Dispute Resolution & Arbitration

Running head: DISPUTE RESOLUTION & ARBITRATION
Dispute Resolution & Arbitration
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1DISPUTE RESOLUTION &ARBITRATION
Case Study
Name of the Case:
Shearson/American Express Inc. v. McMahon1
Citation:
482 U.S. 220 (1987)
Facts of the Case
The origin of the case can be identified during the year 1979 when Eugene McMahon and
Julia McMahon has developed friendly terms with Walter McNulty and Mary Ann McNulty.
Mrs. McNulty has been a broker connected with the Shearson/American Express. She
advised Mrs. McMahon in making investments in her company and convinced her to invest
all the profit sharing funds, employee’s retirement and their personal savings. After two years
of making such an investment, McNulty successfully convinced the McMahons in signing a
power of attorney, which has the effect of allowing the company in making trade in the
absence of express consent of the McMahons. It has been effected with a standard form of
contract in which a clause of arbitration has been included as a method of dispute resolution.
During this time, more than half a million dollars has already been invested in Shearson by
the McMahons and after the signing of the power of attorney, the trading has become more
frequent. The statement of accounts has evidenced three trades in a day and fifty in a week
and majority of the trades were made with respect to high-risk investment. The McMahons
were not adequately aware of the financial complexities and their accountants were also
unable to detect the same. Consequently, the accounts started inflicting losses and in the year
1983 the account was almost empty when they closed the same. The losses connected with
trading has summed up to $350,000 excluding the commissions that has been paid. The terms
between the McMahons and the McNulty deteriorated and the a suit for defamation has been
initiated by Mrs. McNulty against Mr. Eugene. The defamation suit has followed the promise
made by Mr. McMahon to injure the reputation of Mrs. McNulty as revenge of this fraud
trading.
In the year 1984, a suit has been initiated by the McMahons against the McNulty and the
Shearson in the federal court of the New York Southern District. In this suit, McMahons has
accused the defendants to have churned the accounts belonging to the McMahons and all the
1 Shearson/American Express Inc. v. McMahon 482 U.S. 220 (1987)

2DISPUTE RESOLUTION &ARBITRATION
trade they made were alleged to have effected only with the motive of earning commissions
for the defendants. It has been argued by the McMahons that the acts of the defendants were
in contravention of the regulations relating to the Securities and Exchange Commission
(SEC) which has been implemented by virtue of the Securities Exchange Act of 19342. A
violation of the Racketeer Influenced and Corrupt Organizations Act (RICO)3 has also been
contended along with the contraventions of other state laws prevailing in New York. The
McMahons has claimed to be compensated for the losses that has been caused to them with
respect to the fraud trading. They also claimed for punitive damages amounting to five
million dollars from the defendants. In response to that, a motion has been filed by Shearson
in order to enforce the arbitration clause that has been incorporated in the contract initially.
Judgment
In an appeal to the Supreme Court, the certiorari was granted by the Supreme Court. The
decision of the Supreme Court with respect to this appeal has been declared in the favour of
the Shearson. The court held the circumstances of the case to be outside the purview of the
Wilko case. The Court has contended that both the claims under the Securities Exchange Act
(SEC) of 1934 and the Racketeer Influenced and Corrupt Organizations Act (RICO) can be
subjected to arbitration.
It has been contended by the court that the principles of the Wilko case is not rejected
while deciding on the case, but the two situations needs to interpreted from a different
perspective. The arbitration clause has been ignored in the Wilko case as the arbitration of the
case may have led to injustice and a demand for litigation was much needed in order to
protect the rights of the aggrieved party. Moreover, the arbitration clause was present and the
same has been included in the contract for trading that has been entered into by the parties.
The contention of the McMahons regarding the involuntary standard form of agreement
cannot be enforced was rejected by the court as the signing of the document relating to
contract has the effect of agreeing to the terms and all the negotiations regarding the terms of
the same needs to be done at that time only.
It has also been pointed out by the court that the laws with respect to the 1934 Act has
been subjected to a considerable amount of transformation within these years. Subsequent
amendments in the Act of 1934 has made an overall modification in the laws relating to the
enforceability of the arbitration clause has made the circumstances of this case different from
2 The Securities Exchange Act of 1934
3 Racketeer Influenced and Corrupt Organizations Act 1970