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In a January 16, 2019 post (here) on the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. (January 8, 2019), we explained that arbitrability questions are ordinarily for courts to decide, but parties may, by way of a “delegation provision,” clearly and unmistakably agree to submit them to arbitration. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995); Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010). (See also Loree Reinsurance and Arbitration Law Forum posts here, here, and here.)
Typically, a “delegation provision” states in clear and unmistakable terms that arbitrability questions are to be decided by the arbitrators. It might, for example, state that the parties agree to submit to arbitrators questions concerning their “jurisdiction,” or the “existence, scope, or validity” of the arbitration agreement.
The U.S. Court of Appeals for the Second Circuit, however, does not require the parties to expressly state in their agreement that they agree to submit arbitrability questions to the arbitrators. The Second Circuit has found that the parties may “clearly and unmistakably” submit arbitrability questions to arbitration when they agree to a very broad arbitration clause. See Wells Fargo Advisors, LLC v. Sappington, 884 F.3d 392, 394, 396 (2d Cir. 2018) (An agreement “to arbitrate any dispute, claim or controversy that may arise between you and Wells Fargo Advisors, or a client, or any other person[, and] . . . giving up the right to sue Wells Fargo Advisors . . . in court concerning matters related to or arising from your employment” “demonstrate[d] the parties’ clear and unmistakable intent to arbitrate all questions of arbitrability.”); PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1199 (2d Cir. 1996) (A contractual provision that “any and all controversies . . . concerning any account, transaction, dispute or the construction, performance, or breach of this or any other agreement . . . shall be determined by arbitration” and that “the parties are waiving their right to seek remedies in court” clearly and unmistakably demonstrated “parties’ intent to arbitrate all issues, including arbitrability.”) (emphasis omitted); Alliance Bernstein Investment Research and Management, Inc. v. Schaffran, 445 F.3d 121 (2d Cir. 2006) (NASD Code Rule 10324, which authorized arbitrators “to interpret and determine the applicability of all provisions under [the] Code[]” was a clear and unmistakable delegation to arbitrators of arbitrability questions concerning interpretation of the NASD Code.).
In Metropolitan Life Ins. Co. v. Bucsek, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), the Second Circuit was faced with an unusual situation where party A sought to arbitrate against party B, a former member of the Financial Industry Regulatory Authority (“FINRA”)’s predecessor, the National Association of Securities Dealers (“NASD”), a dispute arising out of events that occurred years after party B severed its ties with the NASD.
The district court
rejected A’s arguments, ruling that: (a) this particular arbitrability question
was for the Court to decide; and (b) the dispute was not arbitrable because it arose
years after B left the NASD, and was based on events that occurred subsequent
to B’s departure. The Second Circuit affirmed the district court’s judgment.
After the district court decision, but prior to the Second Circuit’s decision, the U.S. Supreme Court decided Schein, which—as we explained here—held that even so-called “wholly-groundless” arbitrability questions must be submitted to arbitration if the parties clearly and unmistakably delegate arbitrability questions to arbitration. Schein, slip op. at *2, 5, & 8.
The Second Circuit faced a situation where a party sought to arbitrate a dispute which clearly was not arbitrable, but in circumstances under which prior precedent, including Alliance Berstein (cited above), suggested that the parties clearly and unmistakably agreed to arbitrate arbitrability.
To give effect to the parties’ likely intent that they did not agree to arbitrate arbitrability questions that arose after B left the NASD, the Second Circuit had no choice but distinguish and qualify its prior precedent without falling afoul of the Supreme Court’s recent pronouncement in Schein. That required the Second Circuit to modify, to at least some extent, the contractual interpretation analysis that courts within the Second Circuit are supposed to engage to ascertain whether parties “clearly and unmistakably” agreed to arbitrate arbitrability in circumstance where they have not specifically agreed to arbitrate such issues.
Metropolitan Life is an important decision because it means in future cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.
It is easy to see how applying Metropolitan Life in future cases could raise some interesting and challenging questions for parties, their attorneys, and the courts. We may look at those challenges in more detail in a future post, but for now, let’s take a careful look at the Second Circuit’s decision.
I am told “papalote” is a Spanish word meaning “kite” or “hang glider.” It also appears in the name of a party to a recent decision of the U.S. Court of Appeals for the Fifth Circuit concerning narrow arbitration clauses, Papalote Creek II, L.L.C. v. Lower Colo. River Auth., No. 17-50852, slip op. (5th Cir. Mar. 15, 2019) (“Papalote II”). The party was Papalote Creek II, L.L.C. (“Papalote”). It won the appeal.
What was the appeal about? Narrow arbitration clauses, and in particular whether a dispute about maximum, aggregate liability under a wind-energy purchase and sale contract was a dispute “with respect to performance” within the meaning of the parties’ narrow arbitration clause.
The appeal was not the first, but the second, and the procedural history was tangled, both in terms of what transpired in the disputed arbitration and in the district court. The first appeal, Papalote I, resulted in a remand because at the time the district court compelled arbitration, the district court lacked subject matter jurisdiction. The issue on which the arbitration proponent sought arbitration was not ripe, even though it became ripe during the time Papalote I was pending. SeeLower Colo. River Auth. v. Papalote Creek II, L.L.C., 858 F.3d 916 (5th Cir. 2017) (“Papalote I”).
By the time Papalote I was decided, the arbitration panel had ruled against Papalote, the arbitration opponent. But Papalote I obligated the district court to vacate the arbitration award and to reconsider the issue of whether arbitration should be compelled under the narrow arbitration clause.
On remand the district court adhered to its previous decision that the dispute fell within the scope of the narrow arbitration clause, which resulted in another order to compel arbitration and the second appeal, Papalote II.
On the second appeal the Fifth Circuit reversed the district court’s decision on arbitrability, ruling that the dispute was not about “performance,” but about “interpretation.” Going forward that means that the parties will either have to settle their dispute or litigate it in court, even though they’ve both no doubt already spent not only a good deal of time, but money, litigating about arbitration, and arbitrating a dispute they did not mutually consent to arbitrate. (Perhaps for Papalote that’s not necessarily a bad outcome, but it’s just speculation on our part.)
Bottom line: Irrespective of whether the parties considered the potential consequences associated with their narrow arbitration clause, at least one of them (and perhaps even both) may, at least to some extent, now feel like they’re up that proverbial creek without a paddle—or even a papalote….
This post takes a closer look at Papalote II, focusing exclusively on the issue whether the dispute fell within or without the scope of the parties’ narrow arbitration clause.
Narrow Arbitration Clauses: Papalote II Background
In Papalote II the Fifth Circuit held that a narrow arbitration clause that covered disputes about the “performance” of a contract did not cover a dispute concerning the meaning of an aggregate liability provision in a wind-energy contract. That dispute, said the Court, concerned the interpretation of the contract, not its performance, and therefore the arbitration opponent was not required to submit it to arbitration.
Today we look at federal appellate jurisdiction over orders compelling arbitration and staying litigation.
Sections 3 and 4 of the Federal Arbitration Act (the “FAA”) provide remedies for a party who is aggrieved by another party’s failure or refusal to arbitrate under the terms of an FAA-governed agreement. FAA Section 3, which governs stays of litigation pending arbitration, requires courts, “upon application of one of the parties,” to stay litigation of issues that are “referable to arbitration” “until arbitration has been had in accordance with the terms of the parties’ arbitration agreement, providing [the party applying for a stay] is not in default in proceeding with such arbitration.” 9 U.S.C. § 3. Faced with a properly supported application for a stay of litigation of an arbitrable controversy, a federal district court must grant the stay. 9 U.S.C. § 3.
Section 4 of the FAA authorizes courts to make orders “directing arbitration [to] proceed in the manner provided for in [the [parties’ written arbitration] agreement[,]” and sets forth certain procedures for adjudicating petitions or motions to compel arbitration. 9 U.S.C. § 4. It provides that when a court determines “an agreement for arbitration was made in writing and that there is a default in proceeding thereunder, the court shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.” 9 U.S.C. § 4 (emphasis added). Just as courts must grant properly supported applications for relief under Section 3, so too must they grant properly supported applications for relief under Section 4. See 9 U.S.C. §§ 3 & 4.
There is much to be said about the many issues that may arise out of applications to stay litigation, compel arbitration, or both, but our focus here is on the appellate jurisdiction of the U.S. Circuit Courts of Appeals over appeals from the grant or denial of such applications. Before a U.S. Circuit Court of Appeals can hear an appeal on the merits of a federal district court’s order and judgment, it must be satisfied that: (a) the federal district court had original subject matter jurisdiction (e.g., diversity jurisdiction or federal question jurisdiction); (b) there is still a “case or controversy” within the meaning of Article III of the U.S. Constitution (e.g., the controversy has not become moot by settlement or otherwise); and (c) the order or judgment appealed from is one over which it has appellate jurisdiction.
Appellate Jurisdiction
and the FAA
Appellate jurisdiction refers to a Circuit Court of Appeals’ power to review, amend, vacate, affirm, or reverse the orders and judgments of the district courts within the judicial circuit over which the Court of Appeals presides. Generally, and outside the context of injunctions and the certification procedure of 28 U.S.C. § 1292(b), U.S. Courts of Appeal have jurisdiction to review only “final decisions” of district courts. See 28 U.S.C. §§ 1291, 1292. A “final decision” “is a decision that ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment.” Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 86 (2000) (citations and quotations omitted).
But Federal Arbitration Act litigation is quite different from ordinary litigation from both a substantive and procedural prospective, and so it comes as no surprise that the FAA features its own set of appellate jurisdiction rules.
Section 1 of the Federal Arbitration Act exempts from the FAA’s scope disputes involving “contracts of employment of . . . workers engaged in . . . interstate commerce.” 9 U. S. C. § 1. If parties to an arbitration agreement clearly and unmistakably delegate arbitrability questions to an arbitrator, who decides whether a contract containing the arbitration agreement is such a “contract of employment?”
United States Supreme Court
InNew Prime Inc. v. Oliveira, 586 U.S. ___, slip op. (Jan. 15, 2019), the nation’s highest court held that courts decide whether a contract is within the scope of the FAA’s coverage, even where the parties clearly and unmistakably delegate arbitrability questions to an arbitrator. Slip op. at 4. Addressing the merits of the FAA’s applicability to the contract, the United States Supreme Court held that under Section 1 it was exempt from the FAA because in 1925, the year Congress enacted the FAA, the term “contracts of employment” was ordinarily understood to include not only contracts establishing an employer-employee (or master and servant) relationship, but also independent contractor relationships. Slip op. at 15.
Who gets to decide whether the Federal Arbitration Act applies to the parties’ agreement?
Today we’ll focus on the first issue addressed by the Court: who gets to decide whether a contract falls within the Section 1 “contracts of employment” exemption when the parties have delegated arbitrability disputes to the arbitrators. In a later post we’ll look at how the Court decided the contract before it was under Section 1 a “contract of employment of a “worker[] engaged in interstate commerce[,]” and thus outside the scope of the FAA.
Background
Dispute between a trucker and a trucking company
New Prime was a dispute between a truck driver and a trucking company. The relationship between the two was established by a written contract which, at least in form, established an independent contractor, rather than an employer-employee relationship. The contract contained an arbitration clause which provided that “any disputes arising out of the parties’ relationship should be resolved by an arbitrator—even disputes over the scope of the arbitrator ’s authority.” Slip op. at 1-2.
The trucker commenced a federal-court class action, which alleged that, irrespective of what the trucking company called its drivers, the trucking company “treat[ed] them as employees and fail[ed] to pay the statutorily due minimum wage.” Slip op. at 2.
The trucking company asked the district court to compel arbitration of the dispute. In response the trucker contended that his contract was outside the scope of the FAA because it was a “contract[] of employment of . . . [a] worker[] engaged in foreign or interstate commerce.” 9 U.S.C. § 1. Thus, said the trucker, the FAA “supplied the district court with no authority to compel arbitration….” Slip op. at 2.
The trucking company replied that the parties had agreed to submit to arbitration the question whether the Section 1 “contracts of employment” exemption applied to the contract. The trucking company alternatively contended that, if the question was for the Court, then the term “‘contracts of employment’ refers only to contracts that establish an employer-employee relationship[,]” and the trucker was an independent contractor, not an employee, of the trucking company. Accordingly, said the trucking company, the Section 1 exclusion did not apply, the FAA applied, and the Court should stay the litigation and compel arbitration under FAA Sections 3 and 4. See 9 U.S.C. §§ 3 & 4; slip op. at 2-3.
The district court and the United States Court of Appeals for the First Circuit found in favor of the trucker. The First Circuit “held, first, that in disputes like this a court should resolve whether the parties’ contract falls within the Act’s ambit or [Section 1’s] exclusion before invoking the [FAA’s] authority to order arbitration.” Slip op. at 3. The First Circuit further “held that [Section 1’s] exclusion of certain ‘contracts of employment’ removes from the Act’s coverage not only employer-employee contracts but also contracts involving independent contractors.” Slip op. at 3. Accordingly, irrespective of whether the parties’ agreement established an employer-employee or independent contractor relationship, the district court lacked FAA authority to compel arbitration. Slip op. at 3.
In an 8-0 Opinion written by Associate Justice Neil M. Gorsuch, the U.S. Supreme Court affirmed the First Circuit’s decision (Associate Justice Brett Michael Kavanaugh took no part). Associate Justice Ruth Bader Ginsburg penned a brief concurring opinion.
The Court Must Decide Whether Section 1 Exempts the Contract from the FAA’s Scope
The Broad Authority the FAA Confers on Courts does not Extend to All
Private Contracts
SCOTUS: Judicial authority to compel arbitration under the FAA “may be considerable[,]” but it is not “unconditional”
The answer to the “who” question was “immediately” “clear” to the Court. Slip op. at 3. Though “a court’s authority under the [FAA] to compel arbitration may be considerable, it isn’t unconditional.” Slip op. at 3. FAA Sections 3 and 4 “often require a court to stay litigation and compel arbitration ‘according to the terms’ of the parties’ agreement[,]” “[b]ut this authority doesn’t extend to all private contracts, no matter how emphatically they may express a preference for arbitration.” Slip op. at 3.
Section 1 and Section 2 are Antecedent Provisions that Limit Judicial Power to Stay Litigation and Compel Arbitration under Sections 3 and 4
Court must apply FAA Sections 1 and 2 to determine whether it has the authority to stay litigation or compel arbitration under Sections 3 and 4
Sections 1 and 2, the Court explained, are “antecedent statutory provisions” that “limit the scope of the scope of the court’s powers under [Sections] 3 and 4.” Slip op. at 3. Section 2 “applies only when the parties’ agreement to arbitrate is set forth as a ‘written provision in any maritime transaction or a contract evidencing a transaction involving commerce.’” Slip op. at 3. Section 1, which “helps define [Section] 2’s terms[,]” provides that “‘nothing’ in the [FAA] ‘shall apply’ to ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’” Slip op. at 3-4 (quoting 9 U.S.C. § 1).
According to the Court, Section 1’s exemption was included in the FAA, which was enacted in 1925, because “Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers[,]” [a]nd it seems Congress ‘did not wish to unsettle’ those arrangements in favor of whatever arbitration procedures the parties’ private contracts might happen to contemplate.” Slip op. at (quoting Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 121 (2001)).
The FAA’s “Terms and Sequencing” Demonstrates that under Section 1 Courts Decide whether a Contract Falls Under the FAA
The FAA’s “terms and sequencing” supported the Court’s conclusion that “a court should decide for itself whether [Section] 1’s ‘contracts of employment’ exclusion applies before ordering arbitration.” Slip op. at 4. Before a Court can “invoke its statutory powers under [Sections] 3 and 3 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or beyond the boundaries of [Sections] 1 and 2.” Slip op. at 4. That is so even if the “parties’ private agreement [is] crystal clear and require[s] arbitration of every question under the sun….” See slip op. at 4.
The Court’s Prior Decisions have Stressed the Significance of the FAA’s “Sequencing”
SCOTUS says its “holding” should come as no “surprise[,]” because its prior decisions require that a contract fall within the scope of Sections 1 and 2 before litigation may be stayed or arbitration compelled under Sections 3 or 4.
The Court said “[n]othing in our holding on this score should come as a surprise[,]” because the Court has “long stressed the significance of the statute’s sequencing.” By way of example the Court cited and quoted Bernhardt v. Polygraphic Co. of America, 350 U. S. 198, 201–202 (1956), Circuit City, and Southland Corp. v. Keating, 465 U. S. 1, 10–11, and n. 5 (1984). In Bernhardt the Court explained that “‘Sections 1, 2, and 3 [and 4] are integral parts of a whole. . . . [Sections] 1 and 2 define the field in which Congress was legislating,’ and §§3 and 4 apply only to contracts covered by those provisions.” Slip op. at 4 (quoting Benhardt, 350 U.S. at 201-202). In Circuit City, the Court “acknowledged that ‘Section 1 exempts from the [Act] . . . contracts of employment of transportation workers.’” Slip op. at 4 (quoting Circuit City, 532 U. S., at 119). In Keating the Court “noted that ‘the enforceability of arbitration provisions’ under §§3 and 4 depends on whether those provisions are ‘ part of a written maritime contract or a contract “evidencing a transaction involving commerce”’ under §2—which, in turn, depends on the application of §1’s exception for certain ‘contracts of employment.’” Slip op. at 4-5. (quoting Keating, 465 U. S. at 10–11, and n. 5).
The Trucking Company’s Delegation and Severability Arguments Put the Section 3 and Section 4 Cart before the Section 1 and Section 2 Horse
The trucking company’s arguments put the Section 3 and 4 cart before the Section 1 and 2 horse. Admittedly, the above photo doesn’t accurately depict that idiomatic scenario, but why make hay of it?
The trucking company contended that an arbitrator should decide the parties’ Section 1 dispute, relying on the delegation provision in the contract and the severability doctrine. “A delegation clause,” said the Court, “gives an arbitrator authority to decide even the initial question whether the parties’ dispute is subject to arbitration.” Slip op. at 5 (citing Rent-A-Center, West, Inc. v. Jackson, 561 U. S. 63, 68–69 (2010)).
Under the severability doctrine, the Court “treat[s] a challenge to the validity of the arbitration agreement (or a delegation provision) separately from a challenge to the validity of the entire contract in which it appears.” Slip op. at 5. If a party does not “specifically challenge[] the validity of the agreement to arbitrate, both sides may be required to take all their disputes—including disputes about the validity of their broader contract—to arbitration. Slip op. at 5 (citing Rent-a-Center).
The trucking company argued that: (a) the
trucker did not “specifically challenge[] the parties’ delegation clause. . .”;
and, therefore, (b) the parties had to arbitrate their dispute over whether the
contract fell within Section 1’s exemption.
The Court explained that this argument “overlooks the necessarily antecedent statutory inquiry we’ve just discussed.” Slip op. at 5. “A delegation clause,” said the Court, “is merely a specialized type of arbitration agreement, and the [FAA] ‘operates on this additional arbitration agreement just as it does on any other.’” Slip op. at 5 (quoting Rent-a-Center, 561 U. S. at 70.) To “use [Sections] 3 and 4 to enforce a delegation clause[,]” “the clause” must “appear[] in a ‘written provision in . . . a contract evidencing a transaction involving commerce’ consistent with [Section] 2[,]” “[a]nd only if the contract in which the clause appears doesn’t trigger [Section] ’s ‘contracts of employment’ exception.” Slip op. at 5.
“In exactly the same way,” said the Court, the FAA’s “severability principle applies only if the parties’ arbitration agreement appears in a contract that falls within the field [Sections] 1 and 2 describe.” Slip op. at 5-6. Indeed, the Court “acknowledged as much some time ago, explaining that, before invoking the severability principle, a court should ‘determine[] that the contract in question is within the coverage of the Arbitration Act.’” Slip op. at 6 (citing and quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 402 (1967)).
More to follow on New Prime…
But if in the meantime you want to learn more now about arbitrability and delegation provisions, see prior posts here, here, here, here, and here.
Photo Acknowledgments:
The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law.
Arbitrability questions are ordinarily for courts to decide, but parties may, by way of a “delegation provision,” clearly and unmistakably agree to submit them to arbitration. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995); Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010). (See, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, and here.)
But suppose parties to a delegation provision disagree about whether they are required to arbitrate a dispute, yet their contract clearly excludes the dispute from arbitration. Can a Court preemptively decide the merits of an arbitrability question delegated to the arbitrators, and refuse to compel arbitration of the arbitrability question, if the Court decides that the argument for arbitration of the underlying dispute is wholly groundless?
On January 8, 2019 the U.S. Supreme Court, in a 9-0 decision, held that where parties have clearly and unmistakably agreed to arbitrate arbitrability disputes, courts must compel arbitration even if the argument in favor of arbitration is “wholly groundless.” Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. at *2, 5, & 8 (January 8, 2019).
The Court said that “[t]he [FAA] does not contain a ‘wholly groundless’ exception, and we are not at liberty to rewrite the statute….” Slip op. at 2; see also slip op. at 8. “When,” said the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Slip op. at 2; see also slip op. at 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Slip op. at 8.
Facts and Procedural History
Schein was a dispute between a dental equipment manufacturer and a distributor. The parties’ contract contained an arbitration agreement, which required arbitration of “[a]ny dispute arising under or related to [the Parties’] Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [the manufacturer]….” Slip op. at 2. Arbitration was to be “in accordance with the arbitration rules of the American Arbitration Association [(the “AAA”)].” Slip op. at 2.
In prior posts we’ve discussed how footnote 2 of the U.S. Supreme Court’s decision in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2072 n.2 (2013) said it was an open issue whether class-arbitration-consent presented a question of arbitrability, and how certain U.S. Circuit Courts of Appeals have, subsequent to Oxford, held that consent-to-class-arbitration presents a question of arbitrability, which is ordinarily for the court to decide. (See, e.g., here.)
We have also discussed how, under First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995), even though questions of arbitrability are ordinarily for the court to decide, parties may clearly and unmistakably agree to submit questions of arbitrability to the arbitrators. In Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010), the Supreme Court of the United States referred to such agreements as “delegation provisions.” Id.
Class-Arbitration-Consent 2
In Spirit Airlines, Inc. v. Maizes, ___ F.3d ___, slip op. (11th Cir. August 15, 2018), the United States Court of Appeals for the Eleventh Circuit addressed a question that called in to play these two related concepts: “whether the [parties’] agreement’s choice of American Arbitration Association rules, standing alone, is clear and unmistakable evidence that [the parties] intended that the arbitrator decide” the consent-to-class-arbitration question. Slip op. at 2. The Court said the answer to that question was “yes.”
A choice-of-law provision is as much a part of a parties’ contract as any other, and an arbitrator might manifiestly disregard the parties’ contractual choice-of-law, which might provide grounds for vacating the award under Section 10(a)(4) of the Federal Arbitration Act (“FAA”). But, as well-illustrated by the U.S. Court of Appeals for the Eigth Circuit’s decision in Beumer Corp. v. ProEnergy Servs., LLC, ___ F.3d ____, slip op. (8th Cir. August 8, 2018), the circumstances that might justify such a decision would be very unusual, to say the least.
Beumer Corp. v. ProEnergy Servs., LLC
Choice-of-Law Provision 2
Owner and Contractor had a construction contract that contained an arbitration agreement, limitation-of-liability, provision, and a Missouri choice-of-law clause. The Owner complained that the Contractor’s work was deficient and, accordingly, no payment was due. The Contractor commenced arbitration for the amount due under the contract and the Owner counterclaimed for damages.
The parties disputed the scope and enforceability of their contract’s limitation of liability provision, which stated:
Notwithstanding any of the foregoing or any other term in this Contract, the total liability of Contractor for any loss, indemnity, damage or delay of any kind will not under any circumstances exceed 100% of the Contract Sum.
The contract contained a broad Missouri choice-of-law clause, and provided that a prevailing party could collect its attorney’s fees.
The Award
Choice-of-Law Provision 3
The Arbitrator ruled that the clause was enforceable, that the Contract Sum (i.e., the liability cap) was $699,702.39., and that the terms “loss, indemnity, damage or delay of any kind” did not include the prevailing party’s contractual right to attorney fees. The Arbitrator thus awarded Beumer: (a) $699,702.39 in damages; (b) $191,680.14 in pre-judgment interest; (c) post-judgment interest at 9%; and (d) $916,027.90 in attorney’s fees and expenses.
On its motion to vacate the Award the Contractor did not dispute that the Arbitrator “arguably construed” the limitation of liability clause, but contended that the Arbitrator exceeded its powers by “disregarding” the Missouri choice-of-law clause, because: (a) the Arbitrator relied on caselaw from four jurisdictions outside of Missouri to support his construction of the limitation of liability provision as exclusive of costs and attorney fees, and did not cite any Missouri decisions on this construction question; and (b) the Contractor claimed that the Missouri cases required a cost-inclusive interpretation of the clause, not a cost-plus one.
The Arbitrator did not Disregard the Choice-of-Law Provision
Choice-of-Law Provision 4
Did the Arbitrator exceed his powers by ruling that the limitation of liability clause did not limit liability for contractual attorney fees? The Eighth Circuit, in a well-reasoned decision, said the answer was “no.” Continue Reading »
New York Civil Practice Law & Rules (“CPLR”) Section 7511(b)(1)(iii) provides that an arbitration award “shall be vacated” where the arbitrator “so imperfectly executed [the award] that a final and definite award upon the subject matter submitted was not made” CPLR 7511(b)(1)(iii). The Federal Arbitration Act similarly authorizes vacatur “where the arbitrators…so imperfectly executed [their powers] that a mutual, final, and definite award upon the subject matter submitted was not made.” 9 U.S.C. § 10(a)(4).
In Professional, Clerical, Tech. Emps. Ass’n v. Board of Ed. for Buffalo City School Dist., ___ A.D.3d ___, 2018 N.Y. Slip Op. 04128, at *1 (4th Dep’t June 8, 2018), the New York Supreme Court, Appellate Division, Fourth Department, held that the trial court erred by confirming a labor arbitration award that did not adequately explain the basis for the compensation to be awarded or how it should be calculated. Continue Reading »
What constitutes a “final arbitration award” for purposes of the Federal Arbitration Act is important because it bears on whether an award can be confirmed, vacated, or modified under Sections 9, 10, or 11 of the Federal Arbitration Act (the “FAA”). We addressed the basics concerning final awards in a 2009 post, here.
In Northfolk Southern Railway Co. v. Sprint Communications Co., L.P., 883 F.3d 417 (4th Cir. 2018), the U.S. Court of Appeals for the Fourth Circuit was faced with the question whether an award (the “Appraisal Award”), convened under an agreement’s appraisal clause, and issued by three appraisers, was a final arbitration award under the FAA. The unusual procedural posture of the case raised an additional, related question: whether under the FAA an arbitration panel, convened under the arbitration provision of the parties’ agreement, had the authority to declare the Appraisal Award to be a final award. That question matters, for if an arbitration panel has that power, then its decision concerning finality is subject only to the very highly deferential review permitted by Section 10 of the FAA. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-43 (1995); Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068-69 (2013).
Concededly with the benefit of 20/20 hindsight, we wonder whether a different litigation and appellate strategy might have yielded a different outcome. The Court held that the Appraisal Award was not final, and remanded the matter back to the appraisers. But the Court did not, for the reasons set forth below, definitively answer the “who” question. The Court’s decision that the Appraisal Award was not final was unquestionably correct if one considers from a purely objective standpoint, without deference to the Arbitration Award, which declared that the Award was final. But the correct outcome would be considerably less certain had the Railroad sought confirmation of the Arbitration Award and urged the Court to accord deference to the arbitrators who made it.
The dispute between Northfolk Southern Railway Co. (the “Railroad” or the “Appraisal Award Defending Party”) and Sprint Communications Co., L.P. (the “Carrier” or the “Appraisal Award Challenging Party”) arose out of a 25-year-term 1987 licensing agreement (the “Agreement”) under which the Carrier’s predecessor licensed from the Railroad’s predecessor the right to use for fiber-optics-cable purposes certain parts of the Railroad’s rights of way. The Carrier renewed that Agreement for an additional 25-year term (the “renewed Agreement term”), and a dispute arose about the renewal price. Continue Reading »
New York’s arbitration law (Article 75 of the CPLR), like the Federal Arbitration Act (the “FAA”), strictly limits award challenges premised on an arbitrator’s disregard of the parties’ contract. Arbitrator interpretations of the parties’ agreement cannot be second-guessed, even if the arbitrator has “disregarded” “the apparent, or even the plain, meaning of the words of the contract….”Maross Constr. v Central N. Y. Regional Transp. Auth., 66 N.Y 2d 341, 346 (1985) (quotations and citations omitted). To succeed, an award challenger must show that the award “is irrational or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.” Kowaleski v. New York State Dep’t Correctional Serv., 16 N.Y. 3d 85, 91 (2010).
In City of New York v. District Council 37, ___ A.D. 3d ___, 2018 NY Slip Op 3220 (1st Dep’t May 3, 2018), the New York’s Supreme Court, Appellate Division, First Department set aside an award because it exceeded “a specifically enumerated limitation” on arbitral power: The parties’ agreement prohibited the arbitrator from adding to or modifying the agreement.
“The arbitrator’s decision,” said the Court, “rewrote the contract for the parties by expanding the number of workers entitled to the [collective bargaining agreement’s] assignment differential, when the contract expressly limited the differential to workers at a specific facility.” 2018 N.Y. Slip Op. 3220 at *1.
Acknowledging that “[a] provision in a contract that the arbitrator may not alter or modify a contract does not limit the arbitrator’s power to resolve the dispute by interpreting the contract based on his or her findings as to the parties’ intent[,]” the Court explained that “an award should be vacated where it is not derived from the contract, but from the deliberate and intentional consideration of matters outside the contract.” 2018 N.Y. Slip Op. 3220 at *1.
To learn more about vacating awards based on an arbitrator’s manifest disregard of the contract click here, here, here, here, here, and here.
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New York’s arbitration law (Article 75 of the CPLR), like the Federal Arbitration Act (the “FAA”), strictly limits award challenges premised on an arbitrator’s disregard of the parties’ contract. Arbitrator interpretations of the parties’ agreement cannot be second-guessed, even if the arbitrator has “disregarded” “the apparent, or even the plain, meaning of the words of the contract….”
