Justice Kavanaugh issued his first Supreme Court opinion (unanimous) which helped streamline enforcement of arbitration AND provided contract-drafting lawyers some model arbitration language (which, as we’ll see, still needs some work).
The question before the Court was whether a trial court could still decide the threshold question of “arbitrability” — meaning whether the instant dispute was within the ambit of the parties’ arbitration clause — when the contract called for the arbitrator to decide arbitrability and one parties’ argument was “wholly groundless.”
In Schein v. Archer & White, a manufacturer and distributor had a contractual relationship which soured. Here’s the arbitration clause:
“Disputes. 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 of [Schein]), shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association [(AAA)]. The place of arbitration shall be in Charlotte, North Carolina.”
You will notice, as we discussed in another case, that the clause expressly incorporates the rules of the AAA which, incidentally, assert that arbitrability is for the arbitrator to decide.
The U.S. Supreme Court has already decided “that parties may agree to have an arbitrator decide not only the merits of a particular dispute but also “‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.”
The Fifth Circuit and some other courts (including the 11th Circuit) had ” determined that the court rather than an arbitrator should decide the threshold arbitrability question if, under the contract, the argument for arbitration is wholly groundless.”
But the “wholly groundless” exception is inconsistent with the Federal Arbitration Act, court precedent, and the parties’ contract. As to the last point, ” When 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.”
Two side notes:
One, the Court noted that “an arbitrator might hold a different view of the arbitrability issue than a court does, even if the court finds the answer obvious.” This sentence could be interpreted to recognize that an arbitrator’s interpretation of the law could be different than a court’s interpretation.
Two, and perhaps of more concrete value, the Court left unanswered the question whether express incorporation of the AAA rules meant that the parties had agreed that the arbitrator decides arbitrability.
Since the Court generally “approves” the arbitration clause language, it is not a bad “backbone” to use when writing an arbitration clause. However, it needs an express delegation of arbitrability clause.
NOTE (same conclusion from an earlier post, which still applies)
Writing arbitration agreements is not easy. There have been a half dozen Florida appellate cases interpreting arbitration agreements in November – December 2018 alone. That suggests there are poorly written and outdated ADR agreements being used by Florida businesses AND/OR that the lawyers seeking to avoid contract limitations are aggressive and clever.
If your contracts contain arbitration, limits of liability, or other alternative dispute terms, it is imperative to make sure you have the right protective language AND that it is consistent with the rest of your document (don’t just plug in language from cases — it has to harmoniously fit).
An experienced lawyer, who knows what he or she is doing, should be able to update your agreement for about $500-600. Consult a qualified litigator in your area who has written and litigated arbitration and liability waiver provisions. Ask lawyers specific questions about their experience writing and litigating (and appealing) these terms before you them. Good luck!
Image credit: USA Today