Introduction
The Federal Arbitration Act (the “FAA”)’s ordinarily trumps state-law rules of arbitrability in state- and federal-court disputes involving agreements falling under it. But what happens when parties to an FAA-governed arbitration agreement have agreed that state law governs their agreement, or the enforcement of their agreement?
Odd as it may seem, the FAA allows parties to agree that state-law rules of arbitrability govern if the parties unambiguously agree that they govern, even if the result is that an issue subject to arbitration under the FAA is excluded from arbitration because of the parties’ choice of state arbitration law. That holds true so long as enforcing the parties’ choice of law does not “stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives” of the FAA. See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 58-64 (1995); Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 474-78 (1989); Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp., 4 N.Y.3d 247, 252-53 (2005); see, generally, Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, __, 130 S. Ct. 1758,1773-74 (2010). Because the whole point of the FAA is to promote arbitration by enforcing the parties’ arbitration agreement according to its terms, and because parties are free to clearly exclude issues from the scope of their arbitration agreement, giving effect to a applying a state-law rule of arbitrability does not contravene the FAA or its purposes and objectives. See Stolt-Nielsen, 130 S. Ct. at 1773 (“[W]e have said on numerous occasions that the central or primary purpose of the FAA is to ensure that private agreements to arbitrate are enforced according to their terms.”), 1774 (“Underscoring the consensual nature of private dispute resolution, we have held that parties are generally free to structure their arbitration agreements as they see fit[]. . . . [and] may agree to limit the issues they choose to arbitrate. . . .”) (quotations and citations omitted); Volt, 489 U.S. at 476-78.
In Re Rom Management Reinsurance Mgt. Co. v. Continental Ins. Co., ___ A.D.3d ___, 2014 N.Y. Slip Op. 01546 (1st Dep’t March 11, 2014). New York’s Appellate Division, First Department (New York’s intermediate appellate court with jurisdiction over New York and Bronx Counties (i.e., New York City’s Boroughs of Manhattan and the Bronx)), succinctly demonstrated how the parties’ unambiguous agreement to apply state-law arbitrability rules can narrow the issues that the parties would have been required to submit to arbitration had FAA rules of arbitrability applied.
Background and Analysis
ROM was a dispute over the arbitrability of a statute-of-limitations defense. New York’s arbitration statute gives a party to an arbitration proceeding who may have a statute-of-limitations defense two options: (a) ask the court to decide it; or (b) submit it to the arbitrator. See N. Y. Civ. Prac. L. & R. (“CPLR”) § 7502(b) (you can access New York’s Consolidated Laws online here). If a party chooses option (b), the “arbitrators[] may, in their sole discretion, apply or not apply the bar[,]” and “such exercise of discretion by the arbitrators shall not be subject to review by a court on an application to confirm, vacate or modify the award[,]” “[e]xcept” on the limited grounds for vacatur set forth in CPLR section 7511(b). See CPLR § 7502(b).
The Federal Arbitration Act utilizes the reverse presumption: under the doctrine of procedural arbitrability, procedural issues arising out of an arbitrable dispute are presumed to be arbitrable, and statutes of limitations and other timing and “claims-processing” requirements are deemed to be procedural issues falling within the scope of that presumption. See, e.g., BG Group plc v. Republic of Argentina, 572 U. S. ___, No. 12–138, slip op. at 8 (March 5, 2014); Howsam v. Dean Witter Reynolds, Inc., 537 U. S. 79, 85-86 (2002). Because the FAA permits parties to specify the issues to be arbitrated, parties may opt out of the presumption by expressly and unambiguously agreeing that statute-of-limitations (or any or all other procedural defenses) are reserved for the court to decide. See, e.g., BG Group, slip op. at 9, 13-14; Stolt-Nielsen, 130 S. Ct. at 1774; Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-24 (1983) (The FAA “establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.”)
The issue in ROM was whether the parties unambiguously agreed that New York’s rule on statute-of-limitations arbitrability would govern their arbitration. There was no dispute that the FAA governed their arbitration agreement, as it was contained in an agreement that involved commerce. The arbitration agreement contained a choice-of-law provision that, as paraphrased by the Court, said “‘the arbitration laws of New York State’ shall govern the parties’ arbitration.” 2014 N.Y. Slip Op. at 1.
Continental demanded arbitration against ROM, in response to which ROM commenced in a New York state court a special proceeding for a stay of arbitration under N.Y. Civ. Prac. L. & R. (“CPLR”) § 7503(b), which permits a stay where, among other things, the petitioner alleges that “the claim sought to be arbitrated is barred by limitation under subdivision (b) of section 7502.” See CPLR § 7503(b), 7502(b). The trial court denied the stay and dismissed the petition, ROM appealed and the Appellate Division, First Department reversed.
Not surprisingly, the Appellate Division determined that the parties’ choice of “New York arbitration law” to govern the arbitration agreement evidenced the parties’ clear and unmistakable intent to adopt as binding New York’s substantive rules of arbitrability, and that the FAA required the court to give effect that agreement. Noting that Harper Ins. Ltd. v Century Indem. Co., 819 F Supp 2d 270, 274 (S.D.N.Y. 2011), which contained an identical choice-of-law clause, had “observed: ‘[i]t is hard to imagine what the parties intended when they agreed that the arbitration law of New York State shall govern such arbitration’ if they did not intend to have the CPLR apply to petitions to review arbitration awards[,]’” the Court rejected Continental’s argument that the choice-of-law clause was ambiguous.
Continental’s argument that the clause was ambiguous was apparently based principally on the New York Court of Appeals’ decision in Diamond Waterproofing, which held that a choice-of-law provision in the parties’ main agreement that simply stated that the parties’ agreement would be “governed” by New York law did not evidence the parties’ intent to displace the FAA’s rules of substantive arbitrability with those of New York. That holding was mandated by the U.S. Supreme Court’s decision in Mastrobuono as well as by New York Court of Appeals precedent. See Mastrobuono, 514 U.S. at 58-64; Diamond Waterproofing, 4 N.Y.3d at 252-53.
Diamond Waterproofing noted that “[a] choice-of-law provision which states that New York law shall govern both the agreement and its enforcement, adopts as binding New York’s rule that threshold Statute of Limitations questions are for the courts.” 4 N.Y.3d at 253 (quotations omitted; emphasis in original). But “[i]n the absence of more critical language concerning enforcement, however, all controversies, including issues of timeliness, are subjects for arbitration.” Id. (citation omitted).
Not surprisingly, the Court found that the choice-of-law provision’s reference to “the arbitration laws of New York State,” and the inclusion of the provision within the arbitration agreement itself, “constitute[d] the . . . ‘more critical language concerning enforcement” required by Diamond Waterproofing, and rejected Continental’s argument that the choice-of-law provision was ambiguous.
While the opinion does not say, Continental presumably argued that the clause was ambiguous because it provided that New York law “governed” the agreement and did not refer to the “enforcement” of the agreement. But there were two problems with this argument.
First, the choice of law provision in ROM was contained in the parties’ arbitration agreement. Thus, even had it simply said that New York law (rather than “the arbitration laws of New York”) would “govern” the arbitration agreement, that would not create the ambiguity that may exist when a general choice-of-law provision appears in the main agreement and refers to the parties’ agreement as a whole, rather than specifically to their “arbitration agreement.” General choice-of-law provisions appearing in the parties’ main agreement can be reasonably construed to mean that the choice-of-law provision was intended to be merely a “substitute” for the conflict of laws analysis that an arbitrator or court would presumably engage in to determine which state’s substantive law governed merits issues. See Mastrobuono, 514 U.S. at 59. Viewed in that context it does not necessary evidence party intent to be bound by New York’s rules governing the “allocation of power” between courts and arbitrators or otherwise to exclude federal law, which is, at least arguably, part and parcel of every state’s law. See Mastrobuono, 514 U.S. at 59-60.
But if parties agree that New York law will “govern” their arbitration or their arbitration agreement, the notion that the parties’ merely intended New York law to govern only matters for which, under the FAA, state-law provides the rules of decision (e.g., contract formation, and, except where FAA presumptions apply, contract interpretation) is highly doubtful. If two hypothetical “reasonable persons” unqualifiedly agree to have a certain body of “law” govern their arbitration or arbitration agreement, but not necessarily their main agreement, there is no reason to think they intended to exclude from that body of law its special rules and principles that govern arbitration and arbitration agreements.
Second, and in any event, the choice of law clause in ROM did not simply say that New York law in general governed the arbitration agreement or arbitration, it said, without qualification, that “the arbitration laws of New York” would govern arbitration. To suggest that the parties might reasonably have objectively intended that New York arbitration law applied to the arbitration, but only to the extent that it did not differ from the FAA, would be to effectively negate the parties’ express intent to have a specialized body of New York law govern the very subject matter that it was designed to govern—arbitration.
While the Court’s opinion did not analyze the ambiguity question in the same relatively detailed manner as we did above, there was no need for it to do so. And we did so merely for illustrative purposes.
The principles applied by the Court in ROM are neither new nor particularly controversial. Back in the first-half of the 1990s, when the author was a relatively young associate attorney learning the ropes of arbitration law, they actually were quite controversial.
Yet, even today there are some issues about which some uncertainty remains, and so it is helpful for arbitration law practitioners to familiarize themselves with the key cases and legal principles. And while ROM may not be controversial, in some respects that is what makes it worth writing and reading about: it provides a useful tool for learning or reviewing the basics of this always interesting—and occasionally vexing—arbitration-law subject.
Tags: Arbitrability, BG Group plc v. Republic of Argentina, choice of law, choice-of-law provisions, conflicts of law, Contract Ambiguity, Contract Interpretation, Diamond Waterproofing, FAA arbitrability rules, Federal Arbitration Act, Howsam v. Dean Witter Reynolds Inc., Mastrobuono v. Shearson Lehman Hutton Inc., Moses Cone, New York arbitrability rules, New York Court of Appeals, New York CPLR Article 75, Procedural Arbitrability, Rom Management Reinsurance Mgt. Co. v. Continental Ins. Co., Statute of Limitations, stay of arbitration, Stolt Nielsen S.A. v. Animalfeeds Int'l Corp., Volt
