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Posts Tagged ‘interpretation’

Clause Conflicts: Supreme Court, New York County Finds Arbitration and Jurisdiction/Venue Clauses do not Conflict

September 30th, 2024 American Arbitration Association, Applicability of Federal Arbitration Act, Application to Stay Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Authority of Arbitrators, Clear and Unmistakable Rule, Conflict between Arbitration Clause and Another Clause, Drafting Arbitration Agreements, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Formation of Arbitration Agreement, Gateway Disputes, Gateway Questions, Jurisdiction Clause, New York County, New York State Courts, State Courts, Stay of Arbitration, Venue Comments Off on Clause Conflicts: Supreme Court, New York County Finds Arbitration and Jurisdiction/Venue Clauses do not Conflict

clauseWhat happens if a contract containing a broad arbitration clause also contains a clause that provides for federal or state court personal jurisdiction and venue over claims that would also fall within the scope of the arbitration clause? If you’ve ever worked on an insurance or reinsurance case in which the policy or contract contained both an arbitration agreement and a service of suit clause, then you’re probably familiar with how courts typically deal with apparent conflicts of that sort.

A service of suit clause—commonly found in, among others, London Market insurance and reinsurance policies and contracts—is a consent to personal jurisdiction provision that provides for personal jurisdiction in a court of competent subject-matter jurisdiction selected by the plaintiff or petitioner. See, e.g., Brooke Group Ltd. v. JCH Syndicate 488, 87 N.Y.2d 530, 534 (1996). It might provide, for example: “‘in the event of the failure of the Underwriters hereon to pay any amount claimed to be due’ the underwriters will, ‘at the request of the Insured. . . submit to the jurisdiction of a Court of competent jurisdiction within the United States.’” JCH Syndicate 488, 87 N.Y.2d at 534 (quoting service-of-suit clause).

At least at first glance, service of suit clauses appear to conflict with the kind of broad arbitration agreements typically found in reinsurance treaties and many London Market policies written for the U.S. excess and surplus lines market. Submitting to the jurisdiction of a court of competent jurisdiction in the event of a party’s failure to pay any amount claimed to be due under a contract seems antithetical to submitting the same failure to pay claim to arbitration.

Contentions of this sort have—not surprisingly—been made, but the Courts usually resolve them by harmonizing the service-of-suit clause with the arbitration clause, finding that the service-of-suit clause complements the arbitration clause by facilitating arbitration enforcement litigation. See, e.g., Pine Top Receivables of Illinois, LLC v. Transfercom, Ltd., 836 F.3d 784, 787 (7th Cir. 2016) (“Read as a whole, the reinsurance agreement[’s service of suit clause] requires Transfercom to submit to the jurisdiction of any court of competent jurisdiction chosen by PTRIL, whether it be to determine the arbitrable nature of the dispute, to confirm an arbitration award, to compel arbitration, or to resolve on the merits, a claim not subject to arbitration—including PTRIL’s breach of contract claim”); The Pointe on Westshore LLC v. Certain Underwriters at Lloyd’s of London, 670 F. Supp. 3d 1342, 1349-53 (M.D. Fla. 2023) (citing numerous cases).

As today’s case—Kennelly v. Myron & Selina Siegel Family Ltd. P’ship LP, No. 654950/2023, 2024 N.Y. Slip Op. 33278 (Sup. Ct. N.Y. Co. Sept. 17, 2024)—aptly demonstrates, apparent conflicts between arbitration agreements and venue or jurisdiction provisions in other types of contracts are addressed in a similar manner. They are resolved according to state law contract interpretation principles, and if the contract provisions can be harmonized, then the interpretation that gives effect to both provisions must prevail.

Clause Conflicts: Background

The interpretation issue in Kennelly arose out of an operating agreement (the “Operating Agreement”) for a limited liability company (the “LLC”). Two members and a manager (the “Arbitration Petitioners”) demanded arbitration against another member and another manager (the “Arbitration Respondents”), alleging that the LLC “and. . . [the Arbitration Respondent manager] failed to pay [those Arbitration Petitioners] all of the monies owed to [them] under the Operating Agreement, including the proper distributive share of [the LLC’s] net profits, and failed to properly manage and operate the venture’s property.” 2024 N.Y. Slip Op. at * 3. The Arbitration Petitioners sought between $1 million and 10 million dollars in damages, as well as interest, legal fees and expenses. Id.

The Operating Agreement (at Section 12.13) contained an arbitration agreement, which provided, in pertinent part:

Each Member agrees that the arbitration procedures set forth below shall be the sole and exclusive method for resolving and remedying claims for money damages arising out of a breach of this agreement (the ‘Disputes’); provided that nothing in this Section 12.13 shall prohibit a party hereto from instituting litigation to enforce any Final Determination (as defined below). The Members hereby acknowledge and agree that except as otherwise provided in this Section 12.13 or in the Commercial Arbitration Rules (the ‘Rules’) promulgated by the American Arbitration Association as in effect from time to time, the arbitration procedures and any Final Determination hereunder shall be governed by, and shall be enforced pursuant to the United States Arbitration Act, 9 U.S.C. § 1, et seq. . . .

(b) . . . . The arbitration shall be conducted in New York, NY, under the Rules as in effect from time to time. The arbitrator shall conduct the arbitration so that a final result, determination, finding, judgment and/or award (the “Final Determination”) is made or rendered as soon as practicable.

(c) Any applicable Member may enforce any Final Determination in any state or federal court of competent jurisdiction. For the purposes of any action or proceeding instituted with respect to any Final Determination, each party hereto hereby irrevocably submits to the jurisdiction of such courts, irrevocably consents to the service of process by registered mail or personal service and hereby irrevocably waives, to the fullest extent permitted by law, any objection which it my have or hereafter have as to personal jurisdiction, the laying of the venue of any such action or proceeding bought in any such court and any claim that any such action or proceeding brought in any court has been brought in an inconvenient forum.

2024 N.Y. Slip Op. 33278 at *4 (quoting Operating Agreement, § 12.13).

Section 12.14 of the Operating Agreement, “Venue,” stated:

Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with this Agreement or the transactions contemplated hereby or thereby may be brought in any state or federal court in The City of New York, Borough of Manhattan, and each Member hereby consents to the exclusive jurisdiction of any court in the State of New York (and of the appropriate appellate courts therefrom) in any suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objections which he, she or it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Each Member hereby waives the right to commence an action, suit or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with this Agreement or the transactions contemplated hereby or thereby in any court outside of The City of New York, Borough of Manhattan.

2024 N.Y. Slip Op. 33278 at *4 (quoting Operating Agreement, § 12.14).

The Arbitration Respondent brought a special proceeding in Supreme Court, New York County (the “special proceeding”), which sought, among other things,  to stay the arbitration on the ground that the Arbitration Petitioner’s  claims were not arbitrable. According to the Arbitration-Respondent (petitioner in the special proceeding), “the Operating Agreement’s separate venue provision, Section 12.14, conflicts with the arbitration provision and, as such, there was no meeting of the minds. . . .” N.Y. Slip Op. 33278 at *7. The Court rejected this argument. N.Y. Slip Op. 33278 at *7 & 8.

Clause Conflicts: Discussion

At the outset the Court noted that the parties agreed that the Federal Arbitration Act (“FAA”) applied, and that where, as here, the existence of an arbitration agreement is at issue, the court decides the question. N.Y. Slip Op. 33278 at *6-7 (citations omitted). It pointed out that there is no dispute that the parties entered into the Operating Agreement and that the Agreement is binding. In the arbitration provision,  Section 12.13, the parties unambiguously agreed that arbitration pursuant to the American Arbitration Association (“AAA”)’s Commercial Arbitration Rules was the “‘sole and exclusive method for resolving and remedying claims for money damages arising out of a breach’ of the Operating Agreement.” N.Y. Slip Op. 33278 at *7.

The Court explained that the alleged conflict between Section 12.13 and Section 12.14 was false. Under New York contract interpretation rules, courts must avoid interpretations that would render contractual provisions without meaning, and if reasonably possible, allegedly conflicting provisions should be harmonized, giving both force and effect. N.Y. Slip Op. 33278 at *7 (citations omitted).

The Court cited five cases where New York courts had harmonized similar apparent conflicts between arbitration clauses and jurisdiction-related clauses, including one involving a clause providing for “exclusive jurisdiction” in New York State courts. N.Y. Slip Op. 33278 at *7.  Three of these were decided by the Appellate Division, First Department, and two by the Supreme Court, New York County. See N.Y. Slip Op. 33278 at *7 (citing cases).

The Court had little difficulty harmonizing the arbitration (Section 12.13) and jurisdiction and venue clause (Section 12.14). The arbitration clause applied only to claims for money damages. That arbitration clause further provided that “the arbitration mandate [did] not ‘prohibit a party hereto from instituting litigation to enforce  any’ final arbitration determination.” N.Y. Slip Op. 33278 at *8 (quoting Section 12.13). The jurisdiction and venue clause said that “any ‘suit, action, or proceeding’ seeking to enforce any provision of the Operating Agreement, or any matter arising out of the agreement, ‘may be brought in any state or federal court’ located in new York County and that the parties consent to exclusive jurisdiction in any such court.” N.Y. Slip Op. 33278 at *8 (quoting Section 12.14).

From that, in turn, the Court drew three conclusions, which collectively demonstrated that the clauses were in harmony:

  1. Because Section 12.13 required arbitration only of monetary relief claims, claims for “equitable or other relief —e.g., specific performance or to stay or compel arbitration—must be brought in a court, and Section 12.14 would apply to any such suit.” N.Y. Slip Op. 33278 at *8 (citation omitted; emphasis in original).
  2. The arbitration clause (Section 12.13) refers to suits brought to enforce arbitration awards and Section 12.14 governed jurisdiction and venue for those suits. N.Y. Slip Op. 33278 at *8.
  3. The ejusdem generis canon of contract construction indicates that the specific should prevail over the general, and here the arbitration clause is “a specific, mandatory clause” while the jurisdiction and venue provision is “a general clause. . . .” Id.  

The Court thus held that “the plain language of Sections 12.13 and 12.14 permits an interpretation that does not result in an irreconcilable conflict between the two provisions or in one provision being rendered meaningless.” N.Y. Slip Op. 33278 at *8.

Delegation of Arbitrability to the Arbitrator

There were two other issues before the Court, one of which we’ll briefly address. The Arbitration Respondent argued that the Arbitration Petitioner’s claims were all “derivative in nature and should be precluded on that ground as well.” N.Y. Slip Op. 33278 at *8. In response, the Arbitration Petitioner argued that whether the claims were derivative [i.e., would have to be brought on behalf of the LLC], and if so, whether they were subject to arbitration, presented questions of arbitrability—questions the parties had delegated to the arbitrator by incorporating the AAA Commercial Rules into their contract. The Arbitration Respondent also apparently made arguments about “lack of proper service or notice,” but the Court’s opinion does not provide details on those claims.

The Arbitration Petitioner argued that these questions concerning the allegedly derivative nature of the claims, and proper service and notice, all had to be submitted to arbitration. The Court agreed with the Arbitration Petitioner.

The parties did not dispute that they had agreed to arbitrate according to the AAA Commercial Rules, which provided “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 or to the arbitrability of any claim or counterclaim.’” N.Y. Slip Op. 33278 at *9 (quotation and citation omitted).

Citing Second Circuit and New York state court authority, the Court explained that incorporation of the AAA Commercial Rules into an arbitration agreement delegates arbitrability questions to the arbitrator. See N.Y. Slip Op. 33278 at *9 (citing and quoting Contec Corp. v. Remote Solution, Co., 398 F.3d 205, 208 (2d Cir. 2005); other citations omitted); see, e.g., post here. The Court therefore held that the derivative-claim, notice, and service claims raised questions of arbitrability, which the Arbitration Respondent was required to submit to arbitration. N.Y. Slip Op. 33278 at *10.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related and other matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

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Manifest Disregard of the Agreement: Third Circuit Says Arbitrator Rewrote the 10-Day Time Limit For Grievance Filing and Affirms District Court Judgment Vacating Award

July 19th, 2024 Application to Vacate, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Award Fails to Draw Essence from the Agreement, Award Irrational, Award Vacated, Awards, Challenging Arbitration Awards, Enforcing Arbitration Agreements, Exceeding Powers, FAA Chapter 1, FAA Section 10, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, First Principle - Consent not Coercion, Grounds for Vacatur, Judicial Review of Arbitration Awards, Labor Arbitration, LMRA Section 301, Manifest Disregard of the Agreement, Petition to Vacate Award, Practice and Procedure, Section 10, U.S. District Court for the District of New Jersey, United States Court of Appeals for the Second Circuit, United States Court of Appeals for the Third Circuit, Vacate, Vacate Award | 10(a)(4), Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacatur 1 Comment »

disregard of the agreementAn arbitration award may be vacated for “manifest disregard of the agreement” if the award does not draw its essence from the contract and instead reflects the arbitrator’s own notions of economic or industrial justice. (See, e.g., here, here,  here,  here.)  Such an award exceeds the arbitrator’s powers within the meaning of Section 10(a)(4) of the Federal Arbitration Act. 9 U.S.C. § 10(a)(4) and federal common law in Labor Management Relations Act Section 301 cases (which tracks Section 10(a)(4)).

Arbitration awards do not qualify for vacatur under this manifest disregard of the agreement standard unless the arbitrator did not even arguably interpret the agreement. And if you have any doubts about how much extensive leeway arbitrators have to “arguably interpret” contracts, go back and review the U.S. Supreme Court’s decision in  Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 566-70 (2013).

The margins for a reasonable argument for manifest disregard of the agreement vacatur are slim, for once the arbitrator offers—or the award is otherwise susceptible to—an even barely plausible interpretation supporting the arbitrator’s award, then it’s game over, even if the barely plausible interpretation is one a court would almost certainly not adopt as its own.

But in StoneMor, Inc. v. The Int’l Bhd. Of Teamsters, Local 469, ___ F.4d ___, No. 23-1489, slip op. (3d Cir. July 10, 2024), the Third Circuit reminds everyone that, while it is “‘a steep climb to vacate an . . . award[,]’” slip op. at 6 (quoting France v. Bernstein, 43 F.4th 210, 219 (3d Cir. 2022)), the Court’s “review is ‘not toothless,’ and [it] will reverse if the arbitrator ‘rewrites the contract[.]’” Slip op. at 6 (quoting Independent Lab’y Employees’ Union, Inc. v. ExxonMobil Research & Engineering Co., 11 F.4th 210, 219 (3d Cir. 2021)). (You can read our France v. Bernstein post here.)

The award before the Court in StoneMor, was the product of an arbitrator who “did just that[,]” and the Court affirmed the district court’s judgment vacating that award—an award which resulted from manifest disregard of the agreement. Slip op. at 6 & 3. Because the Court was able to conclude that the award was not based on—and did not otherwise reflect—an even barely colorable interpretation of the contract, vacatur was warranted. Continue Reading »

S.K.A.V. v. Independent Specialty Ins. Co.: Fifth Circuit Decides Louisiana Statute Invalidating Arbitration Agreements in Insurance Contracts Applies to Surplus Lines Policies

June 27th, 2024 Anti-Arbitration Statutes, Applicability of Federal Arbitration Act, Application to Compel Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreement Invalid, Arbitration Law, Arbitration Practice and Procedure, Clear and Unmistakable Rule, Delegation Agreements, Existence of Arbitration Agreement, FAA Chapter 1, FAA Preemption of State Law, FAA Section 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, Formation of Arbitration Agreement, Gateway Disputes, Gateway Questions, Insurance Contracts, Louisiana Supreme Court, McCarran-Ferguson Act, Motion to Compel Arbitration, Petition to Compel Arbitration, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Questions of Arbitrability, Section 2, Section 4, State Arbitration Law, State Arbitration Statutes, State Courts, Statutory Interpretation and Construction, United States Court of Appeals for the Fifth Circuit Comments Off on S.K.A.V. v. Independent Specialty Ins. Co.: Fifth Circuit Decides Louisiana Statute Invalidating Arbitration Agreements in Insurance Contracts Applies to Surplus Lines Policies

Introduction: LA Stat. Ann. § 22.868 and its Application to Surplus Lines Policies

surplus lines policy regulation

Louisiana has a statute, LA Stat. Ann. § 22.868, that courts have construed to make unenforceable arbitration provisions in insurance contracts, including surplus lines policies. The statute has an exception or savings provision that removes from the statute’s scope “a forum or venue selection clause in a policy form that is not subject to approval by the Department of Insurance[,]” LA Stat. Ann. § 22.868(D), for example, a venue- or forum-selection provision in a surplus lines policy.

The question before the U.S. Court of Appeals for the Fifth Circuit in S.K.A.V. v. Independent Specialty Ins. Co., ___ F.4th ___, No. 23-30293, slip op. (5th Cir. June 5, 2024), was whether the statute invalidates arbitration provisions contained in surplus lines insurance policies, that is, whether arbitration provisions in such contracts fall within the subsection (D) exception. Predicting how it thinks the Louisiana Supreme Court would rule if faced with the question, the Court held that the subsection (D) exemption did not apply, and accordingly, the statute rendered unenforceable arbitration agreements in surplus lines contracts. The Court accordingly affirmed the judgment of the district court, which denied the arbitration proponent’s motion to compel arbitration.

Pushing the Elephant Out of the Room. . .

Before taking a closer look at how the Court arrived at its conclusion, let’s deal with the “elephant in the room.” Why is the Court in a case governed by the Federal Arbitration Act (“FAA”) even considering enforcing a state statute that would (or could) render unenforceable an FAA-governed arbitration agreement? Doesn’t the FAA preempt state law that puts arbitration agreements on a different footing than other contracts?

The answer is “undoubtedly”, but, as insurance and reinsurance practitioners know, under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011, et seq., “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance. . . .” 15 U.S.C. § 1012(b).

LA Stat. Ann. § 22.868 has been construed to be one that “regulat[es] the business insurance[,]” and the FAA is not an “Act [that] specifically relates to the business of insurance. . . .” Section 22.868 thus “reverse preempts” the FAA under McCarran-Ferguson. See slip op. at 2. (See, e.g., here.)

The Court’s Interpretation of Section 22.868, Including its Surplus Lines Policy Exemption

  LA Stat. Ann. § 22.868, provides, in pertinent part: Continue Reading »

Attorney Fees: Seventh Circuit to Consider Whether Exceeding Powers Challenge to Arbitrators’ Attorney’s Fees Award Warrants FRAP 38 Sanctions

June 19th, 2024 Appellate Practice, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Attorney Fee Shifting, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Bad Faith, Challenging Arbitration Awards, Confirmation of Awards, Exceeding Powers, FAA Chapter 1, FAA Section 10, FAA Section 11, FAA Section 9, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 9, Insurance Contracts, Judicial Review of Arbitration Awards, Petition or Application to Confirm Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Retrospectively-Rated Premium Contracts, Section 10, Section 11, Section 9, Uncategorized, United States Court of Appeals for the Seventh Circuit, Vacate, Vacate Award | 10(a)(4), Vacate Award | Attorney Fees, Vacate Award | Attorney's Fees, Vacatur 1 Comment »

Introduction

Attorney's Fees | Contract InterpretationMost challenges to arbitration awards—including attorney fees awards— fail because the standards of review are so demanding. The bar is exceedingly high by design. Otherwise—the reasoning goes—courts would “open[] the door to the full-bore legal and evidentiary appeals that can rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process and bring arbitration theory to grief in post-arbitration process.” Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 588 (2008) (citations and quotations omitted; some parenthetical material in original).

But the narrow margin for success is not a free pass for challengers to advance arguments that do not, in a court’s view, have a legitimate, good faith basis in the facts and the law, or in a reasonable argument for reversal or modification of the law.

A recent case in point is Circuit Judge Easterbrook’s decision in American Zurich Ins. Co. v. Sun Holdings, Inc., No. 23-3134, slip op. at 1 (7th Cir. June 3, 2024) (Easterbrook, J.). The award challenger claimed the arbitrators exceeded their power by imposing as a sanction an award of $175,000.00 in attorney fees because the contract allegedly barred such an attorney fees award. The problem was that the arbitrators at least arguably interpreted the language in question and concluded that it did not bar the award of attorney fees in question. Moreover,  the attorney fees  award comported with New York law and the American Arbitration Association Commercial Rules, both of which the parties made part of their agreement.

The Seventh Circuit has signaled that it believes there was no good faith basis for the challenge and that the challenger has offered none, apart from its insistence that its interpretation was the only one even barely plausible. The challenger appears to have further undermined its litigation position by engaging in what the Seventh Circuit believes was recalcitrant behavior in the arbitration proceedings, and, according to the Court, not acknowledging the existence of controlling Seventh Circuit and U.S. Supreme Court authority controverting its position. The challenger compounded that by asserting—contrary to FAA Sections 10 and 11— additional award challenges that the Court concluded were simply attempts to second guess various determinations made by the arbitrators.

That this strategy backfired should come as no surprise. It resulted in the Court issuing an order to show cause providing the challenger 14 days “to show cause why sanctions, including but not limited to an award of attorneys’ fees, should not be imposed for this frivolous appeal.” Zurich, slip op. at 5 (citing Fed. R. App. P. 38). At the time of this writing no decision has been made by the Court concerning whether it will, in fact, impose sanctions.

Background: The Award of Attorney Fees

Petitioner Sun Holdings, Inc. (“Sun” or the “Award Challenger”) is a Texas- Continue Reading »

Up Narrow Arbitration Clause Creek without a Papalote?—Narrow Arbitration Clauses and the Difference between Interpretation and Performance

March 26th, 2019 Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Federal Arbitration Act Section 4, Federal Policy in Favor of Arbitration, Practice and Procedure, Presumption of Arbitrability, United States Court of Appeals for the Fifth Circuit 1 Comment »
Narrow Arbitration Clauses: Papalote
Hang Glider or Papalote

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. See Lower 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

Narrow Arbitration Clauses

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.

Continue Reading »

Arbitration and Mediation FAQs: Do Arbitrators Necessarily Exceed their Powers by Making an Award that Conflicts with the Unambiguous Terms of the Parties’ Agreement?

November 11th, 2014 Appellate Practice, Arbitration Agreements, Arbitration and Mediation FAQs, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Confirmation of Awards, Contract Interpretation, Grounds for Vacatur, Judicial Review of Arbitration Awards, New York Court of Appeals, New York State Courts, Nuts & Bolts, Nuts & Bolts: Arbitration, Practice and Procedure, Small Business B-2-B Arbitration, United States Supreme Court Comments Off on Arbitration and Mediation FAQs: Do Arbitrators Necessarily Exceed their Powers by Making an Award that Conflicts with the Unambiguous Terms of the Parties’ Agreement?

We’ve addressed on many occasions the Enterprise WheelStolt-Nielsen/Oxford contract-based outcome review standard, which permits courts to vacate awards when they do not “draw their essence” from the parties’ agreement. Under that standard the “sole question is whether the arbitrators (even arguably) interpreted the parties’ contract, not whether [they] got its meaning right or wrong.” See Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 (2013) (parenthetical in original). (See, e.g.,  Loree Reins. & Arb. L. F. posts here, here, here, here, here & here.)

While exceedingly deferential, the standard is not toothless. Arbitration awards that disregard or contravene the clear and unmistakable terms of a contract are subject to vacatur under it. See Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 676 (panel had “no occasion to ascertain the parties’ intention in the present case because the parties were in complete agreement regarding their intent.”) (quotation omitted); United Paperworkers v. Misco, Inc., 484 U.S. 29, 38 (1987) (“The arbitrator may not ignore the plain language of the contract. . . .”). That’s because an arbitrator who makes an award that lacks “any contractual basis” has not even arguably interpreted the contract, and therefore has strayed from his or her task. See Oxford, 133 S. Ct. at 2069 (distinguishing Stolt-Nielsen); Stolt-Nielsen, 559 U.S. at 668-69, 672; Misco, 484 U.S. at 38.

An arbitrator whose award contradicts the unambiguous provisions of the parties’ contract may—but will not necessarily—exceed her powers. The answer depends on what the agreement says, what the award says and whether the award is at least arguably grounded in the agreement.

Whether or not a contract or contract term is “ambiguous” depends on whether it is reasonably susceptible to more than one meaning. See, e.g., White v. Continental Cas. Co., 9 N.Y.3d 264, 267 (2007); Greenfield v. Philles Records, 98 N.Y.2d 562, 570-71 (2002). When a contract is unambiguous, a court can interpret it as a matter of law; if it is ambiguous, its meaning is a question of fact for trial.

Can the Interpretation of the Arbitrators be “Unreasonable,” yet still Colorable or Plausible?

The legal standard for lack of ambiguity is that there be only one “reasonable” interpretation of the contract terms, not that there are no other at least barely plausible or barely colorable interpretations of what the contract might mean. In probably the majority of contract interpretation cases concerning alleged contract ambiguity, each litigant supports its position with good-faith, reasonable arguments for why the disputed contract terms are allegedly susceptible to one or more than one meaning. Whenever courts determine that a contract is unambiguous, that conclusion necessarily means that the losing party’s interpretation of the contract is unreasonable as a matter of law. Continue Reading »

What does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties? (Part IIIC)

April 11th, 2009 Arbitrability, Authority of Arbitrators, Legislative Developments, United States Supreme Court 1 Comment »

Part IIIC:  Is the Narrow Construction Sustainable?

Introduction

In Part IIIB  (here) we discussed in general terms the “Narrow Construction” of the Arbitration Fairness Act of 2009 (the “Fairness Act”), which would limit the scope of Proposed Section 2(c) to situations where the party resisting arbitration claims that the arbitration agreement requires predispute arbitration of consumer, franchise, employment or statutory civil rights disputes.   We also set forth the five premises on which the Narrow Construction is based.  This Part IIIC addresses the validity of those premises.  [Because this post  frequently refers to Proposed Section 2 and its subsections, we have reproduced at the end the pertinent parts of Proposed Section 2.]

 The Narrow Construction is fairly complex.  A court choosing it would have to determine each of its five premises to be valid.  In addition, the validity of Premise 3 is interlinked to that of Premise 5:  Premise 3 is easier to accept when viewed without regard to Premise 5 and Premise 5 is harder to accept when viewed in isolation from Premise 3.  If a court believes that Premise 3 is reasonable, but has reservations about its validity, when it considers Premise 3 in conjunction with Premise 5, it may conclude that both are invalid.  But if it is confident that Premise 3 is valid, that confidence might lead it to conclude that Premise 5 is valid.  These are important considerations that a party advocating one construction or the other should take into account in structuring its argument.   Continue Reading »

What does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties? (Part IIIA)

April 1st, 2009 Arbitrability, Authority of Arbitrators, Legislative Developments Comments Off on What does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties? (Part IIIA)

Part IIIA:  Interpreting Section 2(c) of the Fairness Act to Apply to Domestic Arbitration Proceedings Involving Sophisticated, Commercial Entities

Introduction

In Part I we provided general background on the Arbitration Fairness Act of 2009 (the “Fairness Act”) and said it was likely to generate litigation over the allocation of power between courts and arbitrators in commercial arbitration proceedings involving sophisticated, commercial entities.  In Part II we briefly discussed why litigation will likely occur if the Act becomes law. 

In this Part IIIA we discuss what we call the “Broad Construction” of the Fairness Act, under which it is construed to abrogate in all commercial disputes:  (a) the doctrine of severability; and (b) deferential review under Federal Arbitration Act (“FAA”)  Sections 10 and 11 of arbitrator determinations of arbitrability in cases where the parties unambiguously submit arbitrability questions to the arbitrators.  This construction would limit fairly significantly the power of arbitrators in commercial disputes involving sophisticated parties. 
    
In Section IIIB we shall discuss the “Narrow Construction”, which would limit the scope of Section 2(c) to situations where the party resisting arbitration claims that the arbitration clause requires predispute arbitration of consumer, franchise, employment or civil rights disputes.   This construction would not alter the allocation of power between courts and arbitrators in commercial disputes involving commercial entities. 

[Note:  We previously said we would cover both constructions in a single post.  We have concluded, however, that it would be easier on our readers if we addressed each separately. ]  Continue Reading »