have held that contracts which are void ab initio are "challenges to the very existence of the contract" as opposed to "attempts to avoid or to rescind a contract" which are otherwise subject to arbitration. See Camaro Trading Co. v. Nissei Sangyo America, Ltd., 577 So.2d 1274 (Ala. 1991)(holding that a foreign corporation could not compel arbitration pursuant to an arbitration clause in a contract because the entire contract was unenforceable and invalid as a result of the foreign corporation's failure to qualify to do business in Alabama); Alabama Catalog Sales v. Harris, 794 So.2d 312 (Ala. 2000)(finding that the trial court, rather than an arbitrator, was to decide whether contracts containing arbitration clauses were void and unenforceable under the Alabama Small Loans Act).
While this position is consistent with well-settled Alabama law which disfavors pre-dispute agreements that submit disputes to binding arbitration, § 8-1-41 (3) Ala. Code 1975, this is in direct contrast to recent holdings in the Eleventh Circuit finding that "void ab initio" arguments should be decided by arbitrators rather than courts. In Goodman, the Court found that because Plaintiff's challenges went to "the method of performance" rather than the "existence" of the underlying contracts, an arbitrator should decide whether Plaintiff's construction contracts were void under state law. Similarly, in Bess v. Check Express, 294 F.3d 1298 (11th Cir. 2002), the Plaintiff claimed that certain contracts were void ab initio because the transactions on which they were based were illegal under Alabama law. Finding that these claims challenged "the content of the contracts" rather than their "existence," the Court found that an arbitrator should decide the contract's validity.
The Alabama state law policies favoring judicial determination of "arbitrability" clearly conflict with the Eleventh Circuit's policy preferences favoring arbitration and its emphasis on the parties' presumptive assent. This conflict may be of particular interest in the construction context, in light of the numerous lawsuits brought under Alabama's harsh qualification statutes. Under state law, a general contractor's non-licensure or a foreign corporation's non-qualification may "void" an underlying contract along with the arbitration provisions contained therein. However, upon finding "presumptive intent," a district court may "separate" the arbitration clause by finding that these claims challenge the "contents" or "performance" rather than the "existence" of the contract. Parties should be aware that a state law voiding a contract may not prevent an arbitrator from ruling on the contract's validity in cases where the parties signed the agreement and have therefore "presumptively agreed to arbitrate." This state/federal disparity could encourage forum-shopping and/or otherwise affect both the business and litigation strategy of parties performing work in Alabama or entering into contracts with Alabama contractors.