YOU CANNOT ARBITRATE CLAIMS NOT COVERED BY THE ARBITRATION AGREEMENT

Regardless of the type of contract you are dealing with, “[a]rbitration provisions are contractual in nature, and therefore, construction of such provisions and the contracts in which they appear is a matter of contract interpretation.”  Wiener v. Taylor Morrison Services, Inc., 44 Fla. L. Weekly D3012f (Fla. 1st DCA 2019).   This means if you want to preserve your right to arbitrate claims you want to make sure your contract unambiguously expresses this right.  Taking this one step further, if you want to make sure an arbitrator, and not the court, determines whether the claim is arbitrable if a dispute arises, you want to make sure that right is expressly contained in the arbitration provision.

For example, in Wiener, a homeowner sued a home-builder for violation of the building code – a fairly common claim in a construction defect action.  The homeowner’s claim dealt with a violation of building code  as to exterior stucco deficiencies.   The home-builder moved to compel the lawsuit to arbitration based on a structural warranty it provided to the homeowner that contained an arbitration provision.   The structural warranty, however, was limited and did not apply to non-load-bearing elements which, per the warranty, were not deemed to have the potential for a major structural defect (e.g., a structural defect to load-bearing elements that would cause the home to be unsafe or inhabitable).  The trial court compelled the dispute to arbitration pursuant to the arbitration provision in the structural warranty.

But, the First District Court of Appeal held the trial court was wrong to compel the dispute to arbitration.  Why?  The homeowner did not sue the home-builder for a breach of the structural warranty.  Even if the homeowner was trying to navigate around the structural warranty, the warranty was limited in nature and would NOT apply to a claim dealing with defective stucco, which is not a load-bearing issue, to say the least.  See Wiener, supra (“[C]onsidering the plain meaning of the structural warranty agreement, the [plaintiff’s] complaint does not raise claims subject to arbitration under that agreement.”).  The home-builder could not have its cake and eat it too — it could not exclude claims from the warranty and then try to arbitrate those very excluded claims per an arbitration provision in the warranty.

Here, the issue of whether the claim was arbitrable (subject to arbitration), was decided by the court, as it typically is.  The arbitrability of a claim is typically a question for the court.  Wiener, supra. This does not mean that it needs to be that way.   Parties can clearly include in their arbitration provision that the determination of the arbitrability of a claim is a determination for an arbitrator, and not the court.

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.

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.