Source: https://loreelawfirm.com/blog/does-the-presumption-of-arbitrability-apply-if-a-contract-contains-two-broad-overlapping-forum-selection-clauses-one-for-arbitration-and-one-for-litigation/
Timestamp: 2019-04-22 16:19:39+00:00

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June 7th, 2015 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Contract Interpretation, Contract Interpretation Rules, FAA Preemption of State Law, Federal Policy in Favor of Arbitration, Moses Cone Principle, Presumption of Arbitrability, Stay of Litigation, United States Court of Appeals for the Ninth Circuit Comments Off on Does the Presumption of Arbitrability Apply if a Contract Contains two Broad, Overlapping Forum Selection Clauses, one for Arbitration and one for Litigation? By Philip J. Loree Jr.
So far, so good. But having accurately stated the governing rules, the Court inexplicably failed to heed them.
There was no dispute about whether a valid arbitration agreement existed and the Plaintiff did not raise any defenses to its enforceability under Section 2 of the Federal Arbitration Act. See 9 U.S.C. § 2. Plaintiff did “not dispute that he is bound by the terms of the LLC Agreement.” Slip op. at 4. The first part of the Court’s two-part inquiry was thus satisfied, leaving only the second, which concerns the scope of the concededly existing and valid arbitration agreement.
Plaintiff’s beef about arbitration was that the arbitration conflicted with the jurisdiction clause in the Grant Agreement. And, as the Court correctly observed, the LLC Agreement’s arbitration provision also conflicted with the jurisdiction and venue provision in the LLC Agreement. It concluded that meant the LLC Agreement was “internally incongruous.” See slip op. at 6.
When two clauses in a concededly valid and enforceable contract conflict, and as a result the contract is susceptible to more than one reasonable interpretation, that creates a classic ambiguity about what the parties’ intended. Under the laws of most states an ambiguity in the meaning of a contract term presents a question of fact for trial, at least where there is extrinsic evidence on which the trier of fact can base a verdict.
But the Federal Arbitration Act would not serve its purposes and objectives very well if courts had to conduct trials every time they were faced with ambiguity about whether a particular dispute was within the scope of the parties’ arbitration agreement. That would be far too time consuming, would tend to make arbitration less desirable as an alternative to litigation, and simply add to the court congestion arbitration is supposed to help ease.
That’s why courts devised the presumption of arbitrability, which allows courts to compel arbitration or stay litigation as long as the allegedly arbitrable dispute is one that at least arguably falls within the scope of a valid and enforceable arbitration agreement.
It is an easily applied default rule that allows courts to decide arbitrability disputes about the scope of an arbitration agreement without a time consuming and expensive trial. Once a court concludes that the parties’ objective manifestations of intent can be interpreted reasonably to mean that they intended disputes like dispute X to be submitted to arbitration, then the court’s job is done, even if the arbitration agreement could also be reasonably interpreted not to require arbitration of dispute X. See, e.g., Mastrobuono, 514 U.S. at 62.
So, in the circumstances, was there an interpretation under which the arbitration agreement could be given effect consistently with the judicial forum selection clauses in the two interrelated agreements? That, too, was undisputed.
The LLC argued that the two clauses could be reconciled in the sense that the Grant Agreement could be read to allow the Court to retain jurisdiction pending arbitration. LLC might also have argued (and perhaps it did; we haven’t read the briefs) that the parties intended for the jurisdiction clauses to aid in the enforcement of the arbitration agreement or award, not unlike the way service-of-suit clauses may be interpreted in insurance or reinsurance agreements when they appear agreements containing arbitration provisions. See, e.g., McDermott Int’l, Inc. v. Lloyds Underwriters, 944 F.2d 1199, 1205 (5th Cir. 1991) (citing cases).
The Court observed that the LLC’s interpretation was “also reasonable,” and thus held that “[i]n light of these competing interpretations, an ambiguity exists. . . .” See slip op. at 5. But instead of applying the presumption of arbitration and resolving that ambiguity in favor of arbitration, the Court concluded that, under Washington law, “this ambiguity must be construed against” the LLC, which drafted the agreement. Slip op. at 5.
The Court correctly noted that state contract law applicable to contracts generally determines whether the parties have entered into an arbitration agreement, whether there are any grounds for revocation or non-enforcement of the agreement that apply to contracts generally (that is, not simply or predominately to arbitration agreements) and how the agreement should be interpreted. See slip op. at 4.
The Court then concluded (probably incorrectly, but, as we’ll see, it doesn’t matter) that under Washington law, an ambiguity in a contract “must” be construed against the drafter. See slip op. at 5. And since that state law applies to arbitration agreements, then therefore the arbitration agreement must be construed against the drafter. See slip op. at 5.
Although the FAA establishes a strong presumption in favor of arbitration, that policy only comes into play after the Court determines that the parties have an enforceable arbitration clause. See Chiron Corp., 207 F.3d at 1131(“[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. . . .” (emphasis added)). Here, ambiguity exists as to the enforceability of the LLC Agreement’s arbitration clause, and thus the FAA’s policy favoring arbitration is not implicated.
It is true that the presumption of arbitrability does not apply when a court is determining whether a valid and enforceable arbitration agreement exists. See Granite Rock Co. v. International Brotherhood of Teamsters, 130 S.Ct. 2847, 2859 (2010) (Thomas, J.). But the issue before the Court had nothing to do with “enforceability” of the arbitration agreement.
The Court decided the case by applying a contract interpretation rule, that is, the rule that ambiguous contract provisions may be construed against the drafter (also known as contra proferentem). Thus, the question was, assuming the parties inclusion of the two conflicting clauses in the contract was not an error that might be resolved by the equitable remedy of reformation, then what did the parties intend the clauses, construed in harmony with each other, to mean, as respects the arbitrability of the dispute before the court? That’s a question of scope, not enforceability.
Second, while general principles of state contract law apply to govern the enforceability of an arbitration agreement, in the first instance, enforceability is a question of federal law governed by Section 2 of the Federal Arbtration Act. Under Section 2, a validly formed agreement to arbitrate is presumed to be “valid, irrevocable, irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.
The U.S. Supreme Court has interpreted Section 2 to mean that arbitration agreements can be “invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1746 (2011) (quoting Doctor’s Associates, Inc. v. Casarotto, 517 U. S. 681, 687 (1996)) (other citation omitted). But contract ambiguity is not a general contract law defense to the enforceability of a contract.
In any event, the Court disregarded the contract’s “delegation clause,” under which the parties clearly and unmistakably agreed to arbitrate “questions or arbitrability or the scope of the parties’ agreement to arbitrate. . . .” As the Supreme Court ruled in Rent-a-Center West, Inc. v. Jackson, 130 S. Ct. 2772, 2778-79 (2010), such clauses are separable from the arbitration agreements in which they are contained.
The court did not identify any specific enforceability defense directed at the delegation clause itself, nor did it explain why it could not be harmonized with the jurisdiction and venue provisions. Thus, once the Court determined there was no dispute about the existence of the arbitration agreement, then all else was for the arbitrators. See Granite Rock, 130 S. Ct. at 2859.
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Tags: Arbitration Agreement Conflicts with Forum Selection Clause, Chiron Corp, Choice-of-Law Clause, Clear and Unmistakable Rule, Construe Against Drafter, Contra Preferentem, Contract Ambiguity, Contract Indefiniteness, Delegation Clause, Enforceability of Arbitration Agreement, Existence of Arbitration Agreement, Federal Arbitration Act Purposes and Objectives, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Policy in Favor of Arbitration, Forum Selection Clauses, Granite Rock Co. v. International Brotherhood of Teamsters, Jurisdiction and Venue Agreements, Mastrobuon, Mastrobuono v. Shearson Lehman Hutton Inc., Moses Cone Principle, Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., Presumption in Favor of Arbitration, Savings Clause, Service-of-Suit Clauses, State Contract Law, Stay of Litigation, U.S. District Court Western District of Washington, v. Ortho Diagnostic Sys. Inc.
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