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10 | 6 | 2006 Posted By James Streett

Federal Arbitration Act Preempts Tennessee Uniform Arbitration Act

Under Tennessee law, the enforceability of arbitration agreements are generally governed by the Tennessee Uniform Arbitration Act. (TUAA).  However, in contracts involving interstate commerce, the Federal Arbitration Act (FAA) also governs.  The Court of Appeals was recently faced with the following question:  What happens when a contract governed by Tennessee law, but also involving interstate commerce, satisfies the requirements of the FAA, but fails the requirements of the TUAA…is the arbitration clause enforceable?

 

The Court of Appeals held that it is.   In Hubert v. Turnberry Homes, LLC., the home buyers argued that the arbitration clause in their contract with the home builder was invalid because it was not separately signed and initialed as is required by the TUAA.  The homebuilder responded that this was a contract involving interstate commerce and that the FAA contained no such requirement. The homebuilder argued that states may not enact special statutory requirements for arbitration agreements, over and above those contained in the FAA, that are not applicable to contracts generally.

 

In agreeing with the homebuilder, the Court of Appeals reasoned that:

the text of § 2 [of the FAA] declares that state law may be applied if that law    arose to govern issues concerning the validity, revocability, and enforceability of contracts generally, and stated that generally applicable contract defenses such as fraud, duress, and unconscionability may therefore be applied to invalidate arbitration agreements without contravening Section 2 of the FAA…

by the same token, “[c]ourts may not, however, invalidate arbitration agreements under state laws applicable only to arbitration provisions.”

 Accordingly, the Court held that because the TUAA requirement in question was applicable only to certain contracts involving arbitration clauses, it was pre-empted by  the FAA.  However, the Court did allow the homebuyers to proceed judicially on their claim of fraud in the inducement.  The Court reasoned that prior Tennessee Supreme Court decisions required that this cause of action be allowed to go forward, and that it was not empowered to find otherwise.

 

Read the full opinion here.