In a recent precedential decision, South Jersey Sanitation Co., Inc. v. Applied Underwriters Captive Risk Assurance Co., Inc., the Third Circuit held that although arbitration agreements may be invalidated by generally applicable contract defenses, like fraud, in order for the court to decide the issue, the challenge “must focus exclusively on the arbitration provision, rather than on the contract as a whole.” “If the challenge encompasses the contract as a whole, the validity of that contract, like all other disputes arising under the contract, is a matter for the arbitrator to decide.”
In South Jersey Sanitation, the dispute arose after South Jersey refused to pay premiums allegedly owed pursuant to a Reinsurance Placement Agreement (“RPA”), which contained an arbitration provision stating that any disputes arising under the contract will be arbitrated. South Jersey initially filed a complaint in the New Jersey Superior Court, seeking declaratory relief and rescission of the RPA on several grounds, including fraud, intentional misrepresentation, and illegality. In response, Applied Underwriters filed a motion to compel arbitration in accordance with the Federal Arbitration Act (“FAA”). The District Court denied Applied Underwriters’ motion to compel arbitration, on the ground that Nebraska law – the choice of law stipulated in the RPA – rendered unenforceable all arbitration provisions concerning or relating to an insurance policy.