Who Decides Arbitrability? It Depends on The Agreement

• Posted on: Sep 1 2021

By  Jeffrey M. Haber

Generally, whether a claim is subject to arbitration is a decision for the court, not the arbitrator.¹ Notwithstanding, the U.S. Supreme Court has held that “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability.’”² Such “delegation clauses” are enforceable where “there is ‘clea[r] and unmistakabl[e]’ evidence” that the parties intended to arbitrate arbitrability issues.³ “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.”⁴ 

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.⁵ 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.”⁶ 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.⁷  

The question then is what is a valid delegation clause? That question was answered in Bromberg & Liebowitz v. O’Brien, 2021 N.Y. Slip Op. 50813(U) (Sup. Ct., Suffolk County Aug. 24, 2021) (here). 

[Ed. Note: This Blog examined the enforcement of delegation clauses here, here and here.]

Bromberg involved the purchase of defendant’s accounting practice by plaintiff. The agreement between the parties provided, in pertinent part, that in the event of a dispute between the parties, the dispute would be submitted to arbitration for resolution:

Any controversy or claim arising out of or relative to this AGREEMENT, or the breach thereof, shall be submitted to arbitration before a single arbitrator, subject to the commercial arbitration rules of the American Arbitration Association.

Under the Commercial Arbitration Rules of the American Arbitration Association (“AAA”), the power to decide whether an issue is arbitrable rests with the arbitrator: 

The 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 or to the arbitrability of any claim or counterclaim. 

The agreement was signed by plaintiff and one of the defendants; the other defendant did not sign the agreement.

Plaintiff commenced the action alleging that, between September 2016 and June 2020, defendants diverted client fees from the practice to themselves. The complaint contained nine causes of action including, inter alia, breach of contract, fraud, conversion, and unjust enrichment. 

Defendants moved to dismiss the complaint or to stay the action and compel plaintiff to proceed to arbitration if the complaint was not dismissed. In opposition, plaintiff maintained that the scope of the arbitration clause did not include the misconduct alleged in the complaint and that it could not be compelled to arbitrate with the defendants who did not sign the agreement.

The Court granted the motion.

The Court held that by incorporating the rules of the AAA, the parties intended the arbitrator to be the gatekeeper of questions of arbitrability:⁸

Here, the agreement incorporates the rules of the AAA and provides that “any controversy or claim arising out of or relative to” the agreement shall be submitted to arbitration. Thus, the scope of the parties’ arbitration agreement, including issues of arbitrability, are for the arbitrator to determine.

The Court noted that the term “[q]uestions of arbitrability” is a term of art that addresses disputes “about (1) whether the parties are bound by a given arbitration clause, as well as disagreements about (2) whether an arbitration clause in a concededly binding contract applies to a particular controversy.”⁹ In other words, said the Court, the question of arbitrability “involve[s] the arbitration agreement’s scope.”¹⁰ In Bromberg, the Court concluded that “whether the arbitration clause applies to the plaintiff’s claims [was] an issue to be resolved by the arbitrator and not the court.”¹¹ 

The Court rejected plaintiff’s argument that it should be permitted to litigate its claims in court against the non-signatories to the agreement.¹² In that regard, the Court held that “as a signatory to a contract containing an arbitration clause incorporating by reference the AAA rules, the plaintiff [could not] disown its agreed-to obligation to arbitrate ‘any controversy or claim arising out of or relative to’ the agreement, including the question of arbitrability with [the non-signatories].”¹³ The Court explained that “[a] signatory to an arbitration agreement is estopped from avoiding arbitration with a non-signatory when (i) there is a close relationship between the parties and controversies involved and (ii) the signatory’s claims against the non-signatory are intimately founded in and intertwined with the underlying agreement containing the arbitration clause.”¹⁴ The Court found that those requirements had been met.¹⁵ Accordingly, the Court stayed the action and directed the parties to proceed to arbitration.

[Ed. Note: This Blog examined the “inextricably interwoven” doctrine here.]

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.”¹⁶ And, because “arbitration is a matter of contract,” the “courts [will] rigorously enforce arbitration agreements according to their terms.”¹⁷ Consequently, the courts will rarely interfere with the parties’ agreement to submit their dispute to arbitration, and will enforce their decision to abide by the rules of the governing forum, including having the arbitrator decide issues of arbitrability.¹⁸ In other words, as in Bromberg, courts will enforce broadly worded arbitration clauses, which incorporate a set of arbitration rules and confers upon the arbitrator the power to determine his/her own jurisdiction, according to their terms. 

Moreover, courts will stay the judicial proceeding pending completion of the arbitration where, as in Bromberg, arbitrable and non-arbitrable claims are intertwined. This is especially so where the merits of an issue between the parties is bound up with a contract binding one party and containing an arbitration clause. 

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. 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).
2. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 68-9 (2010). For a discussion of Rent-A-Center, see here.
3. 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)).
4. Id. at 944.
5. 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 Dept. 2009).
6. Monarch Consulting, 26 N.Y.3d at 675 (quoting American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304, 2309 (2013)).
7. Id. at 675-76.
8. Slip Op. at *1 (citation omitted.)
9. Id. (citing Cartagena Enter., Inc. v J. Walter Thompson Co., 2013 WL 5664992 at *2 (S.D.N.Y. Feb. 6, 2016)).
10. Id. (citing id.).
11. Id.
12. Slip Op. at *1 (citing Lapina v. Men Women NY Model Mgt. Inc., 86 F. Supp. 3d 277, 283-284 (S.D.N.Y. 2015)).
13. Id. (citing Contec Corp. v. Remote Solution Co., Ltd., 398 F.3d 205, 208 (2d Cir. 2005)).
14. Id. (citing Birmingham Assoc. Ltd. v. Abbott Labs., 547 F. Supp. 2d 295, 301 (S.D.N.Y. 2008), aff’d, 328 Fed. Appx. 42 (2d Cir. 2009). “Claims are intertwined where the merits of an issue between the parties is bound up with a contract binding one party and containing an arbitration clause.” Birmingham, 547 F. Supp. 2d at 301 (internal bracket and quotation marks omitted).
15. Slip Op. at *1.
16. Life Receivables, 66 A.D.3d at 495.  
17. Monarch Consulting, 26 N.Y.3d at 675.
18. Id.