June 07, 2017 Practice Points

Standard for Finding an Agreement to Arbitrate Clarified

By Robert E. Bartkus

In Aliments Krispy Kernels, Inc. v. Nichols Farms, 851 F.3d 283 (3d Cir. Mar. 21, 2017), the Third Circuit confirmed the demise of part of a 36-year old Circuit precedent set forth in Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54 (3d Cir. 1980). Par-Knit had required that the proponent of arbitration show "an express, unequivocal agreement to that effect." This language conflicted with the later United States Supreme Court ruling that ordinary contract and agency principles must be applied when determining the existence of an arbitration contract. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995).

In Century Indemnity Co. v. Certain Underwriters of Lloyd's, London, 584 F.3d. 513, 530 (3d Cir, 2009), the Third Circuit stated that the Par-Knit standard was incompatible with current Supreme Court precedent. The Circuit held that the Par-Knit express standard "impermissibly would require more of arbitration agreements than of contracts generally to be enforced whenever the standard differed from the applicable state-law principles of contract law." 584 F.3d at 532. For example, as the Court noted, the express standard would preclude contracts implied in law. Id.

Without acknowledging Century in its unreported decision, the District Court in Aliments cited the old Par-Knit standard. On appeal, the Third Circuit found it necessary to confirm that the Par-Knit standard is incompatible with ordinary contract principles. As the Circuit explained, the judicial understanding of the FAA has changed in the intervening 36 years, and courts should no longer use the Par-Knit language. Aliments, 851 F.3d at 288.

Aliments also discussed the signature requirements for contract formation in UCC 2-201, its Statute of Frauds section. UCC Section 2-201 generally requires that the party to be charged must sign the contract for the contract to be enforceable against that party. Section 2 excuses the signature requirement when the contracting parties are merchants and a proper confirmation is received without timely objection. Given the multiple documents at issue in the case before it and disputes about the issuance and receipt of any confirmations, the Circuit found that there were issues of material fact, and it reversed the trial court's denial of a motion to confirm an award and remanded for the lower court to sort it all out.

The Court did not confront the potential conflict between the FAA and the UCC that results from the UCC 2-201's signature requirement in certain contracts that are not between merchants. The FAA requires that contracts for arbitration must be in a writing, but, unlike the UCC, it does not require that the writing be signed. As Aliments noted, arbitration contracts implied in law can be recognized under the FAA. Thus, non-merchants could exchange purchase and confirmation documents that do not satisfy the UCC's signature requirement but which do contain an arbitration clause.

Robert E. Bartkus is of counsel at McCusker, Anselmi, Rosen & Carvelli, P.C. in Florham Park, New Jersey.

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