Author: Aditya Gogna**
Jurisdiction and Powers of the Courts in Matters of Arbitration Generally
This post summarizes Dr. Julie Bédard’s discussion with Dr. Kabir Duggal and Amanda Lee on Delos Dispute Resolution’s TagTime series regarding arbitrability in international arbitration. The discussion focused on the role courts and tribunals play in deciding this particular question. Dr. Bédard presented a comparative analysis of various jurisdictions, with specific focus on the United States. She also talked about the form and content of an arbitration agreement along with the approach adopted by U.S. courts in dealing with the question of arbitrability.
The issue of arbitrability is decided differently in various jurisdictions. In the United States, the term covers the issues of whether a particular dispute has been submitted to arbitration by the parties. The U.S. Supreme Court has recognized that the arbitrator can decide the merits of a dispute along with questions that are popularly referred to as “gateway questions.” These gateway questions include, but are not limited to, issues such as whether the parties have agreed to arbitrate or whether a particular controversy or dispute is covered by an arbitration agreement. On the other hand, jurisdictions outside the United States look at this issue from a different perspective. The approach adopted outside the U.S. is a narrow approach, which usually involves the question of whether a dispute of a particular nature can be subject to arbitration by law. This issue requires deliberation on whether the subject matter is arbitrable or not by law. It is imperative to point out that this issue is different from the issue of whether the parties intended to arbitrate or litigate a dispute. The issue of arbitrability that this summary covers is as follows: when there is ambiguity in the arbitration agreement and it is unclear whether the parties agree to arbitrate a given dispute, what is the approach adopted by the courts and tribunals?
WHO DECIDES WHETHER A DISPUTE IS ARBITRABLE?
The question of who decides whether parties should be litigating or arbitrating is a difficult one in the United States. Historically, U.S. courts have played an active role in this determination since there is concern about giving arbitrators the power to make decisions regarding issues, which the parties did not intend them to undertake. The courts see themselves as guardians of the parties’ will. Further, questions regarding threshold and gateway issues, such as whether an arbitration agreement was formed, whether it was valid or whether the dispute falls within the scope of the agreement, are usually decided by the courts unless the contract “explicitly and clearly mentions” it. This rule of “explicit and clear” intent to arbitrate was set forth in the landmark decision First Options v. Kaplan. The court stated that it should not be assumed that the parties intended to arbitrate the issue of arbitrability unless there is clear and unmistakable evidence of that. The important conclusion from this case is that it should be manifestly clear that the parties intended to arbitrate the substantive and procedural aspect of a particular dispute. While determining the question of arbitrability, reference should also be made to the draft Restatement of the Law of International Commercial Arbitration, which states that the parties should explicitly mention their intent to forego judicial intervention. The crux of the issue is that there is a presumption in favor of arbitration only if the parties explicitly and clearly intend to do so.
ARBITRABILITY VIS-À-VIS HENRY SCHEIN INC. V. ARCHER AND WHITE SALES INC.
This case dates back to 2012 and began as an arbitral proceeding between a distributor and a supplier of dental facilities. The distributor was unhappy about the fact that the supplier had restricted its sales. The distributor initiated a lawsuit against the supplier on these grounds. The supplier argued for staying the litigation on the grounds that the distributor was bound to arbitrate pursuant to the arbitration clause in the contract. The court looked into the arbitration clause, which stated that “Any disputes arising or related to this agreement . . . shall be resolved by binding arbitration.” Furthermore, the clause laid down the following exceptions:
- Actions seeking injunctive relief, which is a remedy.
- Disputes related to trademarks, trade secret, or other intellectual property, which are the subject matter of a dispute.
In Schein, the bare reading of the arbitration clause indicated splitting substantive relief with respect to different forums. Since preliminary injunctive relief acts as an aid to arbitration, carving out injunctive relief in its entirety creates a difficult and unworkable situation. This might result in part of the issue being litigated and the other part being handled by the arbitral tribunal due to lack of clarity in the arbitration agreement. The arbitration clause in Schein does not talk about arbitrability, which makes the inference of which forum to approach, difficult to ascertain. Having said that, there is a reference in the agreement to the American Arbitration Association Commercial Arbitration Rules (“AAA rules”), which state that the arbitrator should have the power to rule on its own jurisdiction. These rules follow the Kompetenz-Kompetenz principle in coming to this conclusion.
The US district court in Schein denied the supplier’s motion to go for arbitration by stating that their claims are “wholly groundless.” The Fifth Circuit subsequently affirmed the decision and held that courts do not have to refer frivolous arbitrability arguments to arbitrators and considered it as a frolic detour. The supplier subsequently petitioned for certiorari from the Supreme Court and the court granted it.
The Supreme Court unanimously disagreed with the Fifth Circuit, stating that if the parties’ contract delegated the question of arbitrability to the arbitrator, the court could not override the delegation by simply deciding that the theory of arbitrability was groundless. The Supreme Court reaffirmed the principle that the parties may choose to delegate threshold questions and that courts should respect the will of the parties.
In the view of the court, the language of the AAA rules, incorporated by reference, constituted the parties’ submission to the rules. Therefore, this was an indication of the parties’ intent to let the arbitrator decide the questions of arbitrability.
The supplier presented the incorporation by reference argument in court whereas the distributor vehemently disagreed. The court examined the merits of incorporation by reference in lieu of the arguments advanced by the supplier. The Supreme Court indicated that the arbitration agreement should manifestly express the parties’ intent to withdraw from courts. The court did not clarify the question of incorporating by reference but has previously ruled in favor of the fact that parties can arbitrate arbitrability if the intent to do so is unambiguous.
The court in Schein did not address the arbitrability issue and the case was remanded to the Fifth Circuit. That court held that it did not have to defer the question of arbitrability to the arbitral tribunal because the exceptions in the clause overcame any evidence of intent to delegate arbitrability. The supplier once again petitioned for certiorari from the Supreme Court, this time regarding the question of “whether a provision in an arbitration agreement that exempts certain claims from arbitration negates the otherwise clear and unmistakable delegation of arbitrability to the arbitrator?” The Supreme Court did not issue a decision in Schein the second time, instead reversing its previous grant of certiorari, thereby not going into the merits.
The two things to consider in order to avoid incorporation related issues in the arbitration agreement are, firstly, to avoid using carve outs in agreements and, secondly, to incorporate an express reference to a set of rules such as the AAA Rules or the ICC Rules, which indicate explicit intent of the parties and help in removing ambiguity.
Another recommendation is to use stable language which conforms to the basic understanding of the court. Having said that, there has been more clarity from the courts in the past few years regarding the position of arbitrability. The parties can benefit by making sure that there is explicit and clear intent mentioned in the arbitration clause.
 Julie Bédard, Who decides: Courts or Tribunals?Arbitrability in International Arbitration, TagTime (Feb. 3, 2021), available at https://delosdr.org/index.php/tag/tagtime/.
 Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002).
 First Options of Chi., Inc. v. Kaplan, 514 U.S. 938 (1995)
 BG Grp. PLC v. Argentina, 572 U.S. 25 (2014)
 Henry Schein, Inc. v. Archer and White Sales, Inc., 139 S.Ct. 524 (2019).
 See Hadassa Karp, supra note 6.
*This post is part of a series summarizing episodes of Delos Disputes Resolution TagTime webinars.
** Aditya Gogna (India) is an LLM candidate at Columbia University (’21). He has over 3 years of experience in New Delhi law firms in dispute resolution and litigation.
***Julie Bédard is head of Skadden’s International Litigation and Arbitration Group for the Americas. She is a member of Skadden’s Policy Committee, the firm’s governing body. Fluent in French, Spanish and Portuguese, Ms. Bédard practices in four languages in complex international litigation and arbitration matters. Trained in both civil and common law, Ms. Bédard represents clients in federal and state courts in the US and has served as counsel in various international arbitration proceedings. She frequently counsels management and supervisory boards in corporate governance, internal investigations and U.S. Foreign Corrupt Practices Act matters. In 2020, Ms. Bédard was named as an arbitrator for the U.S.-Mexico-Canada Agreement’s dispute settlement mechanism. She is a member of the Court of Arbitration of the Singapore International Arbitration Centre.