ADR

Editor's note: This article describes a hypothetical situation.

Charles Forer

Things were different this time. Bob had anticipated the very issue his adversary raised. Bob was confident he had “drafted his way around the problem.” Except for one thing: Bob's client lost when the rubber hit the road.

Bob included an arbitration provision in a contract he drafted for his client. The provision was a copy and paste of Bob's standard arbitration clause. It included the following: “In making his or her decisions, the arbitrator shall adopt and follow the commercial rules of the American Arbitration Association in effect as of the date of the arbitration.”

Bob knows his clients sometimes need to get equitable relief when there is a contract dispute. He recognizes that courts often can grant that relief more efficiently than arbitrators. Bob's clause therefore added: “Notwithstanding any other provision of this agreement, any party shall have the right to seek equitable relief, in a court of competent jurisdiction, to the extent that equitable relief is available to a party.”

One year later, after hearing how his client was getting shafted (Bob reframed that howl into a “breach of contract”), Bob did two things—he filed an arbitration demand seeking money damages for breach of contract; and he filed suit for unjust enrichment and sought rescission and restitution. An elegant solution to the problem, right? Each adjudicator—the arbitrator and the court—would give Bob's client exactly what she needed. Quickly and efficiently.

Stop. Right. Now. Can advancing on two fronts achieve an expeditious solution of this or any business dispute? Will this strategy inevitably lead to all kinds of impediments that prevent swift dispute resolution?

The first obstacle to Bob's plan: his adversary moved in court to compel arbitration of the unjust enrichment claim. Bob now had to contend with a preliminary motion before the court ever could get to the merits of his request for equitable relief.

The second obstacle: after considering the motion to compel arbitration, the court—several weeks and dozens of pages of briefs later—kicked the arbitrability issue to the arbitrator. The court said the arbitrator must decide whether she or the court has the authority to determine the unjust enrichment claim. Spinning-head result: if the arbitrator concludes she has the authority to decide the unjust enrichment claim, the arbitrator then will decide the claim on the merits. However, if the arbitrator concludes she does not have the authority, then the issue will go back to court. Efficiency?

The reason for the court's decision to punt: Bob's arbitration provision specifically said, “the arbitrator shall adopt and follow the commercial rules of the American Arbitration Association.” Those rules state, “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” As many courts have held, adopting those rules by reference means an arbitrator decides the initial arbitrability issue (who decides the claim).

But wait a second. Bob's contract had a carve-out that anticipated these problems: “Notwithstanding any other provision of this agreement, any party shall have the right to seek equitable relief, in a court of competent jurisdiction, to the extent that equitable relief is available to a party.” This provision, which supersedes any other provision in the contract, surely means that the court decides whether the claim for equitable relief should be submitted to arbitration or to court. Otherwise, if the arbitrator decides this who-decides issue in favor of having the arbitrator decide the issue, the aggrieved party never has been in court.

Before you conclude that deciphering the federal tax code is a better use of your time, let's untangle this Kafka-esque web:

• As Bob recognized when he drafted the arbitration provision, the parties may agree who will decide the initial arbitrability question if the parties' agreement does so by “clear and unmistakable evidence.” See Henry Schein v. Archer & White Sales, 139 S. Ct. 524, 530 (2019). This means the parties may decide to delegate the who-decides question to the arbitrator or to the court.

• Rule 7(a) of the AAA commercial rules says the arbitrator shall have “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” The rules of lots of other arbitration providers say virtually the same thing.

• Courts again and again have held that an agreement to arbitrate “in accordance with” the AAA's rules is “clear and unmistakable” evidence that the parties agreed the arbitrator shall decide the arbitrability (who decides) question.

But here things get trickier. Does the arbitrator have the power to determine the arbitrability question (who decides) when the parties have expressly incorporated the AAA rules, but the parties have included a carve-out provision that says “any party shall have the right to seek equitable relief in a court of competent jurisdiction.”

The court that decided the case adversely to Bob followed the Kentucky Supreme Court's recent opinion in AllyAlign Health v. Signature Advantage, (Ky. June 13, 2019): “whether the plaintiff asserts a true claim for equitable relief or such assertion is a façade to avoid arbitration is a determination to be made by the arbitrator per the contract's adoption of the AAA's rules so stating.”

This is not a slam-dunk conclusion, however. The dissenting opinion in AllyAlign Health v. Signature Advantage said the carve-out expressly controlled over any other provision, and on the basis of fairness concluded: “If the parties are required to submit the initial question of arbitrability to the arbitrator and the arbitrator rules that the issue must be arbitrated, then the party never had the opportunity to seek equitable relief in a court of competent jurisdiction.”

If Bob truly was interested in representing his client's interests, why did he write a contract that contained a time bomb that, at the very least (and even if Bob had prevailed on the legal issue), invited controversy, litigation and inefficiency down the road? He instead could have had his cake and eaten it too by adding one more clause: “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim; excepting, however, that in connection with any party's claim or right to seek equitable relief in court, the court shall have the exclusive power to rule on its jurisdiction, including any objections with respect to the arbitrability of any claim or counterclaim seeking equitable relief.”

Adding the italicized language, which specifically states that the court must rule on anything having to do with equitable claims, would have prevented the court from punting in Bob's case. This language would have ensured that the court would decide whether it or an arbitrator should decide the unjust enrichment claim. That would have saved lots of time and money. And it would have anticipated the very issue Bob's adversary raised in response to Bob's lawsuit.

Charles F. Forer independently provides arbitration, mediation and all other neutral services. He is the current co-chair of the Philadelphia Bar Association's alternative dispute resolution committee. He is a former chair of the association's fee disputes committee. He is a frequent lecturer and writer on the use of ADR in a variety of settings. Contact him at 610-999-5764 and c[email protected].