I was intrigued by the standard set
out by the Supreme Court in First Options
of Chicago, Inc. v. Kaplan (514 US 938) regarding who determines whether
parties agreed to “arbitrate arbitrability” of a specific issue. The Court said
that unless the parties could provide “clear and unmistakable evidence” that
they intended for such a dispute to be arbitrated, the court, not the arbitrator,
would be the entity that decided the issue. Since “clear and unmistakable
evidence” is a fairly high standard, I decided to do some research and find
some examples of cases that would add clarity to the phrase.
The quote
from First Options has been cited in
hundreds of cases since its publication—with both positive and negative
treatment. After reading several of them, I found two opinions (though I am
sure there are many more) where lower courts took it upon themselves to further
clarify the standard from First Options.
In Waveland Capital Partners, LLC v. Tommerup (840 F.Supp.2d 1243),
the United States District Court of Montana determined that “[w]here a party
has notice of a specific claim, and agrees to submit all aspects of that
dispute to arbitration, yet does not reserve its right to challenge the
arbitrators’ jurisdiction, it has clearly and unmistakably agreed to arbitrate
the general arbitrability of the dispute” (1248-49). Though this is helpful
because it gives an example of what “clear and unmistakable evidence” could be,
the Waveland case is special because
the arbitration agreement was signed after the challenging party received
notice of the claim.
In P. McGregor Enterprises, Inc. v. Denman
Building Products, Ltd., the Court of Appeals of Texas (Amarillo) used the
phrase and the fact scenario of First
Options to suggest an example of “clear and unmistakable evidence”—the
filing of a written jurisdictional objection with the arbitrators and a
resassertion of that objection during the arbitration hearing. The Court of
Appeals contrasts the facts in First
Options with the circumstances in the case at bar—where an objection was
made during first during the arbitration hearing, and then in the
post-arbitration brief. The Court of Appeals felt that since the jurisdictional
objection (which included an objection that the parties had not signed a
written arbitration agreement) was not made from the first instance, and
appeared to be merely an afterthought, the evidence that the parties had not
agreed to arbitration regarding the arbitrability of the dispute was not “clear
and unmistakable” (723-24).
From these
two cases, I see a common thread—both courts decided that a party challenging
an arbitrator’s jurisdiction was an important component of the “clear and
unmistakable evidence” that had to be presented by the challenging party. By
not reserving the option to challenge jurisdiction, the challenging party in Waveland was found to have agreed to
arbitration of arbitrability. And by not challenging jurisdiction early enough,
the losing party in P. McGregor also
was found to have consented to the arbitrability of the arbitration clause
dispute. From the case law, though, it still seems as though the standard of “clear
and unmistakable” is developing, so I plan on keeping an eye out for any
further definitions!
I have already made this comment previously, but your additional research seems to confirm it. Even though we have heard so much about a policy favoring arbitration, when it comes to threshold questions of arbitratbility, the court can flex some discretionary muscle in determining the outcome.
ReplyDeleteThis is crucial because although arbitrability is more of a threshold procedural question, it ultimately decides where the challenge will be heard, which affects plaintiff's and defendant's right enormously.
The Waveland case presents an interesting fact scenario in that the arbitration agreement was signed after notice of the claim. This would seem like a rare occurrence. Who knows that there is going to be a dispute, signs an arbitration agreement, and then tries to get out of that agreement. I think that the court was correct in holding that the party agreed to arbitrate the dispute. This fact scenario seems unique enough that it would not create much of a precedent.
ReplyDeleteThe court is applying in Waveland basically the same rule it applies to personal jurisdiction: By not objecting early enough, you waive your right to raise it. Although this makes sense in the context of state or federal courts, does the same hold true in arbitration? In one sense, it makes sense that you subject yourself to arbitration because you don't immediately object to it. On the other hand, the fact that the contractual provisions may be complex means that perhaps one should have more time to determine the validity.
ReplyDeleteEither way, your discussion of "clear and unmistakable" was quite illuminating.
In Waveland Capital Partners, LLC v. Tommerup (840 F.Supp.2d 1243), the United States District Court of Montana determined that “[w]here a party has notice of a specific claim, and agrees to submit all aspects of that dispute to arbitration, yet does not reserve its right to challenge the arbitrators’ jurisdiction, it has clearly and unmistakably agreed to arbitrate the general arbitrability of the dispute” (1248-49).
ReplyDeleteThis kind of waiver would force lawyers to take greater responsibility for knowing the rules and standards for arbitration less their clients face the repercussions of an unintentional waiver of rights. However, I think this is not only harsh, but unfair. It doesn't seem very "clear and unmistakable." What if it was a genuine mistake? I'll have to take a closer look at that case, thanks!
Really nice post, Meera! Clear and mistakable evidence definitely seems to tug at the threads of the Form/Substance issue. Though the substance of an objection may be the same whether the party present it in a written, pre-hearing submission or casually while the hearing takes place, the formalities taken dictate the value of the objection. That's a bit discouraging, given that arbitration is generally aimed at being less formal and encouraging of party's airing grievances in hope of a joint solution... And it's ironic given that it some cases (I wrote about one on my blog) the court may protect a party's right to arbitration though the party violated the formal requirements for preservation of that party, as explicitly specified in the contract.
ReplyDeleteI would echo Jennifer in remarking on the substantial thought that needs to go into the preparation of an arbitration clause or reacting to one. While reading your post, I kept thinking to myself, would this vagueness have been prevented if the clause had been drawn up more clearly, specifically, and explicitly? At the same time, it doesn't exonerate attorneys who don't diligently research the potential ground lost if they don't respond correctly to a vague arbitration clause that would essentially result in their client's waiver.
ReplyDeleteOrdinarily courts give considerable deference to arbitration because of the "strong federal policy" favoring arbitration. For example, a party must meet a high standard to vacate an arbitration award. It's interesting how courts shift the burden of proof on the issue of arbitrability. On that question the burden of proof falls on the party favoring arbitration to show "clear and unmistakable" evidence that the parties intended for the panel to decide arbitrability.
ReplyDeleteOn one hand, it makes sense that the arbitrator shouldn't get to decide its own existential question. On the other hand, doesn't this cut against the strong federal policy, forcing parties into costly litigation over an ancillary issue?
Grant's comment makes sense to me. It seems obvious to us as law students who have recently taken Civil Procedure that if a party does not object early enough to a jurisdictional issue, that party loses that claim. However, I think it is important to remember that this is arbitration, it is created by contract, and thus we should not accept the same rules that Civil Procedure imposes without questioning them. In a contractual claim, you can amend your complaint to add new claims later so why shouldn't the parties be able to do the same when dealing with an arbitration clause in a contract? I can see where complications would arise if jurisdictional issues were presented very late in the process but I think we should continue to question aspects of arbitration that we would otherwise accept as the norm in litigation.
ReplyDeleteThis really seems to increase randomness in outcomes by reducing the amount of information parties have in making decisions early in the litigation process. If you make parties object to arbitration before they have a full understanding of the facts, it decreases their ability to act strategically in the best interest of their clients.
ReplyDeleteJust like the lack of a definition of "arbitration" the lack of a definition of "clear and unmistakable evidence" certainly proves troublesome. For instance, what about the party who, instead of fraud, argues incapacity to contract. What exactly would the party arguing on the other side in favor of arbitrator jurisdiction have to show to be "clear and unmistakable"? What type of evidence is unmistakable other than the evidence that you rarely get such as smoking gun type stuff?
ReplyDelete