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Does a Clear and Unmistakable Delegation Provision Require the Parties to Arbitrate Disputes About the Existence of an Arbitration Agreement?

April 27th, 2019 Arbitrability, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Authority of Arbitrators, Existence of Arbitration Agreement, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Rights and Obligations of Nonsignatories, Separability, Severability, United States Court of Appeals for the Fifth Circuit, United States Supreme Court No Comments » By Philip J. Loree Jr.
Arbitrability Question 5 | Delegation Clause | Delegation Provision

Parties can, and frequently do, agree to include in their contract a so-called
“Delegation Provision” that clearly and unmistakably delegates to the arbitrators questions of arbitrability. (See, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, here, and here.) Questions of arbitrability include questions concerning: (a) the scope of an arbitration agreement, that is, whether the parties agreed to arbitrate particular disputes or categories of disputes; (b) the validity or enforceability of an arbitration agreement “upon upon such grounds as exist at law or in equity for the revocation of any contract[,]” 9 U.S.C. § 2; or (c) whether an arbitration agreement has been formed or concluded, that is, whether an arbitration agreement exists in the first place. (See Loree Reinsurance and Arbitration Law Forum post here.)

Typically, a “delegation provision” states in clear and unmistakable terms that arbitrability questions are to be decided by the arbitrators. For example, by making part of their contract Rule 8.1 of the 2018 version of the International Institute for Conflict Prevention and Resolution (CPR)’s Non-administered Arbitration Rules, parties agree to the following broad Delegation Provision:

Rule 8: Challenges to the Jurisdiction of the Tribunal

8.1 The Tribunal shall have the power to hear and determine challenges to its jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement. This authority extends to jurisdictional challenges with respect to both the subject matter of the dispute and the parties to the arbitration.

CPR Non-Administered Arbitration Rule 8.1 (2018) (emphasis added).

Who Gets to Decide whether the Parties Entered into a Delegation Provision?

Federal Arbitration Act  | Who Gets to Decide? | Delegation Provision

Suppose that Agent A, without the knowledge and consent of Party A, purports to bind Party A to a written contract with Party B, which includes a broad arbitration agreement that expressly incorporates by reference, and makes part of the purported contract, the 2018 version of CPR’s Non-administered Arbitration Rules. Party B and Agent A deal with each other concerning the subject matter of the contract, and a dispute arises.

Party B demands arbitration of the dispute, and serves an arbitration demand on Party A, who is understandably surprised at being named a party in an arbitration proceeding concerning a purported agreement of which it had no knowledge, objects to the arbitration demand, and Party B commences an action to compel arbitration.

In the proceeding to compel arbitration, Party A argues that Agent A had no actual or apparent authority to bind it to the agreement that contained the arbitration agreement. Party B responds that because the Delegation Clause made part of the agreement requires arbitration of issues concerning the “existence” of the arbitration agreement, Party A must arbitrate the issue of whether Agent A had authority to bind it to the agreement.

Must Party A arbitrate the issue whether Agent A had authority to bind it to the agreement because the agreement contains a Delegation Provision? If the only consideration were the text of Rule 8.1, then the answer would be “yes.”

But remember the first principle of arbitration law? (See here and here.) Arbitration is a matter of consent, not coercion—a way of resolving disputes, but only those that the parties agree to submit to arbitration. Lamps Plus, Inc. v. Varela, 587 U.S. ___, ___, No. 17-988, slip op. at *7 (April 24, 2019) (citations omitted); Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995) (citations omitted); Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 295 & n.7, 294 n.6 (2010); AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 648 (1986). 

Parties may agree to include a clear and unmistakable Delegation Provision in their contract, including one like that embodied in Rule 8.1 of the CPR Non-administered Rules (2018). But before the Federal Arbitration Act will require enforcement of such a Delegation Provision the Court must be satisfied that the parties have agreed to it.

The United States Supreme Court in Henry Schein recently reminded us that, “[t]o be sure, before referring a dispute to an arbitrator”—including an arbitrability dispute—“the court determines whether a valid arbitration agreement exists.” Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. ___, ___, No. 17-1272, slip op. at *6 (Jan. 8, 2019). And “if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.” Id. (We discuss Henry Schein in detail here.)

So in our hypothetical Party A would be entitled to a judicial determination of whether Agent A was authorized to bind it to the agreement—notwithstanding the language of the Delegation Provision, which provides for arbitrators to decide disputes concerning the “existence” of an arbitration agreement.

Lloyd’s Syndicate 457 v. FloaTEC L.L.C.: Court Gets to Decide whether Delegation Provision Exists

Oil Rig

A recent case decided by the U.S. Court of Appeals for the Fifth Circuit illustrates this point, albeit in a slightly different context. In Lloyd’s Syndicate 457 v. FloaTEC L.L.C., ___ F.3d ____, No. 17-20550, slip op. (5th Cir. April 17, 2019), an Insurer insured a Chevron oil rig, which suffered damage allegedly caused by defective steel tendons engineered by FloaTEC L.L.C. (“FloaTEC”), which were supposed to secure the oil rig to seabed-embedded columns.

The Insurer agreed to waive its subrogation rights against any “Other Assured” under the policy. The Policy defined the term “Other Assured” to “include ‘[a]ny’ other companies with whom Chevron had ‘entered into written contracts(s) in connection with the Project.’” Slip op. at 4.

FloaTEC was a party to a written contract with Chevron concerning its engineering of the allegedly defective steel tendons for the oil rig. That agreement contained a broad arbitration agreement, which included a Delegation Provision. The Delegation Provision said that “[t]he . . . arbitrators have the power to rule on objections concerning jurisdiction, including the existence or validity of this Contract.” Slip op. at 7 & n.2 (quotation omitted).

The Insurer paid Chevron a large sum for damage to the oil rig and subsequently sued FloaTEC L.L.C. as Chevron’s subrogee. FloaTEC moved to dismiss on the ground that the Insurer was not and could not be a subrogee of Chevron, and therefore could not effectively “step into the shoes” of Chevron and assert Chevron’s claims against FloaTEC. In the alternative, and in the event that the Court determined that the Insurer was Chevron’s subrogee, FloaTEC moved to compel arbitration of the dispute under the broad arbitration agreement in the Chevron-FloaTEC contract.

In response to the motion to dismiss, the Insurer argued that the issue of whether it was a subrogee of Chevron was a “gateway arbitrability issue[]” that the parties delegated to the arbitrator under the Chevron-FloaTEC agreement’s broad Delegation Provision. Slip op. at 7 (quotation omitted). The Insurer argued that “the clause prohibited the court from ruling on FloaTEC’s motion to dismiss because ‘a valid delegation clause requires the court to refer a claim to arbitration to allow the arbitrator to decide gateway arbitrability issues.’” Slip op. at 7 (quoting Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199 (5th Cir. 2016) (citing Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 68-69 (2010))).

The district court granted the motion to dismiss, and on appeal the United States Circuit Court of Appeals for the Fifth Circuit affirmed the district court’s judgment. The Court said that the Insurer “misread our precedent[]” because the Court “follow[s] a two-step analysis[]” to determine whether a Delegation Clause requires the parties to arbitrate arbitrability issues. Slip op. at 7-8.

First, “the court must determine whether the parties entered into any arbitration agreement at all.” Slip op. at 8 (emphasis in original; quotation and citation omitted). The question for the court “is a question of contract formation only—did the parties form a valid agreement to arbitrate some set of claims.” Slip op. at 8 (quotation and citation omitted). Put differently, if “the very existence of any [arbitration] agreement is disputed, it is for the courts to decide at the outset whether an agreement was reached.” Slip op. at 8 (citations and quotations omitted).

Second, if the Courts decide that the parties have entered into an arbitration agreement, then the Court must determine whether that arbitration agreement clearly and unmistakably delegates arbitrability questions to the arbitrator. See slip op. at 8. If it does, then the court should compel arbitration of arbitrability questions. See slip op. at 8.

By insisting that the Court must compel arbitration of the arbitrability issue , the Insurer attempted to “skip the first step of the analysis[,]” that is, “whether they form[ed] a valid [arbitration] agreement with FloaTEC to begin with.” Slip op. at 8-9 (quotation and citation omitted).

The Court said that “[t]he district court correctly treated [the] subrogation issue as a step one inquiry because it goes to whether any arbitration agreement exists between the [Insurer] and FloaTEC.” Slip op. at 9. “If,” said the Court, “the Policy bars Underwriters from stepping into Chevron’s shoes and benefitting from the Contract’s delegation clause, then [the Insurer] and FloaTEC never entered into any arbitration agreement at all.” Slip op. at 9 (emphasis in original; quotation and citation omitted).

“[T]he Policy’s subrogation bar means Underwriters cannot step into the Chevron/FloaTEC Contract containing the arbitration agreement[,]” and “[b]y deciding FloaTEC’s motion to dismiss at the outset, the district court properly resolved that contract-formation issue, which is for the courts and not the arbitrator to decide in the first instance.” Slip op. at 9-10 (citation and quotation omitted). The district court thus correctly decided that FloaTEC was not required to submit the issue of arbitrability to arbitration under the arbitration agreement between FloaTEC and Chevron.

The Court subsequently determined that FloaTEC was an “Other Assured” within the meaning of the Policy, and that the Policy precluded the Insurer from bringing a subrogation claim against FloaTEC, and thus the Insurer did not step into the shoes of Chevron for purposes of the Chevron-FloaTEC Contract. See slip op. at 9-21. The district court thus correctly dismissed the Insurer’s claims against FloaTEC.

The agency scenario we gave in our hypothetical, and the subrogation situation FloaTEC presented, are fairly straightforward examples of when there is an issue for the court concerning whether the parties concluded an arbitration agreement containing a Delegation Provision. In both the parties’ failure to conclude an agreement containing an arbitration agreement and Delegation Provision meant that they never agreed to arbitrate any issues, let alone the issue of arbitrability.

Who Gets to Decide whether Contracts Containing Arbitration and Delegation Provisions are Valid and Enforceable?

arbitrability

Suppose Parties A and B from our previous hypothetical entered into a contract containing a broad arbitration agreement, which included a Delegation Provision, and that Party B allegedly induced Party A to enter into that contract by fraudulent misrepresentation about some material aspect of the subject matter of their agreement. The fraud does not relate specifically to the arbitration agreement or the Delegation Provision.

Who, as between court and arbitrator, gets to decide whether the contract was induced by fraud? If the contract was, in fact, fraudulently induced, then doesn’t that mean that the arbitration clause, including the Delegation Provision, was also fraudulently induced and thus of no force or effect? If that’s so, then isn’t the question of fraudulent inducement of the contract as a whole also a question of arbitrability because it goes to the validity of the arbitration agreement? And, if it is a question of arbitrability, then doesn’t that mean the Court should get to decide it?

And yes, I’m guilty of trying to lead you down the proverbial garden path. For the answer to the “who” question this time is “the arbitrator,” and the answer would be the same even if the parties had simply agreed to a broad arbitration agreement without a Delegation Provision. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404-06 (1967); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444-46, 448-49 (2006).

This is a basic application of the so-called doctrine of “separability” (sometimes referred to as the doctrine of “severability”), which was first articulated by the U.S. Supreme Court in Prima Paint, and reaffirmed in Buckeye Check Cashing. Grounded in Federal Arbitration Act Section 2, the separability doctrine permits courts to compel arbitration of fraudulent inducement claims and defenses—and other contract-validity or contract-enforceability claims and defenses—that fall within the scope of a broad arbitration provision, provided that they relate to the contract as a whole, and do not specifically and independently relate to the arbitration agreement itself (and thus give rise to a bona fide question of arbitrability within the meaning of FAA Section 2).

The doctrine of separability helps implement the Federal Arbitration Act’s enforcement command by preventing courts from being inundated with non-arbitration-agreement-specific contract enforceability and validity claims and defenses. That is important not only to preserve arbitration as a viable alternative to litigation, but also, and relatedly, to discourage parties from asserting contract-enforceability or contract-validity defenses as a pretext to delay or avoid arbitration of disputes for purposes of obtaining an unwarranted strategic advantage in the dispute resolution process.

Who Gets to Decide whether Arbitration Agreements Containing Delegation Provisions are Valid and Enforceable?

Delegation Provision

In the above fraudulent inducement hypothetical, recall that the result would be the same irrespective of whether the parties’ arbitration agreement included a Delegation Provision. Now suppose once again that Parties A and B entered into a contract that contained an arbitration agreement and a Delegation Provision. But this time Party A claims that the arbitration agreement is unconscionable because it severely limits the number of depositions that Party A may take in an arbitration.

Party A claims that this limitation makes the arbitration agreement, including the Delegation Provision, unconscionable but does not explain why the limitation on depositions makes the Delegation Provision itself unconscionable. Party A thus does not explain why a limit on depositions, if applied to the arbitration of the arbitrability dispute, would allegedly be unconscionable, even though a party arbitrating the arbitrability issue would presumably not require depositions to make its argument that the deposition limit would be unconscionable were it applied to the arbitration of the merits dispute.

Who gets to decide to decide whether the arbitration agreement is unconscionable? Just as the arbitrators in the Prima Paint and Buckeye Checking decided contract enforceability or validity defenses directed at the contract as a whole, under a Delegation Provision, arbitrability questions concerning the arbitration agreement as a whole are to be decided by arbitrators, unless they relate specifically to the Delegation Provision. That was what the U.S. Supreme Court held in Rent-A-Center, 561 U.S. at 70-73.  

In Rent-a-Center the U.S. Supreme Court ruled that a Delegation Provision is “separable” from the arbitration agreement as a whole. About 9 years or so ago, the author predicted that the U.S. Supreme Court would so rule in the then-pending Rent-a-Center case. (See Loree Reinsurance and Arbitration Law Post here.)

Perhaps it might seem a bit strange that a contract containing an arbitration agreement is deemed to be “separable” from the arbitration agreement itself, and that the arbitration agreement itself is, in turn, deemed “separable” from a Delegation Provision contained within that arbitration agreement. But the application of the severability doctrine to Delegation Provisions makes good sense as a practical matter.

In the ordinary, Prima Paint-type case, validity or enforceability challenge is directed at the contract as a whole and does not relate specifically to the arbitration agreement. It is therefore not a challenge under Section 2 to the enforceability or invalidity of an arbitration agreement “upon upon such grounds as exist at law or in equity for the revocation of any contract[,]” 9 U.S.C. § 2, and therefore does not present a question of arbitrability to be resolved by the Court.

In a case where there is an arbitration agreement and a Delegation Provision, the validity or enforceability challenge may be directed at the arbitration agreement, but not directed specifically at the Delegation Provision itself. That was quite clear in our Rent-a-Center-based hypothetical above, under which the limit on depositions was relevant to whether arbitration of the merits might be unconscionable, but irrelevant to whether the arbitration of arbitrability would be unconscionable.

By deeming Delegation Provisions to be, for purposes of Section 2 of the FAA, separable from the arbitration agreements to which they relate, courts can give effect to the Delegation Provision, which clearly and unmistakably provides for arbitration of arbitrability questions. The court decides only validity or enforceability challenges to the Delegation Provision itself, just as, in the absence of a Delegation Provision, it decides only validity or enforceability challenges to the parties’ broad arbitration clause itself, not ones directed at the contract as a whole.

Photo Acknowledgements

The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law. Loree & Loree added text to the first, fourth, and fifth photos from the top.



         

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