The question of delegation of arbitrability in business contracts

June 2024  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

June 2024 Issue

Commercial parties in international contracts craft arbitration clauses to create certainty. Parties must pay careful attention to the language of their arbitration agreements to ensure that they reflect the true intent of the parties, especially when it comes to determining so-called ‘gateway’ issues, namely, whether courts or arbitral tribunals primarily will determine whether parties have submitted a particular dispute to arbitration.

In general, this question – the question of arbitrability – is an issue for judicial determination in the US unless parties “clearly and unmistakably provide” otherwise (First Options of Chi., Inc. v. Kaplan (1995)).

It is important to understand what is at stake in this choice. Did the parties reach an agreement to arbitrate? Is that agreement valid? May a non-signatory invoke the agreement or be bound by it? Is this dispute covered by the agreement? All of these gateway issues directly implicate the consent of the parties to submit a dispute to an arbitral rather than judicial forum.

The question of delegation of arbitrability is about the allocation of power between courts and arbitral tribunals. This matters in practice because if there is not ‘clear and unmistakeable’ evidence that the parties intended to delegate questions of arbitrability to an arbitral tribunal, parties could find themselves before a domestic court that they thought they opted out of.

Because party autonomy is the cornerstone of arbitration, the US Supreme Court has held that parties to an arbitration agreement can choose to delegate to arbitral tribunals the authority to decide a question of arbitrability. In balancing the need to respect party autonomy with the possibility of divesting courts of the authority they otherwise possess, the Supreme Court held in First Options that there must be ‘clear and unmistakeable evidence’ that the parties agreed to arbitrate arbitrability.

Otherwise, the decision is for the courts. Nearly three decades after the Supreme Court’s decision in First Options, the question still remains: what qualifies as ‘clear and unmistakeable evidence’ of delegation?

For example, what if the parties refer to institutional arbitration rules in an arbitration agreement and these rules contain a ‘competence-competence’ provision, i.e., one empowering an arbitral tribunal to determine its own jurisdiction? This is common practice. But does this indicate that the parties intended by ‘clear and unmistakeable’ evidence to delegate any questions about arbitrability to an arbitral tribunal? In the US, there is a divide between federal courts and state courts about the answer to this question.

Recently, in Patrick et. al. v. Running Warehouse LLC and Skate Warehouse LLC (2024), the US Court of Appeals for the Ninth Circuit joined nearly all other US Circuit Courts of Appeals (aside from the Seventh Circuit, which has not recently confronted this issue) in holding that a reference to institutional arbitration rules in an arbitration agreement is ‘clear and unmistakable’ evidence of delegation of questions of arbitrability to the arbitrator.

Most arbitration rules, including the Rules of the American Arbitration Association (AAA), the ICC Rules of Arbitration, and the Judicial Arbitration and Mediation Services Comprehensive Arbitration Rules & Procedures, incorporate the general principle that, as a threshold matter, an arbitrator or arbitral tribunal has the authority to determine their own jurisdiction and questions of arbitrability.

Although US federal courts are nearly united on this issue, US state courts are varied, with some holding similarly to US federal courts (like the Supreme Court of Texas), others holding differently, and others not yet having ruled on this issue (like the California Supreme Court or the New York Court of Appeals).

For example, a state court in Florida held that a reference in an arbitration agreement to the AAA Rules did not meet the US Supreme Court’s threshold of ‘clear and unmistakeable evidence’ of delegation because, among other things, the agreement: (i) was silent on the question of who decides arbitrability; (ii) did not refer to a particular provision of the AAA Rules; (iii) only said that the arbitration would be administered by the AAA (thus presupposing that an arbitration had commenced); and (iv) the AAA Rules did not grant exclusive authority for an arbitrator to decide questions of arbitrability (Doe v. Natt (2020), quashed and remand sub nom. Airbnb, Inc. v. Doe 2022)).

The issue of whether incorporation of arbitration rules in an arbitration agreement constitutes ‘clear and unmistakeable evidence’ that the parties intended to delegate the question of arbitrability to an arbitral tribunal has reached the US Supreme Court twice – but the issue still remains unresolved.

This indecision has several implications for parties whose cases end up in US courts, as outlined below.

First, the divide between US federal and state courts means that parties may receive different results on the same arbitration agreement depending on whether they are in a federal or state court.

Second, if the majority view of US federal courts is ultimately adopted by the US Supreme Court, meaning that reference to institutional rules in an arbitration agreement implies that parties delegated to arbitrators the authority to decide the question of arbitrability, the only instance when a US court would be allowed to decide the question of arbitrability will be when a party seeks annulment of an arbitral award or resists its recognition and enforcement, and even then the court’s review will be narrow and deferential to the arbitral tribunal.

Third, if the majority view is adopted, less sophisticated parties could be impacted to their detriment. Courts presume that sophisticated commercial parties, many of whom frequently use arbitration, consider the drafting of an arbitration agreement, the different arbitration rules, and the implication of referring to such rules in their arbitration agreement. Less sophisticated parties, however, who are unfamiliar with arbitration and arbitration agreements, may be caught off guard with such delegation.

Fourth, if the majority view is adopted, even sophisticated parties may find themselves desiring to resist arbitration in certain cases. For example, reference to institutional rules in a contract could result in companies being forced to arbitrate mass disputes and pay arbitral filing fees, even if the arbitral tribunal otherwise lacks jurisdiction.

Parties must carefully assess their objective in referring to institutional rules in an arbitration agreement. If parties wish to delegate questions of arbitrability to the arbitral tribunal, then they should consider incorporating language in the arbitration clause that provides ‘exclusive’ authority to the arbitrator and limits access to courts over questions of arbitrability.

For example, in Rent-A-Ctr., W., Inc. v. Jackson (2010), the mutual agreement to arbitrate between an employer-employee expressly delegated the authority to the arbitrator by providing “[t]he Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the […] Agreement”.

Similarly, parties should consider referring to specific arbitration rules in the arbitration agreement, such as the AAA Consumer Arbitration Rules or AAA Commercial Arbitration Rules, and specifically to the relevant rule that discusses the jurisdiction of the arbitral tribunal. Doing so may save time and money and provide for the certainty that arbitration clauses are designed to achieve.

Erin M. Culbertson is a senior associate and Aarushi Nargas is an international associate at Three Crowns. Ms Culbertson can be contacted on +1 (202) 540 9498 or by email: erin.culbertson@threecrownsllp.com. Ms Nargas can be contacted at +1 (202) 540 9504 or by email: aarushi.nargas@threecrownsllp.com.

© Financier Worldwide

BY

Erin M. Culbertson and Aarushi Nargas

Three Crowns

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