Part IVA: Who Decides?
By Philip J. Loree Jr.
In Part III (here) we examined the background of Stolt-Nielsen and identified four issues that the United States Supreme Court will likely confront when it decides the case. In this part IVA we consider the first issue: Who decides whether class arbitration can be imposed on the parties when their arbitration agreements are silent on that point? Put differently, is the question one of arbitrability for the court or one of procedural arbitrability or contract interpretation for the arbitrators?
Resolution of the question defines the standard of review. Questions of arbitrability are reviewed de novo on the law and for clear error on the facts. But if the question is one of procedural arbitrability or contract interpretation, the standard is the deferential one provided by Federal Arbitration Act Section 10, the one applied by both the District Court and the United States Court of Appeals for the Second Circuit.
The arbitrators in Stolt-Nielsen decided that class arbitration was authorized by the parties’ arbitration agreements even though the agreements said nothing about class arbitration. We believe that at least five Justices will conclude that this question was one of arbitrability for the Court to decide, and will either decide the issue de novo or remand it to the lower courts to decide.
II. Who Decides Whether Imposing Class Arbitration on the Parties is Consistent with the Federal Arbitration Act When the Parties’ Agreement is Silent on Class Arbitration?
Courts get to decide questions of arbitrability unless the parties “clearly and unmistakably” agreed that arbitrators get to decide them. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945-46 (1995). Before discussing whether we are dealing with an arbitrability question, we must therefore consider whether Stolt-Nielsen has clearly and unmistakably submitted arbitrability questions to the arbitrators. If so, then the question is moot, and the applicable standard of review will be the deferential one under Federal Arbitration Act Section 10.
A. Assuming the Question is one of Arbitrability, Has Stolt-Nielsen Clearly and Unmistakably Submitted it to the Arbitrators?
We believe that at least five members of the Court will conclude that Stolt-Nielsen did not clearly and unmistakably submit arbitrability questions to the arbitrators. “[M]erely arguing the arbitrability issue to an arbitrator does not indicate a clear willingness to arbitrate that issue. . . .” First Options, 514 U.S. at 946. As discussed in Part III (here), in its submission agreement Stolt-Nielsen appears to have reserved its rights to argue the court should decide whether the parties consented to class arbitration. Stolt-Nielsen also argued to the Second Circuit that the arbitrators had no authority to decide whether the parties consented to class arbitration. Because Stolt-Nielsen “forcefully objected” to the arbitrators’ authority, and otherwise appears to have reserved its right to a judicial determination, we do not think Stolt-Nielsen clearly and unmistakably agreed that the arbitrators could decide arbitrability. See 514 U.S. at 946.
B. Is the Question One of Arbitrability?
One of the foundational tenets of arbitration law is that “arbitration is simply a matter of contract between the parties; it is a way to resolve. . . disputes — but only those disputes — that the parties have agreed to submit to arbitration.” First Options, 514 U.S. at 943. As a general rule, arbitrability questions concern “whether the parties have submitted a particular dispute to arbitration. . . .” Howsam v. Dean Witter Reynolds, Inc.,, 537 U.S. 79, 83 (2002). The Supreme Court has said that “[l]inguistically speaking, one might call any potentially dispositive gateway question a ‘question of arbitrability,’ for its answer will determine whether the underlying controversy will proceed to arbitration on the merits.” 537 U.S. at 83. But the term “arbitrability” has “a far more limited scope,” and is “applicable in the kind of narrow circumstance where contracting parties would likely have expected a court to have decided the gateway matter, where they are not likely to have thought that they agreed that an arbitrator would do so, and, consequently, where reference of the gateway dispute to the court avoids the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate.” Two classic examples of arbitrability questions are whether: (a) “the parties are bound by a given arbitration clause;” and (b) “an arbitration clause in a concededly binding contract applies to a particular type of controversy. . . .” 537 U.S. at 84 (citations omitted).
But “the phrase ‘question of arbitrability’ [is] not applicable in other kinds of general circumstance where parties would likely expect that an arbitrator would decide the gateway matter.” 537 U.S. at 84. There is a doctrine known as “procedural arbitrability under which procedural questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide.” Id. (citation and quotations omitted) These types of questions generally concern “whether prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate have been met. . . .” 537 U.S. at 85 (citation and quotations omitted; emphasis deleted). And there is also a presumption that arbitrators decide “’allegation[s] of waiver, delay, or a like defense to arbitrability.’” See 537 U.S. at 84 (quoting Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)).
The plurality in Bazzle determined that the issue before it – whether the parties’ contracts authorized or precluded class arbitration – was a question of procedural arbitrability. On the facts before it the plurality characterized the question as concerning “what kind of arbitration proceeding the parties agreed to.” (See Part II, here.) It was, indeed, a “gateway” question; it was –- according to the plurality decision — simply not the type of “gateway” question that courts get to decide because it involved a disputed issue of contract interpretation.
The question in Stolt-Nielsen is likewise a “gateway” question: Did the parties to each individual charter party agree to submit to a single arbitration panel not only the disputes between them, but also disputes involving nonsignatories to the individual charter party who might or might not be signatories to a separate charter party with one of the parties to that individual charter party? From a linguistic perspective, one might also characterize this question as concerning “what kind of arbitration proceeding the parties agreed to.” But linguistics do not answer the question. Linguistically, even classic arbitrability questions – such as whether “an arbitration clause in a concededly binding contract applies to a particular type of controversy. . . . ,” 537 U.S. at 84 (citations omitted) – concern the “kind of arbitration proceeding” to which the parties agreed. In the example provided they either agreed to: (a) an arbitration proceeding involving only the matters within the scope of their arbitration agreement; or (b) an arbitration proceeding involving matters falling outside the scope of the arbitration agreement (which might be the case if the parties entered into a post-dispute submission agreement that expanded the scope of the original arbitration clause). Surely arbitration proceeding (a) is different in “kind” then arbitration proceeding (b). But whether they agreed to proceeding (a) or proceeding (b) is a classic arbitrability question: What did the parties submit to arbitration?
Since linguistics do not provide the answer, court have to look at the substance of the question presented. The question presented in Stolt-Nielsen concerns what the parties submitted to arbitration, the parties with whom they agreed to arbitrate, whether the parties agreed that one arbitration clause’s more exacting arbitrator selection requirements can trump the other arbitration clause’s more general ones or vice-versa, and whether the Stolt-Nielsen parties agreed to forgo whatever right they might otherwise have had to appoint different arbitrators to serve in separate arbitrations involving only the parties to each individual arbitration agreement.
These questions are fundamentally different than those in Bazzle. Contract interpretation does not resolve them because there is nothing to interpret. The contracts are silent on class action arbitration and the arbitrator selection provisions are unambiguous and irreconcilable. The question implicates to a far greater extent the manner in which each individual arbitration agreement is to be enforced according to its terms pursuant to Federal Arbitration Act Section 2’s enforceability command. The resolution turns not on a disputed issue of contract interpretation, but on whether state contract, federal maritime law or the Federal Arbitration Act provides a default rule that applies as a “gap filler” in circumstances where the parties have evidenced no intent as to whether class arbitration is permitted, and on what the result should be when class arbitration would cause irreconcilable conflict between the arbitration clauses’ differing arbitrator qualification provisions.
1. At the Time of Contracting, the Parties in Stolt-Nielsen Would Likely Have Believed that the Court Would Decide the Class Arbitration Question.
Under First Options and Howsam, whether or not a question is one of arbitrability depends on the reasonable expectations of the parties at the time of contracting. There are at least three reasons why we believe the parties would likely have believed that a court would decide whether class arbitration was permissible in the circumstances.
a. At the Time of Contracting the Majority of Federal Courts Had Ruled that the Court Determines Whether Class or Consolidated Arbitration Can Be Imposed in the Face of the Parties’ Silence.
The charter parties in Stolt-Nielsen were entered into during the period 1998 through 2002, before the Supreme Court decided Bazzle. (See Part III, here.) At the time a majority of the federal courts had ruled — or at least assumed – that the question whether a parties’ contract authorized class or consolidated arbitration was for the court to decide, at least where the contract was silent on that point. See, e.g., Glencore, Ltd. v. Schnitzer Steel Products, 189 F.2d 264 (2d Cir. 1999); United Kingdom v. Boeing Co., 998 F.2d 68 (2d Cir. 1993); Champ v. Siegal Trading Co., 55 F.3d 269 (7th Cir. 1995). That strongly suggests that the parties would have expected a court to decide whether the FAA permitted the imposition of class arbitration in the face of silence.
b. The Class Arbitration Determination in Stolt-Nielsen Implicates the Arbitrator Selection Provisions of the Arbitration Agreements, and Courts Ordinarily Determine Whether Arbitrator Selection Provisions Have Been Followed.
Unlike those in Bazzle the arbitration agreements in Stolt-Nielsen have potentially conflicting arbitration selection provisions. One of the form arbitration agreements requires each party-appointed arbitrator to be “a merchant, broker or individual experienced in the shipping business. . . . ,” and requires the two party-appointed arbitrators to appoint “an Admiralty lawyer” as a third arbitrator. The other provides that arbitration shall proceed “before a board of three persons, consisting of one arbitrator to be appointed by the Owner, one by the Charterer, and one by the two so chosen.” (See Part III, here.)
The conflicting arbitrator qualifications specified by the two arbitration agreements raises a vitally important issue that has, by statute and treaty, been committed to the court to decide. As Judge Posner once said, “Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.” Lefkovitz v. Wagner, 395 F.3d 773, 780 (7th Cir.), cert. denied, 546 U.S. 812 (2005). Federal Arbitration Act § 5 provides that, “[i]f in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed…” Article V(1)(d) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (here) provides a defense to recognition and enforcement of an award where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties.” And courts will not hesitate to vacate domestic or non-domestic awards if arbitrator selection procedures were not followed. See, e.g., Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986).
The arbitrators in Stolt-Nielsen have effectively decided that, for the merits phase of a class arbitration, both parties must either: (a) appoint merchants, brokers or other individuals experienced in the shipping business as party-appointed arbitrators, who will, in turn, select an admiralty lawyer as a third arbitrator; or (b) appoint whomever they please as party-appointed arbitrators, who will, in turn, appoint whomever they please as the third arbitrator. But no matter what the arbitrators might have intended, results (a) and (b) are both in derogation of the unambiguous terms of one of the two form arbitration clauses.
The arbitrators have also effectively determined that the parties did not agree that they would have the benefit of selecting different arbitrators for each dispute that might arise under each individual arbitration agreement. As Chief Justice Rehnquist said in his dissent in Bazzle:
[P]etitioner had the contractual right to choose an arbitrator for each dispute with the other 3,734 individual class members, and this right was denied when the same arbitrator was foisted upon petitioner to resolve those claims as well. Petitioner may well have chosen different arbitrators for some or all of these other disputes; indeed, it would have been reasonable for petitioner to do so, in order to avoid concentrating all of the risk of substantial damages awards in the hands of a single arbitrator.
539 U.S. at 458-59.
In Bazzle the parties’ contract was, according to the plurality, ambiguous on whether class action arbitration was permitted in the first place, and if it were deemed by an arbitrator to permit class arbitration, then the clause, again according to the plurality, might reasonably be construed to waive the parties’ rights to select different arbitrators for some or all of its individual disputes with putative class members. But even assuming the plurality correctly decided this point, where, as in Stolt-Nielsen, the contract is silent on whether class arbitration is permitted, there is no basis to assume that the parties intended to sacrifice their freely-bargained rights to tailor their arbitrator selection to each specific dispute between the two parties arising out of or relating to the applicable charter party.
Since the express statutory provisions of the Federal Arbitration Act, and Article V of the Convention expressly contemplate that courts will safeguard the expectations of the parties with respect to arbitrator selection, in all likelihood the parties in Stolt-Nielsen assumed that a court – not an arbitrator – would decide any question that necessarily implicated whether or not the unambiguous terms of the parties’ agreement concerning arbitrator selection have been or will be followed.
c. The Federal Arbitration Act Authorizes Courts to Enforce Arbitration Agreements in the “Manner Provided for in the Agreement,” and the Question in Stolt-Nielsen Concerns Whether Each Arbitration Agreement Should be Enforced to Impose Class Arbitration When the Agreements are Silent on Class Arbitration.
Federal Arbitration Act Section 4, though a procedural statute technically applicable only in federal court, reflects an allocation of power between courts and arbitrators that is derived from the substantive enforceability command of Section 2 (which is applicable in both state and federal courts). See Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 447 (2006); Prima Paint v. Conklin Mfg. Corp., 388 U.S. 395, 403-04 (1967). Section 4 provides that “A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C § 4 (emphasis added). On hearing a motion to compel, the court must “make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement” if “the making of the agreement for arbitration or the failure to comply therewith is not in issue. . . .” Id. (emphasis added)
When an arbitration agreement is silent on whether the parties agreed to class arbitration and the resisting party does not arbitrate on a class action basis because it contends it never agreed to do so, a question arises whether there has been a failure, neglect or refusal to perform the arbitration agreement. Faced with that question, the court must resolve it and ensure that arbitration proceeds in the manner provided by the agreement and in accordance with its terms. That necessarily requires the court to determine whether the silence merely creates an ambiguity, which might be an appropriate subject for arbitration, or whether the silence manifests consent or a lack of consent to class arbitration.
In view of Section 4, the parties in Stolt-Nielsen would, at the time they entered into their contracts, in all likelihood have believed that a court would determine whether class arbitration should proceed in these circumstances. At the very least, they would have reasonably believed that the court would determine whether the silence gave rise to an ambiguity – a question of state contract law applicable by virtue of Federal Arbitration Act Section 2, and one which might be resolved by the arbitrators in appropriate circumstances – or whether silence impliedly authorized or prohibited arbitration, a question that implicates the purposes of the Federal Arbitration Act as well as applicable state law.
2. Courts are Better Equipped than Arbitrators to Decide the Class Arbitration Question.
Whatever the expectations of the parties may have been, courts are best suited to resolve the question presented by Stolt-Nielsen. In determining whether a matter is arbitrable, the law assumes “an expectation that aligns (1) decision maker with (2) comparative expertise. . . ,” because that “will help better to secure a fair and expeditious resolution of the underlying controversy – a goal of arbitration systems and judicial systems alike.” Howsam, 537 U.S. at 85.
The question in Stolt-Nielsen is one of enforcement. Congress has already decided that courts are better suited than arbitrators to resolve enforcement questions. The Federal Arbitration Act’s principal purpose is “not to resolve disputes in the quickest manner possible, no matter what the parties’ wishes, but to ensure that commercial arbitration agreements, like other contracts, are enforced according to their terms, and according to the intentions of the parties.” First Options, 514 U.S. at 947 (citations and quotations omitted). And the Act expressly provides that the court is charged with enforcement of the parties’ agreement. See Federal Arbitration Act, 9 U.S.C. §§ 3, 4, 5, 9, 10 & 11.
Courts also have more expertise than most arbitrators in deciding these questions, which we believe boil down to what the Federal Arbitration Act and generally applicable state contract law have to say about whether the parties can be deemed to have agreed to something when their contract is silent on the point. By contrast, in Bazzle, the question came down to what the contract had to say about class arbitration.
While we predict that at least five Justices will rule that the question in Stolt-Nielsen is one of arbitrability, predictions of how the Supreme Court will rule on controversial issues like this are always fraught with uncertainty. It is a close call and it will be interesting to see where each Justice comes out on this issue. In the meantime, Disputing and I would love to hear any comments readers have concerning it.
In part IVB we shall consider how the Court might decide the merits of Stolt-Nielsen under a de novo versus a Section 10 deferential standard of review, so stay tuned to Disputing. . . .
Philip J. Loree Jr. is a partner in the boutique law firm of Loree & Loree, which focuses its practice on reinsurance dispute resolution and commercial and industry arbitration. Prior to forming Loree & Loree, Mr. Loree was a partner in the Litigation Departments of Cadwalader, Wickersham & Taft LLP and Rosenman & Colin LLP. He was also a Shareholder in Stevens & Lee, P.C.’s Litigation Department.
Mr. Loree is also blogmaster of the Loree Reinsurance and Arbitration Law Forum, where he frequently comments on issues pertinent to reinsurance, and commercial and industry ADR. He is owner and co-founder (with Disputing’s Victoria VanBuren) of LinkedIn’s Commercial and Industry Arbitration and Mediation Group, which provides an open forum for the discussion of commercial, industry and consumer ADR.