by Colleen E. Durbin, Associate 

It is a tried and true axiom that the best laid plans of mice and men often go awry.  Parties to a contract may decide to submit any disputes arising out of that contract to binding arbitration because, unlike litigation in general, arbitration is designed to be private, informal, quick, practical, and economical.  The irony is that many arbitration agreements end up being scrutinized and dissected by state or federal courts before the arbitration even begins, thereby undermining the aforementioned procedural benefits.  This article will discuss judicial intervention in issues of arbitrability, arbitration organizations’ responses to that intervention, and methods by which parties to an arbitration agreement can help to maintain the integrity of their chosen arbitration process.

Arbitrability

The determination of whether an arbitration proceeding has been properly commenced, the breadth of the issues subject to arbitration, and who may be bound to arbitrate are deemed to be issues of “arbitrability.”  The resolution of these issues can impact the tenor of the entire arbitration proceeding.  If arbitrability issues may be raised in court proceedings before the arbitration can be completed, the arbitration process may be halted, disrupted, or even terminated in favor of protracted litigation.

Most often this judicial intervention begins with the gateway question of whether a judge or an arbitrator decides the issue of arbitrability — i.e., who has the power to decide whether the claim itself is arbitrable.  Does that power belong to the arbitrators or the court?  If it is determined that the court has jurisdiction to decide issues of arbitrability, then the arbitration agreement itself may be worth as little as the paper on which it is written.

Who Decides Issues of Arbitrability

In 1995, the United States Supreme Court decided First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920 (1995), which turned on the question of how a court should review an arbitrator’s ruling on arbitrability.  In that case, individuals who had not personally signed the contract containing an arbitration agreement claimed that they were not bound by the arbitration clause.  Rather than raising the issue with the court, they filed their objections to the arbitration with the arbitration panel itself.  The panel ruled not only that the individuals were required to participate in the arbitration, but further ruled against them on the merits.  The individuals appealed, seeking to vacate the arbitration award.

The Supreme Court ruled that because there was no “clear and unmistakable evidence” that the parties intended to submit issues of arbitrability to arbitration, a court should retain primary authority to decide that issue.  The Court noted that this approach reversed the normal presumption in which courts favored arbitration, and where silence or ambiguity about whether an issue is arbitrable is ordinarily resolved in favor of arbitration.  However, the separate question of who the parties intended to decide issues of arbitrability, the Court noted, deserved the opposite presumption, that issues of arbitrability would be primarily decided by a court, unless the parties had clearly expressed a contrary intention.

Attempts to Keep Arbitrability Out of the Courtroom

The Court’s decision in First Options prompted a direct response from the American Arbitration Association (AAA).  In 1999, the AAA modified its Arbitration Rules to clarify the powers of its arbitrators.  These rules now expressly state that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” 

Multiple courts have held that the language and scope of the AAA rules satisfies the “clear and unmistakable” standard of First Options, thus granting to arbitrators the power to determine all manner of arbitrability issues, at least as a preliminary matter.  For example, in Congress Const. Co., Inc. v. Geer Woods, Inc., 2005 WL 3657933 (D.Conn.), the court ruled that where the parties explicitly incorporate the AAA Construction Industry Rules, which empower an arbitrator to decide issues of arbitrability, the incorporation serves as “clear and unmistakable” evidence of the parties’ intent to delegate such issues to an arbitrator.  Similarly, in Mission Residential, LLC v. Triple Net  Properties, LLC, 654 S.E.2d 888 (2008), the Virginia Supreme Court noted that Rule 7 of the AAA  Commercial Arbitration Rules makes the arbitrator the sole judge of the issue of arbitrability, although the Court did overturn the arbitrator’s decision.  The rules of most other major arbitration organizations in the United States and elsewhere grant similar authority to
their arbitrators.

Responsibility of the Parties

While the AAA’s rule revisions are helpful in keeping the parties out of the courtroom, it is not an absolute panacea.  The parties themselves must be diligent at the outset of their contractual relationship to craft an arbitration agreement that expressly manifests their arbitration goals.  Thus, carefully and clearly worded agreements are the best defense against protracted judicial intervention.  First, the arbitration agreement should specifically state what is or is not covered.  If the parties desire the arbitration agreement to govern all disputes arising out of or related to the contract, it should be clearly articulated.  The agreement should also clearly state that all disputes will be decided by the arbitrator, including the validity of the arbitration provision itself, so as to provide maximum authority for the arbitrator.  As a further safeguard, the parties should consider specifying a particular organization to conduct the arbitration, in order to take advantage of the existence of a specific set of procedural rules.

Conclusion

While courts generally believe the power to decide arbitrability is theirs, they will defer to the will of the parties, if clearly manifest in the arbitration agreement.  Thus, the failure to craft an appropriate agreement that does not address this rather abstruse issue could prove to be as expensive and time consuming as conventional litigation.  While courts will no doubt wrestle with the issue of who decides arbitrability for years to come, parties can minimize judicial intervention with the clarity of the agreement.  Armed with foresight and a clear and concise arbitration agreement, they can obviate unexpected results, delays, and other procedural logjams that undermine the very purpose of arbitration.


The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.

Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.