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Small Business B-2-B Arbitration Part II.B.2(A): Other Structural Aspects of Pre-Dispute Arbitration Agreements—What am I Agreeing to Arbitrate?

January 2nd, 2014 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Drafting Arbitration Agreements, Making Decisions about Arbitration, Small Business B-2-B Arbitration Comments Off on Small Business B-2-B Arbitration Part II.B.2(A): Other Structural Aspects of Pre-Dispute Arbitration Agreements—What am I Agreeing to Arbitrate? By Philip J. Loree Jr.

In the last installment of our B-2-B Arbitration series we focused on one of the most important structural aspects of pre-dispute arbitration agreements: the mutual promise to submit disputes to arbitration, what it means and how its performance by the parties through their post-dispute submission defines and delimits the scope of authority parties actually delegate—as opposed to promise to delegate—to arbitrators to resolve particular disputes.

But there are other important structural aspects of arbitration agreements about which business people should be mindful if they wish to make informed decisions about arbitration. While a comprehensive discussion of them would be far beyond the scope of this post, let’s focus briefly on arbitration-agreement terms that bear on the following questions:

  1. What disputes am I agreeing to arbitrate?
  2. Will the arbitration be “ad hoc” or “administered,” that is, will it be administered and conducted solely by the parties and the arbitrators, or under the rules and auspices of an arbitration provider, such as the American Arbitration Association (“AAA”) or JAMS?
  3. Who will decide the disputes submitted to arbitration?

This Part II.B.2(A) will address the first question—which concerns the scope of an arbitration agreement—and future segments will address the other two.

What Disputes Must the Parties Submit to Arbitration?

In our last installment we said that the promise to submit disputes to arbitration is frequently set forth in the first sentence of a pre-dispute arbitration agreement, which might say, for example, “A and B agree that any dispute arising out of or relating to this Agreement shall be submitted to arbitration. . . .” The phrase “any dispute arising out of or relating to this Agreement” defines the universe of disputes that the parties agree to submit to arbitration, and thus, the scope of that mutual obligation.

Like most other questions governed by an agreement between the parties, whether or not a dispute is within the scope of an arbitration agreement is a question of contract interpretation: what does the arbitration agreement have to say about the universe of disputes subject to arbitration and what would a hypothetical, reasonably intelligent person entering into such an agreement think those words meant? But there’s one critical difference between general rules of contract interpretation and the rules of interpretation that apply to scope provisions in arbitration agreements: doubts or ambiguities about what disputes the parties intended to require each other to submit to arbitration are resolved in favor of arbitration.

Our hypothetical scope provision—which is very similar or identical to many arbitration agreements commonly found in commercial contracts— applies to “any dispute arising out of or relating to” the parties’ contract. It is what courts often refer to as a “broad” arbitration agreement, and for good reason.

While it clearly encompasses contract-law-based claims that involve the parties’ agreement, and other types of claims (e.g., equitable, tort-based or statutory claims) that may require consideration of the parties’ agreement or the relationship created by it, the outer extent of its limits are necessarily not precisely defined.

The prepositional phrase “arising out of or relating to” describes a relationship between the subject—“any dispute”— and the object—“this Agreement”—that may be direct or indirect. From the standpoint of linguistics or philosophy, the number of things that make up a class of things that might arise out of or relate to some other thing outside that class is infinite, or at least practically so. The famous children’s story, “When a Butterfly Sneezes” illustrates that by explaining in a step-by-fashion how a series of interdependent, sequential events—beginning with a butterfly’s sneeze and ending with a change in the weather thousands of miles of way—are causally connected with one another, albeit each in a way progressively more spatially and temporally remote from those that preceded it. Of course, the story did not have to end with a change in the weather; in theory it could have gone on ad infinitum, whether forward in time from the change in the weather, backward in time from the butterfly’s sneeze, or both. And linguistically and metaphysically, any one of the sequential events would arise out of or relate to any other.

Obviously, courts do not interpret open-ended terms like “arising out of or relating to” in their linguistic and metaphysical sense; they decide on a case-by-case basis whether a dispute one party claims the parties intended to submit to arbitration is one the parties could reasonably have intended to submit to arbitration. But the presumption in favor of arbitration cuts off the inquiry once a court determines—from an objective standpoint and consistent with arbitration-neutral principles of state contract law and agency—that the arbitration agreement is  reasonably susceptible to an interpretation that would require arbitration  of the dispute, even if it is also reasonably susceptible of an interpretation that would not require arbitration. Put differently, if the dispute is at least arguably within the scope of the arbitration agreement, then the dispute will be deemed to be subject to arbitration.

The take-home point? Agreeing to arbitrate disputes arising out of or relating to an agreement, or under other broad terms whose limits are not clearly defined, is fine, provided the parties are committed to arbitrating any dispute that arguably falls within its scope. If not, the only workable alternative is to exclude, in clear terms, any disputes or types of disputes that at least one of the parties does not wish to submit to arbitration.

But there is an important exception to the presumption in favor of arbitration of which persons considering arbitration should be aware. Courts determine whether a dispute falls within the scope of an arbitration agreement, unless the parties clearly and unmistakably agree to submit to the arbitrator the question whether the parties agreed to arbitrate a particular dispute.[1] That threshold question, in arbitration-law parlance, is referred to as one of “arbitrability,” and is what courts refer to as a “gateway” question because its  resolution determines whether or not arbitration of a particular issue—or any arbitration at all—should proceed.[2]

Given that litigation is the default mode of dispute resolution, and that arbitration is an exception that depends on party consent, it would be strange to think that a party contesting whether a particular dispute “arises out of or relates to” an agreement for purposes of determining whether the parties agreed to submit it arbitration intended to consent to an arbitrator resolving that issue, even though the parties’ consent to arbitrate that issue is itself uncertain. The terms of the FAA expressly contemplate judicial determination of whether the parties opted out of judicial dispute resolution[3], and in any event, the question of who gets to decide whether the parties agreed to submit a dispute to arbitration in the first place—as opposed to what merits-related disputes the parties intended to agree to submit to arbitration—is fairly arcane and technical. It is thus not one to which most parties are likely to have given much, if any, thought when they agreed to arbitrate, whereas, having agreed to arbitrate at least some merits-related disputes, they likely did think about the types of merits-related disputes they intended to submit to arbitration.[4]

Despite its arcane and technical nature, the question of whether an arbitrator or court decides arbitrability has important practical consequences on the parties, consequences which result from another fairly arcane and technical point of arbitration law: the standard of review courts apply to arbitration awards. If the parties agreed, or are presumed to have agreed, to arbitrate questions of arbitrability, courts will review the arbitrator’s decision on arbitrability under the same deferential standard that courts apply to an arbitrator’s decision on any other issue the parties agree to submit to arbitration.[5] They will not overturn that decision based solely on an egregious error in contract interpretation. They will overturn it only in the relatively rare case where there is not even a barely colorable basis for it in the parties’ contract[6], or where the proceedings otherwise violated a few other modest, fundamental-fairness-related protections imposed by the FAA, and thus implied into all arbitration agreements, such those permitting vacatur of an award for fraud, corruption, or evident partiality displayed by an ostensibly neutral arbitrator.[7] This deferential standard of review is considerably more forgiving than the ordinary appellate standard of review appellate courts apply to trial court decisions on arbitrability questions, under which legal questions are reviewed de novo (i.e., independently) and factual questions are reviewed for clear error.[8]

Courts therefore do not apply the presumption in favor of arbitration where the question is whether the parties agreed to arbitrate disputes about: (a) what the arbitration agreement requires the parties to submit to arbitration; (b) whether an enforceable arbitration agreement has been formed; or (c) who is bound by it. Instead, courts reverse the presumption by substituting in its place a presumption against arbitration. Thus, even though courts faced with a broad arbitration agreement generally will find a dispute arguably within the scope of the agreement to be subject to arbitration unless the parties clearly exclude the dispute from the scope of arbitrable disputes, courts faced with the same broad arbitration agreement generally will not find that the parties agreed to arbitrate arbitrability unless the parties clearly include that dispute within the scope of the issues they agree to submit to arbitration.

The take-home point: one contemplating entering into an arbitration agreement should think at least twice if the proposed agreement includes a provision expressly delegating to an arbitrator authority to decide disputes about arbitrability. Agreeing to arbitrate arbitrability disputes may or may not be a wise choice for both parties. By requiring parties to clearly and unmistakably state their consent to arbitrate arbitrability, courts have effectively given parties contemplating arbitration an opportunity to consider seriously whether they wish to arbitrate arbitrability. That is an opportunity that should never be missed.

There are a couple of other basic points on this score that parties contemplating arbitration are well-advised to remember. First, while the parties’ intent to arbitrate arbitrability must be expressed in clear and unmistakable terms, that does not mean that those terms must be expressly spelled out in the arbitration agreement itself; generally it is enough that the arbitration agreement expressly incorporates by reference arbitration rules that clearly and unmistakably require submission of arbitrability disputes to arbitration. The AAA Commercial Rules, for example, clearly and unmistakably provide that “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.”[9] Rule 11(c) of the JAMS Comprehensive Arbitration Rules and Procedures also authorizes arbitrators to decide arbitrability disputes:

(c) Jurisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall be submitted to and ruled on by the Arbitrator. The Arbitrator has the authority to determine jurisdiction and arbitrability issues as a preliminary matter.[10]

Provisions like these, and all other provisions of incorporated-by-reference  rules, are generally binding on the parties to the same extent they would have been had the parties set them out verbatim in the arbitration agreement. They are thus as much a part of that agreement as each of the provisions that are expressly set forth in the body of the agreement. That a party might not have read those rules generally does not make them any less clear and unmistakable.

Determining whether they will be deemed to have clearly and unmistakably agreed to arbitrate arbitrability is but one reason why parties who agree to arbitrate pursuant to a particular set of arbitration rules must familiarize themselves with those rules if they wish to make an informed decision about whether to agree to arbitrate, and if so, under what terms. For there are any number of other provisions of arbitration rules that may be outcome determinative of any number of other issues pertinent to the nature and scope of the parties’ arbitration agreement, and apart from the issue of whether the parties entered into an enforceable arbitration agreement in the first place, virtually all arbitration-law questions ultimately turn on the terms of the arbitration agreement.

Second, an agreement to arbitrate arbitrability, although part of a broader arbitration agreement, can require a party to submit to arbitration the issue of whether the broader arbitration agreement is subject to an arbitration-neutral state-law enforceability defense, such as fraud in the inducement or unconscionability. That conclusion, of course, is counterintuitive; if the arbitration agreement is unenforceable, shouldn’t every provision of the arbitration agreement likewise be unenforceable? But for reasons we need not dwell on here, the answer is “no,” unless the defense to enforceability relates specifically to the agreement to arbitrate arbitrability, or specifically relates to both aspects of the arbitration agreement.[11]

That about covers the basics of arbitration-agreement scope. The next installment will address the second of the three structural aspects of arbitration agreements we referred to earlier: whether the arbitration will be ad hoc or administered.

 

Links to Previous Segments of this Multi-Part Small Business B-2-B Arbitration Post:

Part I

Part II.A

Part II.B.1

Links to Future Segments: 

Part II.B.2(B)

Part II.B.2(C)

 



[1]First Options, Inc. v. Kaplan, 514 U.S. 938, 944-45 (1995).

[2]See Howsam v. Dean Witter Reynolds, 537 U.S. 79, 83-84 (2002).

[4]See First Options, 514 U.S. at 945.

[5]See 514 U.S. at 943.

[6]See 514 U.S. at 942, 943; Stolt-Nielsen, S.A. v. AnimalFeeds, Inc., 130 S. Ct. at 1767-68, 1768-70.

[7]See 9 U.S.C. §§ 10(a)(1)-(4).

[8]See AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740, 1751 (2011); First Options, 514 U.S. at 947-48.

[11]Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2775, 2779-81 (2010)

         

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