Who Decides Arbitrability? It Depends on The Agreement – Revisited

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Posted on: Mar 31 2025

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 more cost-efficient process. Typically, arbitrations are conducted by a private firm in which an attorney or retired judge, selected by the parties, presides over the proceeding. 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, 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.[1] Thus, in the initial instance, the court will “determine in general terms whether the parties have agreed that the subject matter under dispute should be submitted to arbitration.”[2] Once it appears that there is a “reasonable relationship between the subject matter of the dispute and the general subject matter of the underlying contract, the court’s inquiry is ended.”[3]

In making this determination, courts look to the parties’ agreement to arbitrate. 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.”[4]

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.”[5] 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.”[6]

In short, “the first question in any arbitration dispute must be: What have these parties agreed to?”[7] And, the answer to that question is governed by state contract-law principles, provided that those rules do not expressly or covertly discriminate against agreements to arbitrate.[8]

Notably, parties may agree to have an arbitrator decide not only the merits of a dispute, but also “‘gateway questions of arbitrability,’ ‘such as whether their agreement to arbitrate covers a particular controversy or whether one party should be relieved from the agreement due to the wrongful conduct of another party.’”[9] The United States Supreme Court has repeatedly “explained that an ‘agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the … court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other.’”[10] Thus, before enforcing a provision that delegates arbitrability issues to an arbitrator, the court must first assess whether the delegation provision is itself valid.[11] In undertaking that analysis, the court must be mindful that a delegation provision is severable from the remainder of the arbitration provision and contract in which it appears.[12] Therefore, unless a party “challenge[s] the delegation provision specifically,” the court must enforce it according to its terms, which in the case of a comprehensive delegation provision will mean leaving any challenge to the enforceability of the arbitration agreement or contract more generally for the arbitrator.[13]

“One type of direct challenge that must be resolved by a court is a claim that the parties did not in fact agree to delegate arbitrability issues, which may arise from a broader challenge to the formation of the underlying contract.”[14] In contrast, challenges that go solely to the enforceability of other provisions of the contract, and do not relate to the severable delegation provision, such as whether the moving party was fraudulently induced to enter the agreement, cannot be considered by the court.[15] A party trying to avoid an arbitration clause must therefore show that the arbitration clause itself, not the overall agreement, was procured through fraud or is otherwise unenforceable.[16]

On March 27, 2025, the Appellate Division, First Department, issued a decision in Mouli v. Stern, 2025 N.Y. Slip Op. 01872 (1st Dept. Mar. 27, 2025 (here), in which the Court affirmed the grant of a motion to compel arbitration on the grounds that the parties’ agreement to arbitrate permitted the arbitrator to determine the arbitrability of the matter instead of the court.

Mouli involved investments by plaintiff in projects developed by defendant. In particular, in 2015, plaintiff invested $2.9 million in JDS Miami River LLC in support of defendant’s real estate project in Miami, Florida. In 2018, defendant asked plaintiff to convert his “interest in JDS Miami River LLC into an equivalent interest in 340 Flatbush Sponsor Members LLC, another project being developed by defendant, now known as Brooklyn Tower. On November 28, 2018, “[i]n consideration for [plaintiff’s] continued investment in [defendant’s] projects, [defendant] executed a personal guaranty to [plaintiff’s] benefit … for the amount of [his] original investment in JDS Miami River LLC.” Plaintiff demanded payment. Defendant allegedly admitted owing plaintiff the money but nonetheless failed to pay him.

Plaintiff moved pursuant to CPLR 3213 for summary judgment in lieu of complaint. Relying on an assignment agreement between plaintiff and JDS Principal 9DKB Parent 2 LLC and 340 Flatbush Sponsor Members LLC, dated March 13, 2023, defendant moved to compel arbitration of the dispute based on the arbitration provision in that agreement. Under the Assignment Agreement, plaintiff agreed to transfer his interest in JDS Flatbush to JDS Principal in exchange for payment of $3,300,000.00.

Among other things, the Assignment Agreement contained a broad arbitration clause, which required that “[a]ny dispute, controversy or claim related to this Agreement, [JDS Flatbush], the Operating Agreement, the Project [defined as “Brooklyn Tower . . . located at 9 DeKalb Avenue and 340 Flatbush Extension Avenue, Brooklyn, New York”] and/or any other property or project to which any Releasor and/or Releasee was involved or associated with including, but not limited to, the parties’ compliance or noncompliance with or the breach of any of the foregoing documents” be settled by arbitration “administered by the American Arbitration Association under its Commercial Arbitration Rules.”

Plaintiff challenged whether the parties intended to arbitrate issues under the guaranty. In addition, plaintiff contended that the assignment agreement was fraudulently induced.

The motion court granted defendant’s motion, finding that the “arbitrators must determine the arbitrability of the dispute between [defendant] and [plaintiff] under this broad arbitration provision which may benefit [defendant] and extend to the guaranty.”

On appeal, the First Department unanimously affirmed.

The Court held that the motion court “properly granted defendant’s motion to compel arbitration and for a stay of this action, as the parties delegated issues of arbitrability to the arbitrator.”[17] The Court explained that the “parties’ assignment agreement contain[ed] a broad arbitration provision incorporating the rules of the American Arbitration Association and expressly provid[ed] that the threshold issue of arbitrability with respect to the repayment of funds at issue would be decided by the arbitrator.”[18] Accordingly, because the parties “explicitly incorporate[d] rules that empower the 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.”[19]

The Court rejected plaintiff’s argument that the guaranty and assignment were different agreements.[20] The Court explained that plaintiff “entered the assignment agreement to recover the funds that were owed to him under a separate guaranty. Accordingly, plaintiff’s arguments that the assignment agreement existed entirely independently from the guaranty agreement and that these agreements were not ‘inextricably interwoven’ are unavailing.”[21]

The Court also rejected plaintiff’s contention that the motion to compel arbitration should have been denied because plaintiff was fraudulently induced to enter the assignment agreement. The Court held that “[a]s plaintiff’s assertions of fraudulent inducement relate to the assignment agreement’s other substantive provisions rather than the arbitration clause itself, Supreme Court properly declined to address this issue.”[22]

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.”[23] And, because “arbitration is a matter of contract,” the “courts [will] rigorously enforce arbitration agreements according to their terms.”[24] 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.[25]

Mouli stands as another 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.”[26]

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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.

[1] 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); Matter of Nationwide Gen. Ins. Co. v Investors Ins. Co. of Am., 37 N.Y.2d 91, 96 (1975).

[2] Matter of Nationwide Gen. Ins. Co., 37 N.Y.2d at 96.

[3] Id.

[4] Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s, 66 A.D.3d 495, 495 (1st Dept. 2009) (quoting Smith Barney, 91 N.Y. at 47).

[5] 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)).

[6] Life Receivables, 66 A.D.3d at 495.

[7] Wu v. Uber Tech., Inc., — NY3d —, 2024 NY Slip Op 05869, *5 (2024) (citing Coinbase, Inc. v. Suski, 602 U.S. 143, 150-151 (2024)).

[8] Id. (citations omitted).

[9] Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. 63, 67-68 (2019) (quoting Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68-69 (2010)); see also Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002); Revis v. Schwartz, 38 N.Y.3d 939, 940 (2022).

[10] Henry Schein, 586 U.S. at 68 (quoting Rent-A-Center, 561 U.S. at 70.

[11] Wu, 2024 NY Slip Op 05869, *7 (citing Coinbase, 602 U.S. at 149).

[12] Id. (citations omitted).

[13] Id. (quoting Rent-A-Center, 561 U.S. at 72).

[14] Id. (citations omitted).

[15] Id. (citing Rent-A-Center, 561 U.S. at 71-72 (instructing that the FAA “operates on the specific ‘written provision’ to ‘settle by arbitration a controversy’ that the party seeks to enforce.”)).

[16] Id.

[17] Slip Op. at *1.

[18] Id.

[19] Id. (internal quotation marks and citations omitted).

[20] Id.

[21] Id. (quoting Rinaolo v. Berke, 188 A.D.2d 297, 297 (1st Dept. 1992)).

[22] Id. (citing Matter of Weinrott (Carp), 32 N.Y.2d 190, 197-199 (1973)).

[23] Life Receivables, 66 A.D.3d at 495.

[24] Monarch Consulting, 26 N.Y.3d at 675.

[25] Id.

[26] Life Receivables, 66 A.D.3d at 495 (citations and internal quotation marks omitted).