CLEARLY DETERMINING IN CONTRACT WHO DETERMINES ARBITRABILITY OF DISPUTE

As you know from prior postings: “Arbitration provisions are creatures of contract and must be construed ‘as a matter of contract interpretation.’ ”  Fallang Family Limited Partnership v. Privcap Companies, LLC, 46 Fla.L.Weekly D639e (Fla. 4th DCA 2021) (citation omitted).    Thus, if you prefer to arbitrate potential disputes, instead of litigating potential disputes, you want to include an arbitration provision in your contract.  While there are positives and negatives to arbitration, no different than litigation, these positives and negatives should be considered during the contract negotiation process when dealing with the dispute resolution process in the contract.

Generally, under the law, the arbitrability of a dispute is determined by the court.  However, this can be deferred to the arbitrator with clear and unmistakable language in the contract.

By way of example, the American Arbitration Association includes a rule that allows an arbitrator to rule on the arbitrability of the dispute, i.e., the claims asserted are subject to the governing arbitration provision in the contract.   Recent law has suggested that if the objective is to authorize an American Arbitration Association arbitrator to make this determination, the contract clearly and unmistakably needs to state this intent and generally referring to the American Arbitration Association rules is not good enough.  For this reason, I have included in arbitration provisions language that specifically states, “In the event of any dispute as to the arbitrability of any claim or dispute, the parties agree that an appointed arbitrator within the American Arbitration Association shall make this determination.”  I have also included in arbitration provisions the converse so that if there is a dispute as to the arbitrability of a claim or dispute, the court, and not the arbitrator, will make this determination.

In Fallang Family Limited Partnership, the arbitration provision simply read: “In the event of any dispute under this agreement the parties agree to submit to binding arbitration in the state of Florida with a panel of one arbitrator. The arbitrator shall be chosen by the AAA [American Arbitration Association] and the AAA rules and procedure shall apply, and the arbitration will be governed by the law of the state of Florida.”  A lawsuit was filed and the court compelled certain claims to arbitration finding that such claims were arbitrable; however, the court authorized the arbitrator to make the final determination as to the arbitrability of the claims.

As mentioned, the rules of the American Arbitration Association allow the arbitrator to rule on the arbitrability of claims subject to the arbitration provision.  However, the simple arbitration provision did not clearly and unmistakably specify this intent.  The Fourth District concluded “that the general reference to the ‘AAA rules’ in this case left ambiguity as to whether the arbitrator has authority to decide arbitrability to the exclusion of the trial court.Fallang Family Limited Partnership, supra.  Based on this ambiguity, the Fourth District held that the trial court’s ruling was right making the initial determination as to which claims were arbitrable with the final decision left to the arbitratorFallang Family Limited Partnership, supra (“[W]e conclude that the trial judge’s order in this case properly made a preliminary decision as to which counts of the complaint are covered by the arbitration agreement, based on a limited showing of the facts in this multiple count, factually complex case, and properly left the final decision as to what was arbitrable to the arbitrator.”).

The bottom line is that, naturally, it may not be the most efficient for the trial court to make a preliminary determination as to the arbitrability of the claim with a final decision left to the arbitrator.  However, this ruling was due to the fact that the American Arbitration Association’s rules were incorporated into the contract but did NOT clearly and mistakably say that the arbitrator, and the arbitrator alone, would rule on the arbitrability of claims.  For this reason, there is value taking the extra step in the contract to clearly and mistakably reflect this intent, one way or the other.

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.

 

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