Question Of Arbitrability Is For The Arbitrator, Not The Court, When Required By The Agreement To Arbitrate

• Posted on: Jun 1 2017

Arbitration is an alternative to a court proceeding. It is an adversarial proceeding in which the parties can call witnesses and present evidence to a neutral arbitrator or panel of arbitrators. The rules of discovery and evidence are relaxed to make it a shorter and more cost-efficient process.  An attorney or retired judge, who works for a private firm, conducts the proceeding.  Often, the parties select the arbitrator or panel of arbitrators. Arbitration can be binding, in which the arbitrator renders (or the panel of arbitrators render) a decision that can be enforced by the courts, or non-binding, in which the arbitrator renders (or the panel of arbitrators render) an advisory opinion that the parties can accept or reject. In short, an arbitration is similar to a trial without the formalities.

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).

In New York, courts will enforce an agreement to arbitrate, and will not take the issue of arbitrability away from the arbitrator when the parties specifically provide as such:

 [W]hen the parties’ agreement specifically incorporates by reference the AAA rules, which provide that ‘[t]he tribunal shall have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement,’ and employs language referring ‘all disputes’ to arbitration, courts will ‘leave the question of arbitrability to the arbitrators.’

Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s, 66 A.D.3d 495, 495 (1st Dep’t 2009) (quoting Smith Barney, 91 N.Y. at 47). 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, Inc. v. National Union Fire Ins., 26 N.Y.3d 659, 675 (2016) (quoting American Express Co. v Italian Colors Restaurant, 133 S.Ct. 2304, 2309 (2013)).  New York “favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties . . . . Therefore, New York courts interfere as little as possible with the freedom of consenting parties to submit disputes to jurisdiction.” Life Receivables, 66 A.D.3d at 495. In short, courts will enforce the parties’ agreement to have the arbitrator decide issues of arbitrability, and they will not stay an action that a party claims is not arbitrable. Id.

On May 23, 2017, Justice Ostrager of the Supreme Court, New York County, Commercial Division, issued a decision in Port Authority of N.Y. & NJ v. 2 World Trade Center LLC, 2017 NY Slip Op. 31121(U), in which he refused to stay an arbitration on the grounds that the parties’ agreement to arbitrate permitted the arbitrator to determine the arbitrability of the matter instead of the court.

Background

Just before the terrorist attacks of September 11, 2001, 2 World Trade Center LLC, 3 World Trade Center LLC, and 4 World Trade Center LLC (collectively, “SPI”), entities owned or controlled by Silverstein Properties, entered into leases (the “Net Leases”) for several of the buildings at the World Trade Center, including the Twin Towers and Four and Five World Trade Center (the “Properties”). The Net Leases required that SPI maintain insurance on the Properties and that, in the event the Properties were damaged or destroyed, SPI would rebuild them.

In February 2003, SPI adopted a plan for the reconstruction of the World Trade Center site, which contemplated the construction of five buildings, including One World Trade Center, as well as Towers 2, 3, 4, and 5.

By December 2005, SPI had not begun construction on any of the contemplated buildings and the Port Authority (the owner of the land compromising the World Trade Center) entered discussions with SPI to improve the likelihood of success of the redevelopment project.

In November 2006, the Port Authority and SPI entered into several agreements, including a master development agreement (“MDA”) and a Second Amended and Restated Reciprocal Easement and Operating Agreement (the “REOA”) that altered the parties’ responsibilities in connection with reconstruction of the site. Among other things, the Port Authority took over the leases and development obligations for One World Trade Center and Tower 5, as well as took on an enhanced responsibility for other construction and infrastructure for the site. SPI retained the Net Leases and obligation to develop and construct Towers 2, 3, and 4.

The MDA generally governed the overall development and construction of Towers 2, 3, and 4. The REOA called for SPI and the Port Authority, together with the City of New York, to create commercial design guidelines (“CDG”) to govern many of the design elements of the World Trade Center site, including the retail space.

Both the MDA and the REOA contained arbitration provisions. The MDA provided, in pertinent part, that “[a]ll disputes, Claims or controversies arising” under the agreement were to be resolved by a single arbitrator in accordance with the commercial arbitration rules of the American Arbitration Association (“AAA”). Arbitration under the REOA was to be conducted in accordance with the commercial arbitration rules of the AAA, with certain modifications.

A dispute arose over whether the Port Authority had improperly permitted one of the successor lessees, non-party Westfield Corporation (“Westfield”), to “rebrand” the visual identity of the World Trade Center in contravention of certain design standards under the agreements. In particular, the dispute concerned signage that Westfield erected at certain retail areas of the site and the potential placement of two kiosks in the space:

SPI has repeatedly notified the Port Authority that SPI does not accept the Port Authority’s temporary signage, which degrades the unified aesthetic that is central to the CDGs. In a letter from our attorneys, Skadden, Arps to the Port Authority, dated May 7, 2015, SPI has made clear that it does not accept the Port Authority’s plan to use signage to “rebrand” the visual identity of the World Trade Center campus, and it has repeatedly requested that the Port Authority adhere to the uniformity standard that is fundamental to the CDGs.

The Court’s Decision

The Port Authority commenced a special proceeding pursuant to CPLR §7503(b), seeking a permanent stay of an arbitration that was commenced on April 3, 2017 by the SPI. The Port Authority also moved for a temporary restraining order in connection with a hearing scheduled by the arbitrator for May 19, 2017.

The Port Authority argued, among other things, that the arbitration was improper because it failed to include Westfield, an essential party, and because the dispute was not governed by the MDA but rather by the REOA. SPI argued that both the MDA and REOA governed the signage dispute and that it was for the arbitrator to decide whether the dispute was arbitrable because the MDA incorporates the AAA rules.

The Court sided with SPI, holding:

It is a well-settled proposition that the question of arbitrability is an issue generally for judicial determination in the first instance. Nevertheless, an important legal and practical exception has evolved which recognizes, respects and enforces a commitment by the parties to arbitrate even that issue when they clearly and unmistakably so provide. Thus, the Court must examine whether the parties evinced a clear and unmistakable agreement to arbitrate arbitrability as part of their alternative dispute resolution choice in the MDA Agreement.

When the parties’ agreement specifically incorporates by reference the AAA rules, which provide that the tribunal shall have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement, and employs language referring all disputes to arbitration, courts will leave the question of arbitrability to the arbitrators. While the Port Authority attempts to distinguish the language of the arbitration clause in this case from the Life Receivables Trust case, the Court finds the Port Authority’s argument unpersuasive.

Citations and internal quotations omitted.

Takeaway

Like many jurisdictions, New York “favors and encourages arbitration” because it “conserv[es] the time and resources of the courts and the contracting parties.”  Life Receivables, 66 A.D.3d at 495.  And, because “arbitration is a matter of contract,” the “courts [will] rigorously enforce arbitration agreements according to their terms.” Monarch Consulting, Inc. v. National Union Fire Ins., 26 N.Y.3d 659, 675 (2016). Consequently, the courts will rarely interfere with the parties’ agreement to submit their dispute to arbitration (i.e., stay an arbitration), and will enforce their decision to abide by the rules of the governing forum, including having the arbitrator decide issues of arbitrability. Id.

Port Authority of N.Y. & NJ stands as a reminder that the foregoing principles are clear and unambiguous and that the courts will “leave the question of arbitrability to the arbitrators” when the parties agree that the arbitrator or panel of arbitrators will “have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement.” Life Receivables Trust, 66 A.D.3d 495 (citations and internal quotation marks omitted).