A hospital sued a former employee. The employee’s employment contract included an arbitration provision, which required arbitration of any claim arising out of the contract and any counterclaims. The employee moved to compel arbitration and the court granted the motion.
After a hearing, the arbitrator entered an award denying the employee’s claim for severance pay and ruling that the hospital had lawfully rescinded the employment contract. The hospital moved to confirm the award in superior court and also moved to amend its complaint to allow it to pursue claims against the employee that it had asserted, or could have asserted, in the arbitration. The hospital argued that the rescission of the employment contract undid the arbitration provision’s requirement that all claims be arbitrated. The superior court confirmed the award and lifted the stay, allowing the hospital to proceed with claims against the employee. The court of appeals declined jurisdiction of the employee’s special action, and the Supreme Court granted review.
The Supreme Court reversed the superior court’s decision allowing the hospital to amend its complaint. The Court held that Arizona law recognizes the “separability” doctrine developed by the U.S. Supreme Court, under which a challenge to the validity of a contract containing an arbitration clause is arbitrable because the arbitration clause is considered separate from the contract as a whole. By contrast, if a party challenges the making of the arbitration clause specifically—e.g., by arguing that the arbitration clause was fraudulently induced—that challenge must be adjudicated by the court before compelling arbitration. Because the hospital had not challenged the arbitration clause specifically, but instead had challenged the contract as a whole under a theory of fraudulent inducement, the superior court had correctly compelled arbitration. And once the dispute was referred to arbitration, the hospital was required to present all counterclaims related to the employment relationship. Although the arbitrator later found valid grounds for the hospital’s rescission of the contract, that ruling did not vitiate the unchallenged arbitration clause or allow the hospital to assert any claims that it had asserted, or could have asserted, in the arbitration. The Court reasoned that allowing the hospital to relitigate its claims would undercut the fundamental policies of arbitration and result in considerable waste and duplication.
The Court therefore remanded with directions to dismiss the amended complaint.
Vice Chief Justice Pelander authored the opinion of the court.
Posted by: Josh Bendor
Disclosure: Osborn Maledon attorneys were involved with this case.