SUPREME COURT HOLDS ARBITRATOR CAN FULLY DECIDE THRESHOLD ARBITRABILITY ISSUE

shutterstock_1018025605The United States Supreme Court recently decided parties to a contract can agree, under the Federal Arbitration Act, an arbitrator, rather than a court, can fully resolve the initial arbitrability question.  Henry Schein, Inc. v. Archer and White Sales, Inc., 2019 WL 122164 (2019).  The arbitrability question is whether the dispute itself is subject to arbitration under an arbitration provision.  Parties that do not want to arbitrate try to circumvent this process by filing a lawsuit and asking the court to determine the threshold arbitrability question.  

 

In Henry Schein, Inc., the contract at-issue provided:

 

This Agreement shall be governed by the laws of the State of North Carolina.  Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.  The place of arbitration shall be in Charlotte, North Carolina.

 

The plaintiff in this case asserted a claim for injunctive relief (among other claims) and argued that, therefore, the dispute is not subject to arbitration based on the exception in the provision.  The initial, threshold issue became whether the dispute was subject to arbitration and, importantly, who decides this issue. The Court further looked at whether a trial court can resolve this issue under the “wholly groundless” exception, i.e.,the court can decide the issue if the argument for arbitration is wholly groundless.  

 

The Supreme Court held that, “[w]hen the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract.  In those circumstances, a court possesses no power to decide the arbitrability issue.  That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Henry Schein, Inc, supra, at *4.  Through this ruling, the Court rejected the wholly groundless exception that would allow a trial court to rule on an threshold arbitrability question if the argument for arbitration is wholly groundless. 

 

The Court did not rule as to whether the arbitration provision at-issue delegated the arbitrability question to the arbitrator.   However, the American Arbitration Association’s rules provide that arbitrators have the power to resolve such threshold arbitrability questions so there is an argument that the provision through reference to the American Arbitration Association gave this authority to the arbitrator.  But, the best thing to do, as always, is to be clear.   Include language in the arbitration provision that specifically states that an arbitrator is authorized to decide the arbitrability of issues, particularly if it is your arbitration provision and you want disputes resolved by arbitration.  Conversely, if you want the initial, threshold issue of arbitrability to be decided by a court, make sure to specify that in the provision.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

 

 

SUBCONTRACT REQUIRING ARBITRATION OUTSIDE OF FLORIDA

shutterstock_1127513288Have you entered into a subcontract that requires you to arbitrate disputes?  If so, does the arbitration provision require you to arbitrate your dispute outside of Florida?  If so, the case of Sachse Construction and Development Corp.  v. Affirmed Drywall, Corp., 43 Fla. L. Weekly D1622e (Fla. 2d DCA 2018) applies and reinforces the notion: Read and consider what you sign!  

 

In Sachse Construction, a drywall subcontractor entered into a subcontract for a construction project in Miami with an  arbitration provision.   The subcontract provided that it shall be construed in accordance with Michigan law and required that arbitration shall take pace in Michigan per the Construction Industry Rules of the American Arbitration Association. 

 

A dispute arose and, naturally, the drywall subcontractor did not want to arbitrate against the general contractor in Michigan.  The subcontractor argued the arbitration provision was unenforceable pursuant to Florida Statute s. 47.025, which is a Florida venue statute that renders a venue provision in construction contracts void if it requires a resident contractor to initiate venue outside of Florida (see hyperlink for more on the statute).  A clever argument.  But…the venue provision in the subcontract at-issue involved arbitration, not litigation, and the appellate court held that if the arbitration provision was governed by the Federal Arbitration Act, then the Federal Arbitration Act would preempt the application of s. 47.025 and the venue provision would not be rendered unenforceable.  “[A] Florida court must enforce an arbitration agreement that is valid and enforceable under the FAA even when the agreement would be unenforceable under Florida law.”  Sasche Construction, supra

 

The Federal Arbitration Act would apply if the contract involved interstate commerce.  (Commerce, as defined under the Federal Arbitration Act, involves commerce among the states or with foreign countries).  For this reason, the appellate remanded back to the trial court to determine whether interstate commerce applied. If interstate commerce did apply then the drywall subcontractor would be required to arbitrate its dispute in Michigan.

 

Two considerations:

 

First, it would seem that the general contractor should be able support the application of interstate commerce to trigger the application of the Federal Arbitration Act.  It argued that its principal office was in Michigan, but it should be able to further argue accounting or other financial or insurance related issues were processed and performed in Michigan.  It may also argue that the materials to be incorporated into the project (e.g., the drywall, etc.) were materials that flowed through interstate commerce.  If this is the case, the drywall subcontractor will be required to arbitrate its dispute in Michigan—a huge advantage to the general contractor.  

 

Second, even if interstate commerce did not apply and the application of s. 47.025 came into effect, it is uncertain why the parties would be required to litigate the dispute versus arbitrate the dispute in Florida, instead of Michigan.  The appellate court did note that the contract did not contain a severability clause (reinforcing the importance of such a clause in a contract), but there was not any argument or real discussion regarding this issue and the invalidation of an arbitration provision as a whole.  

 

Remember, read and consider what you sign!  It can have huge implications, such as being required to arbitrate your dispute outside of Florida.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

ARE YOU SURE YOU WANT TO ARBITRATE?!?

imagesArbitration is a hot topic in dispute resolution as parties need to dictate in their contracts whether they want to arbitrate disputes arising out of their contract or, if not, litigate their disputes.   Recently, I discussed a Third District Court of Florida case where the court held that when a party is challenging the legality of a contract, that determination MUST be decided by the arbitrator;  and, the arbitration award will NOT be vacated simply because the arbitrator may have decided the issue wrong.

 

The Florida Supreme Court also chimed in on this issue in a non-construction case.  In Visiting Nurse Association of Florida, Inc. v.  Jupiter Medical Center, Inc., 39 Fla. L. Weekly S503b (Fla. 2014), the issue was whether a court can vacate an arbitration award because of an illegal contract.  In this case, the party moving to vacate the arbitration award argued that the arbitration panel reached a decision based on an interpretation of an agreement that would render the agreement illegal.  The Florida Supreme Court nixed this argument stating: “the claim that an arbitration panel construed a contract containing an arbitration provision to be an unlawful agreement is an insufficient basis to vacate an arbitrator’s decision pursuant to the FAA [Federal Arbitration Act] or the FAC [Florida Arbitration Code].” Jupiter Medical Center, supra.

 

If a party wants to be able to challenge an arbitration award based on the potential illegality of the entire contract, they should include this specific right in their contract that allows the court and not the arbitrator to determine the illegality and enforceability of the contract.  The contract should also provide that the parties can move to vacate the award based on the illegality of the contract. However, by preserving such arguments or rights, the party is severely watering-down the fundamental purpose of arbitration which is to timely and efficiently resolve disputes.  Yes, technical arguments such as the illegality of a contract will have more weight in court where there is a right to appeal.  But, this should be known on the front-end when selecting arbitration as the method of dispute resolution in order to achieve a timely, efficient, and final resolution versus a resolution in  court where the losing party will have a right to appeal and prolong the dispute resolution process.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.