Client Alerts
January 14, 2019

Supreme Court Settles Age-Old Arbitrability Debate

Stites & Harbison Client Alert, January 15, 2019

Many construction contracts designate arbitration as the means to adjudicate disputes which are not resolved through executive negotiation, mediation or some alternate method. Occasionally, a question arises whether the claim falls within the scope of the arbitration clause. In other words, the parties debate whether the dispute is arbitrable under the contract. Examples of such arbitrability disagreements include claims for negligence, misrepresentation, fraud, interference in business relationships or other non-contractual claims. One of the parties might file a lawsuit and request the court to decide the issue of arbitrability of the claim. For many years, legal scholars have debated whether the court or the arbitrator should decide the threshold arbitrability question.

On January 8, 2019, the U.S. Supreme Court answered the age-old question regarding arbitrability. In Henry Schein, Inc., et al. v. Archer & White Sales, Inc., the Supreme Court ruled that, when the parties' contract delegates the arbitrability question to an arbitrator, the court cannot meddle in the parties' contract; and, therefore, the arbitrator must decide the issue of arbitrability. The Schein decision marked Justice Kavanaugh's first Supreme Court opinion, which he wrote for the unanimous Court.

The Schein case involved a dispute between a dental equipment distributor and a dental equipment manufacturer. The parties' contract contained a straightforward arbitration provision which excluded actions for injunctive relief and disputes related to trademark, trade secrets or other intellectual property of the manufacturer. The arbitration clause also incorporated the Rules of the American Arbitration Association ("AAA"). Interestingly, the AAA rules provide that arbitrators have the power to resolve arbitrability questions.

In Schein, the distributor claimed that the manufacturer violated federal and state antitrust laws and filed suit in federal court in Texas. The manufacturer invoked the Federal Arbitration Act ("FAA") and requested that the court refer the antitrust disputes to arbitration in accordance with the parties' contract. The question then became who decides the threshold question whether the antitrust dispute is subject to arbitration…the court or the arbitrator.

Both the trial court and the Court of Appeals determined that the manufacturer's arbitrability challenge was "wholly groundless" and ruled that the court could determine the arbitrability issue. The Supreme Court disagreed and held that the "wholly groundless" argument was inconsistent with the FAA and Supreme Court precedent. The Court held that when the parties' contract delegates the arbitrability question to an arbitrator, a court cannot override a parties' contract. Justice Kavanaugh wrote that, in such circumstances, a court possesses no power to decide the arbitrability issue, even when the court thinks that the challenge to the scope of the arbitration provision is "wholly groundless."

In Schein, the Supreme Court was careful not to express a view on whether the contract between the manufacturer and the distributor, in fact, delegated the arbitrability question to an arbitrator, because the Court of Appeals did not decide that issue. Under Supreme Court precedent, courts "should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so."

Although Schein is not a construction case, its holding clearly applies to arbitrability issues which arise under a construction contract. Notably, Rule R-9 of the AAA's Construction Industry Arbitration Rules provides that the arbitrator has the authority to decide arbitrability of claims. Similarly, Rule 11 of the JAMS Engineering and Construction Arbitration Rules provides that the arbitrator has such authority to decide the threshold arbitrability question. Therefore, if a construction contract incorporates the AAA or JAMS Arbitration Rules, the parties agree to delegate the arbitrability question to the arbitrator.

If a construction professional is concerned about giving the arbitrator the authority to decide arbitrability of claims, it can do one of at least three things. First, specify in the construction contract that any issue relating to arbitrability of the claim or dispute will be decided by the court, not the arbitrator. Second, review the arbitration rules which are incorporated into the arbitration provision to determine whether the arbitrability question is delegated to the arbitrator by the rules. Third, carefully craft the arbitration clause to exclude specific construction claims which are not covered by the arbitration provision.

The recent Schein decision regarding arbitrability of claims extends well beyond manufacturer-distributor disputes and clearly relates to claims arising under a construction contract containing an arbitration provision. In Schein, the Supreme Court settled the age-old debate whether the court or arbitrator decides the threshold arbitrability question by holding that the arbitrator makes such determination when the parties’ contract delegates such authority to the arbitrator. You can read the short and concise Schein opinion HERE.

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Construction Drafting, Reviewing & Negotiating Construction Contracts Arbitration, Mediation & Alternative Dispute Resolution Business Litigation Fabricated Structural Steel Health Care - Construction Manufacturing