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New York Court Of Appeals Confirms Questions Of Arbitrability Are For The Arbitrators

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  • Posted on: Nov 6 2017

Parties to commercial and business disputes frequently encounter and litigate the threshold question whether their dispute must be arbitrated rather than litigated in court. But, before this question can be answered, there is an even more fundamental question that must be resolved: who decides whether a dispute is subject to arbitration – the court or the arbitrator? Courts have struggled with this question for years and continue to do so today.

Generally, whether a claim is subject to arbitration is a decision for the court, not the arbitrator. See Primex Int’l Corp. v. Wal-Mart Stores, Inc., 89 N.Y.2d 594, 598 (1997) (affirming trial court ruling that “whether there is a clear, unequivocal and extant agreement to arbitrate the claims, is for the court and not the arbitrator to determine.”); Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 45-46 (1997) (noting “well-settled proposition that the question of arbitrability is an issue generally for judicial determination in the first instance.”) (citing cases). Notwithstanding, the U.S. Supreme Court has held that “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability.’” Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68-9 (2010). (For a discussion of Rent-A-Center, see here.) Such “delegation clauses” are enforceable where “there is ‘clea[r] and unmistakabl[e]’ evidence” that the parties intended to arbitrate arbitrability issues. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943, 944 (1995), quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986). “When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply ordinary state-law principles that govern the formation of contracts.” First Options of Chicago, Inc., 514 U.S. at 944.

Courts in New York follow the foregoing principles and will not take the issue of arbitrability away from the arbitrator when the parties specifically provide as such. Matter of Monarch Consulting, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 26 N.Y.3d 659, 676-677 (2016); Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s, 66 A.D.3d 495, 495 (1st Dep’t 2009). This approach reflects the “overarching principle of law ‘that arbitration is a matter of contract’” and that “courts must rigorously enforce arbitration agreements according to their terms.” Monarch Consulting, 26 N.Y.3d at 675, quoting American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304, 2309 (2013). Thus, where a contract contains a valid delegation to the arbitrator of the power to determine arbitrability, such a clause will be enforced absent a specific challenge to the delegation clause by the party resisting arbitration.  Monarch Consulting, 26 N.Y.3d at 675-76.

This Blog previously discussed the issue here.

On October 12, 2017, the New York Court of Appeals issued Garthon Bus. Inc. v. Stein, 2017 NY Slip Op. 07160, in which it held, in a tersely written decision, that the gateway issue of arbitrability should be determined by the arbitrator where “the terms of the parties’ final agreements . . . incorporated the rules of the” arbitral forum. In Garthon, the parties incorporated into their agreement the rules of the London Court of International Arbitration (“LCIA”), which provides, in pertinent part, that “[t]he Arbitral Tribunal shall have the power to rule upon its own jurisdiction and authority, including any objection to the initial or continuing existence, validity, effectiveness or scope of the Arbitration Agreement.”

In so holding, the Court reversed the decision of the Appellate Division, First Department, which held (with two justices dissenting) that the parties’ incorporation of the LCIA Rules was insufficient to demonstrate a “clear and unmistakable” intent to have the arbitrator determine the arbitrability of the parties’ dispute. Garthon Bus. Inc. v. Stein, 138 A.D.3d 587, 593 (1st Dept. 2016). The First Department reasoned that under the circumstances, where the “agreements containing … arbitration clauses…, directly clash[ed] with an enforceable forum selection clause in a separate agreement relevant to the parties’ dispute,” it could not be said “with any degree of certainty that the parties clearly and unmistakably intended for the chosen arbitral body to decide the particular issue presented to us.” As a consequence, the court declined to let the arbitrators decide the issue of arbitrability even though the agreement to arbitrate incorporated the arbitral body’s rules which reserved the gateway issue of arbitrability to itself. (A copy of the First Department’s decision can be found here.)

Takeaway

Since First Options of Chicago, arbitration associations have amended their rules to provide that the arbitrator has the power to decide whether a given dispute is arbitrable. When parties incorporate the rules of the arbitration association into their contract, they are, therefore, delegating to the arbitrator the jurisdiction to decide the issue of arbitrability of the matter.

Garthon confirms that broadly worded arbitration clauses, which incorporate a set of arbitration rules and confers upon the arbitrator the power to determine his/her own jurisdiction, will be enforced according to their terms. Garthon also teaches that unless parties want to arbitrate whether a given dispute is arbitrable, they should specifically address in the arbitration clause the question of who will determine whether the dispute is arbitrable. Failure to do so can lead to expensive litigation or lead to results the parties never intended.

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