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Who Decides Whether A Binding Agreement to Arbitrate Exists? First Department Tackles This Threshold Question

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  • Posted on: Nov 16 2019

Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. Rent-A-Ctr., W, Inc. v. Jackson, 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. Matter of Smith Barney Shearson v. Sacharow, 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Id. Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id. at 49-50. (citations omitted).

Since arbitration is a “creature of contract” (Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC, 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960)).

Not surprisingly, whether the parties are bound by an arbitration agreement and whether they agreed to submit their dispute to arbitration are hotly contested questions. The person(s) who will resolve these questions is dependent upon the agreement at issue.

As a general matter, questions of arbitrability are decided by a court. However, the parties to an arbitration agreement can agree to delegate questions of arbitrability to an arbitrator. MetLife v. Buscek, 919 F.3d 184, 189 (2d Cir. 2019) (“In general, what is determinative for deciding whether the arbitrability of a dispute is to be resolved by the court or by the arbitrator is the arbitration agreement”).  When the parties agree to delegate the question of arbitrability to an arbitrator, the parties must clearly and unmistakably express their intent to do so. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). In the absence of such a clear and unmistakable expression of intent, the presumption favors the courts deciding arbitrability. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995).

Recently, the United States Supreme Court held that, when the parties have agreed to submit the question of the arbitrability to an arbitrator, the courts must respect and enforce that contractual agreement. Henry Schein Inc. v. Archer & White Sales, Inc., 139 S.Ct. 524 (2019). Consistent with this holding, the Second Circuit observed that “parties are free to enter into a binding contract by which either party can compel the other to have every aspect of a future dispute between them, including its arbitrability, determined by arbitrators.”  MetLife, 919 F.3d at 190, citing Rent-A-Ctr., , 561 U.S. at 66, 69 (finding that an arbitration agreement giving the arbitrators “exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this contract” empowered the arbitrators to resolve arbitrability of an unconscionability claim).

The foregoing rules were intended to guard against “the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate.” Howsam, 537 U.S. at 83-84. “Were the courts to cede to arbitrators resolution of the arbitrability of the dispute (absent the clear and unmistakable agreement of the parties to that effect), this would incur an unacceptable risk that parties might be compelled to surrender their right to court adjudication, without their having consented.” MetLife, 919 F.3d at 190, citing First Options, 514 U.S. at 945. Accordingly, in the absence of an arbitration agreement that clearly and unmistakably provides for the issue of arbitrability to be decided by the arbitrator, the question of whether the dispute is subject to an arbitration agreement “is typically an issue for judicial determination.” Id., quoting Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287, 296 (2010) (internal citation and quotation marks omitted).

Last week, the Appellate Division, First Department, addressed the foregoing principles, reversing an order granting a permanent stay of arbitration, without prejudice, so that the issue of arbitrability could be decided by the arbitrator in arbitration. Matter of 215-219 W. 28th St. Mazal Owner LLC v. Citiscape Bldrs. Group Inc., 2019 N.Y. Slip Op. 08281 (1st Dept. Nov. 14, 2019) (here).

Background

[Ed. Note: The factual discussion below comes from the appellate briefing filed by Petitioners 215 West 28th Street Property Owner LLC, 225 West 28th Street Property Owner LLC, and 213-227 West 28th Street LLC.]

In the fall of 2013, an affiliate of HAP Investments LLC and HAP Development LLC (collectively “HAP”) acquired properties located at 215-219 West 28th Street in New York City as part of a project to construct a twenty-story condominium tower (the “Project”).

To assist with the Project, 215-219 West 28th Street Mazal Manager LLC (“Mazal”), a subsidiary of HAP, engaged various third-party professionals, including Respondent Citiscape Builders Group, Inc. (“Citiscape”). In August 2015, Mazal retained Citiscape to serve as its representative for the Project, providing various pre-construction, planning, and construction services. Citiscape’s compensation depended, in part, on its reaching certain milestone events and cost-savings for the Project.

Mazal and Citiscape memorialized the terms of their arrangement in an agreement, titled the Owner’s Representative Agreement (“Owner’s Representative Agreement” or “Agreement”). Relevant to the appeal, the Agreement contained an arbitration clause that provided: “Any dispute hereunder shall be exclusively governed and resolved by expedited binding arbitration in accordance with the American Arbitration Association located in the City of New [York].”

After Mazal and Citiscape executed the Agreement, HAP continued acquiring properties at West 28th Street through Mazal and other entities that it owned and/or managed. Between December 2015 and February 2017, HAP acquired five additional properties on West 28th Street.

As HAP’s portfolio grew, so did the scope of the Project. HAP planned to develop and build a second twenty-story tower, which required an expanded role for Citiscape. As a result, Mazal and Citiscape amended the Agreement on two occasions.

The First Amendment was executed in July 2016 by Citiscape and by four entities owned and/or managed by HAP – Petitioners Mazal, 213 West 28 LLC, 223 West 28 LLC, and 225-227 West 28 LLC (together, the “Signatory Petitioners”). The First Amendment ratified and confirmed the Owner’s Representative Agreement. The Second Amendment was executed in January 2017 and altered Citiscape’s compensation to keep up with the changes to the Project.

After the Owner’s Representative Agreement and First Amendment were executed, non-parties West 28th CCMF Investment LLC, 8 Partners LLC, and 8 Manager LLC established 213-227 West 28th Street LLC (a petitioner in the proceeding) as a joint venture for the purpose of commercializing the Project.

Subsequently, several of the properties on West 28th Street were conveyed to 215-219 West 28th Street Mazal Owner LLC, 213-227 West 28th Street LLC, 215 West 28th Street Property Owner LLC, and 225 West 28th Street Property Owner LLC (“Nonsignatory Petitioners”) – entities that HAP directly or indirectly owned and/or managed. The Nonsignatory Petitioners did not sign the Owner’s Representative Agreement or its amendments.

At some point, Mazal became dissatisfied with Citiscape’s services and, consequently, terminated the Owner’s Representative Agreement for cause in February 2019. Citiscape responded by filing a demand for arbitration.

Citiscape named both the Signatory Petitioners and the Nonsignatory Petitioners as respondents in the arbitration.

Petitioners initiated a special proceeding pursuant to CPLR § 7503(b) to, among other things, secure a permanent stay of arbitration. The Nonsignatory Petitioners argued that they could not be compelled to arbitrate with Citiscape because they had no contractual privity with Citiscape and no other basis existed for enforcing the arbitration agreement against them.

Citiscape asserted, however, that the Nonsignatory Petitioners were required to arbitrate because they were the “successors” or “assigns” of the Signatory Petitioners, and thus required to arbitrate by virtue of the First Amendment. Alternatively, Citiscape maintained that the Nonsignatory Petitioners could be compelled to arbitrate because they were the “alter-egos” of the Signatory Petitioners, and, thus, effectively signatories to the arbitration agreement. Finally, Citiscape argued that the Nonsignatory Petitioners should be estopped from resisting arbitration because they “benefitted” from the Owner’s Representative Agreement.

The motion court denied the application to permanently stay the arbitration, though it permitted a temporary stay provided an appeal of the decision was perfected by July 12, 2019. Petitioners promptly appealed the decision and order.

The First Department’s Decision

In a pithy decision, the First Department unanimously reversed the motion court’s order.

The Court held that the motion court should have determined whether the matter was arbitrable as to the Nonsignatory Petitioners, stating that “the issue of whether a party is bound by an arbitration provision in an agreement it did not execute is a threshold issue for the court, not the arbitrator, to decide.” Slip Op. at *1 (internal quotation marks and citation omitted).

The Court declined, however, to address the issue of whether the Nonsignatory Petitioners should be bound by the agreement to arbitrate because the motion “court did not come to a definitive ruling” on the issue. Id. “Instead,” said the Court, the motion court “denied the petition without prejudice so that it could be decided by the arbitrator.” Id. at *2.  Since there was no ruling on the threshold question, “the only question to be addressed … is whether the IAS court properly declined to do so,” a question the Court resolved on the appeal. Id. at *2.

Accordingly, the Court reversed the motion court’s order denying the petition for a permanent stay of arbitration and remanded the proceeding to the motion court for a hearing to determine the threshold issue of whether the Nonsignatory Petitioners were bound by the arbitration agreement.

Takeaway

On motions to stay or to compel arbitration there are three threshold questions to be resolved by the courts: (1) whether the parties made a valid and enforceable agreement to arbitrate, (2) whether, if such an agreement was made, it had been complied with, and (3) whether the claim sought to be arbitrated would be barred by some type of limitation, such as the statute of limitations.

As to the first question, the Court of Appeals long ago stated, “The parties are entitled first to a judicial determination whether there was a valid agreement to arbitrate.” Matter of County of Rockland [Primiano Constr. Co.], 51 N.Y.2d 1, 7 (1980). “If the court determines that the parties had not made an agreement to arbitrate, that concludes the matter and a stay of arbitration will be granted or the application to compel arbitration will be denied.” Id. (citations omitted). “Similarly, if the court concludes that, while the parties may have made a valid agreement to arbitrate, the particular agreement that they made was of limited or restricted scope and the particular claim sought to be arbitrated is outside that scope, there will likewise be a stay of arbitration or a denial of the motion to compel arbitration.” Id. (citations omitted).

If, however, the agreement to arbitrate brings the dispute within the scope of the arbitration agreement, then the court must determine whether the parties complied with their agreement – that is, the court must determine whether there is any preliminary requirement or condition precedent to arbitration to be complied with and, if so, whether the parties complied with that requirement or condition precedent.  “If the court concludes that the parties made a valid agreement to arbitrate, that the dispute sought to be arbitrated falls within its scope, and that there has been compliance with any agreed on conditions precedent to arbitration, judicial inquiry is at an end (absent any issue as to bar by limitation of time) and the parties [are] … to proceed to arbitration.” Id. at 8.

Matter of 215-219 W. 28th St. Mazal Owner LLC illustrates the foregoing principles. As the First Department noted, since the parties disputed whether there was an agreement to arbitrate in the first place, that threshold issue should have been decided by the motion court. By failing to address the issue, the Could found that the motion court erred.

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