Precision of Language in Arbitration Clauses and Subsequent Express Agreements in Determining Jurisdictional and Gateway Issues

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By Gerald M. Levine

Applications for court intervention in an arbitration or objection to confirmation frequently succeed or (most likely) fail on the language of the parties' arbitration clause and their subsequent agreements where the clause is unclear. Parties are free to write into their arbitration clause the arbitrator's jurisdiction and issues within his or her authority, but in retrospect this calls for a level of prescience difficult to summon at the start of a commercial relationship. Who anticipates endings when beginning are so bright with hope? From the U.S. Supreme Court: "The question whether the parties have submitted a particular dispute to arbitration ... is 'an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise'." Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) (quoting AT & T Techs., Inc. v. Commc'ns Workers of America, 475 U.S. 643, 649 (1986)). The parties can "clearly and unmistakably provide otherwise" initially in their arbitration clause, or subsequently by agreement. In Oxford Health Plans LLC v. Sutter, 12-135 (U.S. 6-10-2013) because the arbitration clause did not provide for class actions the parties agreed to have the issue determined by the arbitrator. In effect, the parties expanded the arbitration clause by making their agreement "unmistakably clear[er]" (reversing the words in the original quotation, but not changing the sense). The irony in Oxford (particularly in view of American Express Company v. Italian Colors Restaurant, 12-133 (U.S. 6-20-2013)) is noted by Justice Alito when he states that "[t]oday's result follows directly from petitioner's concession and the narrow judicial review that federal law allows in arbitration cases." In American Express the arbitration clause contained a class action waiver which was also "unmistakably [clear]" even if the result of its clarity is "Another Blow to Class Action," New York Times Editorial, June 22, 2013 at A18.

For a party to succeed in either affirming or denying relief under the arbitration clause the language has to clearly state what is within or outside its scope. One way to do this is to make it explicitly clear (as the parties did each in their own way in Oxford Health Plans and American Express). Another way is to incorporate a tribunal's rules. To take a recent example from our circuit: in Schneider V. Kingdom of Thailand, 688 F.3d 68 (2nd Cir. 2013) the parties incorporated article 21 of the UNCITRAL rules, which reads:

The arbitral tribunal shall have the power to rule on objections that it has no jurisdiction, including any objections with respect to the existence or validity of the arbitration clause or of the separate arbitration agreement.

In consequence, "[w]here 'parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties' intent to delegate such issues to an arbitrator," citing Contec Corp. v. Remote Solution, Co. Ltd., 398 F.3d 205, 208 (2d Cir.2005). "That is precisely what occurred here [that is in Schneider]. Thus, Thailand is not entitled to [an] independent court adjudication of" the issue it sought to have the court adjudicate. Ruling: award confirmed on the ground that "the parties clearly and unmistakably provide[d] otherwise."

To bring these thoughts down to a gateway issue under New York law, consider N.J.R. Assoc, v. Tausend, 19 N.Y.3d 597, 602 (2012). CPLR § 7502(b) provides that statute of limitations issues are initially reserved for the court, but they can be waived [CPLR § 7503(b)]. Determination of limitations issues are also affected by the language of the arbitration agreement. "A contract may be governed by the Federal Arbitration Act yet subject to the New York rule if the agreement between the parties so provides." N.J.R. at 602, citing Matter of Smith Barney, Harris Upham & Co. v.Luckie, 85 NY2d 193 (1995) and Diamond Sys v. 55 Liberty, 4 NY3d 247 (2005). CPLR 7502 (b) provides that "If, at the time that a demand for arbitration was made or a notice of intention to arbitrate was served, the claim sought to be arbitrated would have been barred by limitation of time had it been asserted in a court of the state, a party may assert the limitation as a bar to the arbitration on an application to the court as provided in section 7503. . .." This procedural rule is reversed under federal law where it is for the arbitrator except where the parties explicitly agree to leave timeliness issues to the court. The "presumption is that the arbitrator should decide 'allegation[s] of waiver, delay, or a like defense to arbitrability'." Howsam, supra. at 84 quoting Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 US 1, 25 [1983]).

CPLR 7503(b) provides that a statute of limitations defense may be raised in state court by "a party who has not participated in the arbitration .... " (emphasis added). However, to leave the timeliness issue to the court in New York the phrasing of the arbitration clause must be precisely phrased. For example, the sentence "[t]his Agreement shall be governed by, and construed in accordance with, the laws and decisions of the State of New York" sounds as though it should invoke New York law, but the language of the arbitration clause controls. In Diamond Sys 4 NY3d at 253 the parties agreed only that the '[t]he Contract shall be governed by the law of the place where the Project is located'." The Project was located in New York. The imprecision in draftsmanship (if it was that, or counsel at the last moment simply commandeered a standard clause) places the decision with the arbitrator and not the court where the "subject project 'affect[s] interstate commerce."

For New York law to apply, the choice of law provision must state that New York law shall govern both "the agreement and its enforcement" (emphasis added). Luckie, 85 NY2d at 201. So that while the gateway statute of limitations questions are for the courts, in "the absence of more critical language concerning enforcement, however, all controversies, including issues of timeliness, are subjects for arbitration," Id. These factors illustrate the importance of carefully considering whether the client wants these issues to be decided in court or arbitration if a dispute arises and crafting the clause to achieve that goal, rather than relying on standard clauses. The lesson from N.J.R. is not that the moving party participated in the arbitration (although it appears to be a persuasive reason in that particular case) but that the parties' agreement was deficient in reserving that gateway issue to the court. For Justice Smith, "this case turns on whether the governing rule is supplied by the F[ederal] A[rbitration] A[ct] or by New York law. The FAA governs if the contract containing the arbitration clause -- the NJR partnership agreement -- is 'a contract evidencing a transaction involving commerce' within the meaning of FAA § 2."

To cycle back to the two recent arbitration decisions from the U.S. Supreme Court and without dwelling on whether the arbitrator in Oxford and the Court in American Express were wise in their judgments the parties made the beds in which they were to lie. The policy issues are now lobbed to the legislative branch of government.

Gerald M. Levine is a member of Levine Samuel, LLP. He practices in New York City and is on the list of neutrals of the American Arbitration Association. Mr. Levine runs an ADR blog on domain names and cybersquatting at

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This page contains a single entry by Geri S. Krauss, Esq. published on June 24, 2013 2:40 PM.

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