Challenging the arbitrability of arbitration provisions

Nov 18, 2015   

Thursday November 18th, 2015

Challenging the arbitrability of arbitration provisions

Contracting parties are routinely implementing arbitration provisions in their agreements to ensure a modicum of predictability of rules and venue, and to ensure a degree of control over the arbitral process. Arbitration provisions typically include “delegation provisions” wherein the parties agree that the arbitrator shall not only decide the underlying dispute, but even the threshold question of whether the dispute is ripe or proper for arbitration. Courts have been split over whether a “delegation provision” may usurp the function of a court to determine the gateway issue of arbitrability.

Challenging the Delegation Provision

A recent Eleventh Circuit appellate case illustrates the benefit of including properly drafted delegation provisions in a contract. In Parnell v. Cash Call, Inc., 2015 WL 6504332 (11th Cir. 2015), the parties entered into a loan agreement (the “Loan Agreement”) which contained an arbitration provision that specifically delegated any dispute (given its broadest possible meaning) to the arbitrator. Upon making his final payment, Parnell filed a complaint against Cash Call in Georgia state court alleging, inter alia, exploitative business practices and illicit avoidance of federal and state regulations. Cash Call removed the case to federal court and moved to compel arbitration. The district court, however, rejected Cash Call’s motion to compel arbitration on its determination that Parnell’s complaint articulated a challenge to the Loan Agreement’s arbitration provision and that said provision was unconscionable.

On appeal, the Eleventh Circuit reversed, and held that the Loan Agreement contained a binding delegation provision which required the arbitrator, not the court, to determine whether the arbitration provision itself was enforceable. The Court further held that because Parnell failed to directly challenge the delegation provision, and instead globally challenged the agreement as a whole, the Federal Arbitration Act (“FAA”) required the Court (i) treat the delegation provision as valid, (ii) enforce the terms of the Loan Agreement, and (iii) leave the determination of the enforceability of the Loan Agreement’s arbitration provision to the arbitrator. Relying on the Supreme Court’s rationale in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 72 130 S. Ct. 2772, 2779 (2010), which found that when the threshold determination of enforceability of an agreement to arbitrate is committed to the arbitrator, the “courts only retain jurisdiction to review a challenge to that specific provision,” the Parnell Court ruled that the challenge to the arbitration agreement as a whole was insufficient to prevent the court from enforcing the delegation provision. Parnell explained that delegation provisions have consistently been held as valid and severable from the underlying agreement to arbitrate. Parnell at 3, citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445, 126 S. Ct. 1204, 1208 (2006). Since Parnell’s complaint only challenged the Loan Agreement’s arbitration provision generally, it fell short of the Rent-A-Center pleading requirement and the court was required to permit the parties to proceed to arbitration.

Delegation Provision Must be Clear & Unmistakable

Delegation provisions remain, however, susceptible to attack in a court of law. The Supreme Court has found that to enforce a delegation provision, there must be “clear and unmistakable” evidence that the parties agreed to submit the threshold question of arbitrability to an arbitrator. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944, 115 S. Ct. 1920, 1924 (1995). As a result, delegation provisions may be invalidated by “generally applicable contract defenses, such as fraud, duress, and unconscionability.” Rent-A-Center, at 68, 2776, citing, Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996) (explaining that the FAA places arbitration agreements on an equal footing with other contracts).

Conclusion

The “take-away” from Parnell is two-fold: (a) for transactional professionals seeking to insert delegation provisions for arbitration clauses, take due care to ensure that the provision clearly, and unmistakably, evinces an intent to submit the gateway question of arbitrability to the arbitrator; and (b) for litigators seeking to challenge delegation provisions, attack not only the arbitration clause as a whole, but the specific delegation provision at issue. The attorneys at Fuerst Ittleman David & Joseph understand that every clause of every contract is vital to the success or a transaction. If you or your business need assistance in the negotiation, drafting, or litigating such clauses, we encourage you to contact us by email at contact@fidjlaw.com or telephone at (305) 350-5690 so that we might assist you in ensuring that your interests are protected.