Arbitration – Assigned Contractor – Original Party – Arbitrability – Question for Arbitrator

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Plaintiff bought a car from defendants and entered into a retail installment sales contract (RISC), which contained an arbitration clause. Even though defendants assigned the RISC to a third party, an arbitrator – and not the circuit court – must decide the question of whether plaintiff’s misrepresentation claims against defendants are subject to arbitration.

We reverse our Court of Appeals’ decision, which upheld the circuit court’s ruling to the contrary.

Plaintiff claims that, after defendants assigned the RISC to a third party, the contract between plaintiff and defendants ceased to exist. Plaintiff claims the circuit court, and not the arbitrator, must therefore decide his challenge. Plaintiff’s argument is without merit.

There are generally two types of challenges to arbitration—a challenge to the validity of the container contract as a whole (to be decided by the arbitrator) and a challenge to the validity of the arbitration provision therein (to be decided by the court.

It is true that courts must determine issues of contract formation. But plaintiff does not challenge contract formation. Instead, plaintiff claims the court must determine whether the contract continued to exist after a certain point in time.  We disagree.

Courts often state that they – rather than arbitrators – must determine whether a contract exists. However, a closer review of these cases shows courts were addressing the question of whether a contract existed in the first place, not whether the contract continued to exist after a certain point.

Plaintiff’s argument rests on a misreading of contract formation cases; there is no support for the conclusion that a challenge to the continued existence of a container contract is for the court to decide under the doctrine of Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).

Furthermore, there is good reason to treat a challenge to the original formation of a container contract differently from a challenge to the continued existence of the contract. A challenge to the original formation of the container contract necessarily raises the question of whether the parties ever agreed to arbitrate. Because arbitration is strictly a matter of consent, it would be illogical for the arbitrator to resolve such a challenge. On the other hand, continued contract existence cases—like the one before us—typically present no such risk of sending a party to arbitration when that party never agreed to arbitration.

Plaintiff does not challenge the validity of the arbitration provision itself. However, plaintiff argues defendants’ assignment of the contract to a third party divested defendants of all rights under the contract. This is a challenge to the continuing validity of the contract as a whole. Therefore, Prima Paint requires the arbitrator to decide whether defendants retained the right to compel arbitration after assignment.

Reversed and vacated.

Dissent

(Hearn, A.J.) The contractual assignment from defendants to a third party extinguished any enforceable rights by defendants, so there is nothing left to enforce, including the arbitration provision. I understand Prima Paint requires that the arbitration provision is severable, but once defendants assigned their rights under the contract, I do not believe severability can save the day because defendants are not the party that may enforce the contract.

I would follow the general rule that an assignment extinguishes the rights under a contract, and without an agreement to enforce, it follows that the circuit court must generally resolve this threshold question.

Sanders v. Savannah Highway Automotive Co. (Lawyers Weekly No. 010-042-23, 16 pp.) (George James, J.) (Kaye Hearn, Acting Justice, joined by James Lockemy, Acting Justice, dissenting) Appealed from Charleston County Circuit Court (J.C. Nicholson, J.) On writ of certiorari to the Court of Appeals. John Thomas Lay and Jessica Waller Laffitte for petitioners; Steven Moskos and Brooks Robert Fudenberg for respondent; James Becker and Robert Lawrence Reibold for amicus curiae. South Carolina Supreme Court