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Arbitration: There are Exceptions to Every Rule

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  • Posted on: Aug 24 2022

By: Jeffrey M. Haber

New York “favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties”.1 Under the Federal Arbitration Act, “‘questions of arbitrability must be addressed with a healthy regard for the federal policy [favoring arbitration] … [and] any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.’”2 

Thus, “where the [parties’] contract contains an arbitration clause, there is a presumption of arbitrability in the sense that an order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute”.3 Although the intention of the parties is controlling, “those intentions are generously construed as to issues of arbitrability”.4 

As a general rule, “[w]hether a dispute is arbitrable is … an issue for the court to decide.5 The exception to this rule occurs when “the parties clearly and unmistakably provide otherwise”.6 Thus, “[i]f a valid agreement [to arbitrate] exists, and [that] agreement delegates the arbitrability issue to an arbitrator, [then] a court may not decide the arbitrability issue.”7

Often, the parties to an agreement will include broad arbitration clauses that incorporate by reference the rules of an arbitration organization, such as the American Arbitration Association (“AAA”), which provide that the issue of arbitrability rests with the arbitrators. In such circumstances, the courts will “leave the question of arbitrability to the arbitrators”.8  

However, if the parties’ agreement “contains a narrow arbitration provision, the reference to the [rules of the arbitral forum] does not constitute clear and unmistakable evidence that they have intended to have an arbitrator decide arbitrability. Thus, that question is for the court to decide in the first instance”.9 

The rationale for the exception to the rule makes sense. When the parties include a broad arbitration provision covering all or substantially all disputes under the agreement,10 it is reasonable to conclude that they clearly and unmistakably agreed to refer disputes regarding the scope of the arbitration provision itself to the arbitrator. When the arbitration provision is more limited, as it was in Zachariou (where the arbitrator was limited to determining the amount of certain distributions), there is no such clarity as to whether the parties agreed to defer the question of arbitrability to the arbitrator. Thus, in such cases, the default rule controls (i.e., the court decides).

The foregoing principles were considered by the Appellate Division, First Department in Matter of Metropolitan Transp. Auth. v. Westfield Fulton Ctr., LLC, 2022 N.Y. Slip Op. 05008 (1st Dept. Aug. 23, 2022) (here).

The parties were signatories to a lease agreement with respect to certain portions of the Fulton Center transportation complex in lower Manhattan. The lease provided that New York state and the federal courts would have “exclusive jurisdiction over any case or controversy arising from, under or in connection with [the] Lease” and would “be the sole and exclusive forum in which to adjudicate any such dispute, except for any dispute that by the express terms of [the] Lease is to be resolved by Arbitration”. 

The Lease described seven specific categories of disputes that were subject to Arbitration, including (as relevant to the case) “any dispute between Landlord and Tenant as to whether Substantial Completion or Final Completion has occurred”. If an arbitrable dispute is “construction-related,” the arbitration would “be administered under the Construction Industry Arbitration Rules and Mediation Procedures of the AAA”. Under those rules, “[t]he arbitrator [has] 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”.

Respondent filed with the AAA a demand for arbitration and a statement of claim against Petitioner. Broadly construed, Respondent’s claims arose under Section 3.1 of the Lease, which, as noted, mandated arbitration of “any dispute between Landlord and Tenant as to whether Substantial Completion or Final Completion has occurred.”

In response, Petitioner sought a permanent stay of the arbitration under CPLR §§ 7502 and 7503(b). Petitioner asserted that Respondent’s claims for relief did not fall “within any of the narrow grounds for arbitration identified in the Lease”. 

Shortly thereafter, Petitioner moved by order to show cause for a preliminary injunction and temporary restraining order enjoining Respondent from proceeding with the arbitration. In response, Respondent asserted that its claims in arbitration were disputes “as to whether Substantial Completion or Final Completion ha[d] occurred,” and therefore were subject to mandatory arbitration under Section 3.1 of the Lease. The motion court signed the order to show cause, temporarily staying the arbitration pending the hearing on the motion for a preliminary injunction.

Following argument, the motion court dissolved the temporary restraining order, denied the motion for a preliminary injunction, and denied the petition seeking a permanent stay of the arbitration.

As an initial matter, the motion court held that the issue of arbitrability was one for the court and not the arbitrator:

Most importantly, the default rule under Section 29 of the Lease is that “any case or controversy arising from, under or in connection with this Lease” are to be resolved exclusively in litigation unless the dispute is expressly directed to arbitration elsewhere in the agreement. Although there are several provisions in the Lease directing the parties to arbitrate specific substantive disputes, including Section 3.1 upon which Westfield relies, there are no provisions stating “clearly and unmistakably” that the question of arbitrability is to be decided by the arbitrator.

Having decided that issue, the motion court held that the claims asserted by Respondent were arbitrable under Section 3.1 of the Lease. The motion court explained that “[t]he gravamen of [Respondent’s] Statement of Claim is that [Petitioner] failed to deliver the Commercial Usage Areas of the Premises to [Respondent] in ‘Tenant-Ready Condition’”.11 “As such,” concluded the motion court, “the Statement of Claim concern[ed] a dispute as to whether [Petitioner] satisfied a condition of Substantial Completion and Final Completion.” 

On appeal, the First Department unanimously affirmed the decision and order of the motion court.

First, the Court found that the motion court “correctly reached the issue of whether the claims asserted by respondent … came within the scope of the arbitration provisions in the parties’ lease.”12 The Court explained that “[a]lthough there [were] several provisions in the lease directing that the parties arbitrate specific substantive disputes, including section 3.1 upon which [Respondent] relie[d], there [were] no provisions stating ‘clearly and unmistakably that the question of arbitrability [was] to be decided by the arbitrator”.13 

Second, the Court held that the motion court “correctly dismissed [the] petition to stay the arbitration.”14 The Court explained that “[a]lthough Section 3.1 of the lease contain[ed] a narrow arbitration clause, the allegations in [the] statement of claim, broadly construed, all relate[d] to ‘whether Substantial Completion or Final Completion has occurred.’”15 Accordingly, concluded the Court, the motion court “correctly” held “that respondent’s claims triggered the arbitration clause.”16 

Further, said the Court, “even if some of the relief requested in the arbitration appears to fall outside the narrow arbitration clause, that alone [was] not a basis to stay the arbitration as long as ‘the fashioning of some relief on the issue sought to be arbitrated remains within the arbitrator’s power”.17 The Court held that “[t]his includes [Respondent’s] request for attorneys’ fees under section 23.1 of the lease, should it ultimately prevail at arbitration.”


Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.


Footnotes

  1. Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 49-50 (1997) (citations omitted).
  2. Singer v. Jefferies & Co., Inc., 78 N.Y.2d 76, 81-82 (1991) (quoting Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)).
  3. AT&T Techs. v. Communs. Workers of Am., 475 U.S. 643, 650 (1986) (citations omitted); see also Wilson v. PBM, LLC, 193 A.D.3d 22 (2d Dept. 2021).
  4. Singer, 78 N.Y.2d at 82 (citation omitted).
  5. Zachariou v. Manios, 68 A.D.3d 539, 539 (1st Dept. 2009).
  6. Id.
  7. Henry Schein, Inc. v. Archer and White Sales, Inc., 139 S.Ct. 524, 530 (2019).
  8. Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s, 66 A.D.3d 495, 496 (2009) (citation omitted).
  9. Zachariou, 68 A.D.3d at 539.
  10. See, e.g., Flintlock Const. Servs., LLC. v Weiss, 122 A.D.3d 51, 54 (1st Dept. 2014).
  11. Under the lease, “Substantial Completion” was defined to include, among other things, that the premises was in “Tenant-Ready Condition”.
  12. Slip Op. at *1.
  13. Id. (citing Zachariou, supra).
  14. Id.
  15. Id.
  16. Id.
  17. Id. (quoting Zachariou, 68 A.D.3d at 540 (internal quotation marks omitted)).
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