Order, Supreme Court, New York County (Charles E. Ramos, J.), entered September 30, 2008, which denied plaintiff's motion to stay or enjoin arbitrations pending before the American Arbitration Association (AAA), affirmed, without costs.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Saxe, J.P., Buckley, McGuire, DeGrasse, Freedman, JJ.
The arbitration agreement at issue requires that "[a]ll disputes and differences arising under or in connection with this [contract]... be referred to arbitration under the American Arbitration Association Rules." The AAA rules authorize the arbitration tribunal to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement. Although the question of arbitrability is generally an issue for judicial determination, when the parties' agreement specifically incorporates by reference the AAA rules, which provide that "[t]he tribunal shall have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement," and employs language referring "all disputes" to arbitration, courts will "leave the question of arbitrability to the arbitrators" (see Matter of Smith Barney Shearson v Sacharow, 91 NY2d 39, 47  [internal quotation marks omitted]). Thus, the motion court was correct in finding that the scope and validity of the arbitration agreement, necessarily including issues of arbitrability, are for the arbitration tribunal to determine.
The stay and injunctive relief sought by plaintiff are not warranted by the inclusion in the arbitration agreement of a provision that gives the parties the right to challenge the arbitrators' determination on the ground that the panel made an error of law. Although the United States Supreme Court recently held that the Federal Arbitration Act does not permit parties to expand, by their own agreement, the scope of judicial review beyond that authorized by the Act (see Hall St. Assoc., L.L.C. v Mattel, Inc., __ US __, 128 S Ct 1396 ), this Court need not reach the issue of whether that portion of the parties' arbitration provision is severable from the remainder of the arbitration provision, since that issue is necessarily included among the arbitrability issues that the parties' agreement reflects would be decided by the arbitrators (see Contec Corp. v Remote Solution Co., Ltd., 398 F3d 205, 211 [2d Cir 2005]).
The policy of this State, like the federal policy discussed in Hall Street Associates, favors arbitration "with just the limited review needed to maintain arbitration's essential virtue of resolving disputes straightaway," and therefore seeks to avoid "the full-bore legal and evidentiary appeals that can render informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process... and bring arbitration theory to grief in post-arbitration process" (id. at 1405 [internal citations, quotation marks and brackets omitted]). "[T]his State favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties... Therefore New York courts interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration" (Smith Barney, 91 NY2d at 49-50 [internal citation and quotation marks omitted]). Permitting the arbitration to proceed at this juncture fully comports with that policy. All concur except McGuire, J. who concurs in a separate memorandum as follows: McGUIRE, J. (concurring)
The parties agree that their arbitration agreement is subject to the Federal Arbitration Act (FAA) (9 USC § 10[a]). The agreement provides in relevant part that "the parties shall each retain the rights to appeal errors of law to a court of law having jurisdiction in the matters addressed herein..." In Hall Street Assocs. v Mattel, Inc. (__ US __, 128 S Ct 1396 ), an arbitration agreement contained a similar provision, purporting to authorize judicial review of any erroneous conclusions of law by the arbitrator; and the Supreme Court held that the grounds for judicial review specified in the FAA cannot be supplemented by contract. Thus, Hall Street renders unenforceable the provision in the arbitration agreement providing for judicial review of errors of law by the arbitrator. The principal issue on this appeal is whether a court or the arbitration panel should decide if the arbitration agreement is invalid because of the unenforceability of the provision providing for judicial review of errors of law.
To resolve that issue, the principles set forth in First Options of Chicago, Inc. v Kaplan (514 US 938 ) should be reviewed. As the Supreme Court reiterated, "[w]hen deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally... should apply ordinary state-law principles that govern formation of contracts" (id. at 944). Here, as in First Options, "[t]he relevant state law... would require the court to see whether the parties objectively revealed an intent to submit the arbitrability issue to arbitration" (id.). The Court stressed, however, that "[c]courts should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so" (id. [brackets and internal quotation marks omitted]). As the Court explained, "[i]n this manner the law treats silence or ambiguity about the question who (primarily) should decide arbitrability' differently from the way it treats silence or ambiguity about the question whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement'" (id. at 944-945 [emphasis in original]).
Although a presumption in favor of arbitrability applies when the latter question is at issue, the Court provided two reasons supporting a presumption against arbitration when the former question is at issue. First, because the question of " who (primarily) should decide arbitrability'... is rather arcane," "[a] party often might not focus upon that question or upon the significance of having arbitrators decide the scope of their own powers" (id. at 945 [internal quotation marks omitted]). Second, "given the principle that a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration," courts are hesitant "to interpret silence or ambiguity on the who should decide arbitrability' point as giving the arbitrators that power" (id.). After all, so to interpret silence or ambiguity "might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide" (id.).
In this case, there is "clear and unmistakable" evidence that the parties' dispute about the validity of the arbitration agreement in light of the Supreme Court's decision in Hall Street is one they agreed to arbitrate. Putting aside the breadth of their agreement to arbitrate "[a]ll disputes and differences arising under or in connection with this Insurance" (even though the current dispute about the validity of the arbitration agreement is one that "arises" both "under" and "in connection with" the Contingent Cost Insurance contracts of which the arbitration agreement is a part), the parties also agreed in each of the four CCI contracts that all such disputes and differences would be referred to arbitration under the rules of the American Arbitration Association (AAA). Article 15.1 of the AAA rules specifies that "[t]he tribunal shall have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement."
Appellants, commercially sophisticated entities, do not claim they were unaware of the content of the AAA rules to which they expressly agreed to be bound. Thus, far from being silent or ambiguous about the question of who should decide arbitrability, the arbitration agreement provides objective and unequivocal proof that the parties did "focus upon that question [and] upon the significance of having arbitrators decide the scope of their own powers" (First Options, 514 US at 945, supra). Indeed, the Second Circuit has held that "when... parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties' intent to delegate such issues to an arbitrator" (Contec Corp. v Remote Solution, Co., Ltd. (398 F3d 205, 208 ). Thus, in Contec, where the arbitration agreement incorporated a rule identical in relevant part to article 15.1, the Second Circuit rejected the claim of Remote Solution, a signatory to the arbitration agreement, that it could not be compelled to arbitrate with a non-signatory, i.e., the corporate successor to the agreement's other signatory. Agreeing with the "virtually indistinguishable" (id. at 210) decision of the First Circuit in Apollo Computer, Inc. v Berg (886 F2d 469 ), the Second Circuit concluded that because Remote Solution "agreed to be bound by provisions that clearly and unmistakably allow the arbitrator to determine her own jurisdiction over an agreement to arbitrate whose continued existence and validity is being questioned, it is the province of the arbitrator to decide whether a valid arbitration agreement exists" (Contec, 398 F3d at 211 [internal quotation marks omitted]).*fn1
Relying principally on Cap Gemini Ernst & Young, US, LLC v Nackel (346 F3d 360 ) and Nichols v Washington Mut. Bank (2007 WL 4198252, 2007 US Dist LEXIS 85936 [ED NY 2007]), appellants advance a formidable argument in support of their position that judicial resolution of their challenge to the validity of the arbitration agreement is necessary. In Cap Gemini, the employment agreement between the parties contained an arbitration clause that broadly provided for arbitration of, inter alia, "[a]ny dispute, controversy or claim... arising out of [the] employment," and incorporated the "commercial arbitration rules then obtaining of the [AAA]" (346 F3d at 364 n3). It appears (id. at 364 n3, 366), and we are informed by appellants, that those rules included a provision identical in relevant part to article 15.1. The employee argued he could not be compelled to arbitrate his claims against Cap Gemini because the arbitration agreement was invalid as unconscionable under California law (id. at 364). Although the Second Circuit remanded to the District Court to determine, inter alia, whether New York or California law governed the validity of the arbitration agreement, the panel held that "before proceeding to determine the scope of the arbitration agreement, the court must first confirm that the agreement is valid and enforceable" (id. at 366; see also id. at 365 ["[i]t is clear that questions of contractual validity relating to the unconscionability of the underlying arbitration agreement must be resolved first, as a matter of state law, before compelling arbitration pursuant to the [Federal Arbitration Act, 9 USC § 16]"]).
In Nichols, the arbitration agreement was similarly broad -- it provided for arbitration of " [a]ny controversy or claim arising out of or relating to th[e] contract, or the breach thereof'" (2007 WL 4198252 at *6, 2007 US Dist LEXIS 85936 at *20)-- and it also incorporated an AAA rule identical in relevant part to article 15.1 (WL id. at *7, LEXIS id. at *22). Nichols, the party resisting arbitration, challenged the validity of the arbitration agreement on the ground that it was unconscionable under New York law (and on two other grounds that are noted below), and the District Court agreed that judicial resolution of her challenges was necessary. The court recognized that in Contec the Second Circuit "expressly found that an arbitration clause incorporating [a provision authorizing the arbitrator to rule on objections with respect to the existence, scope or validity of the arbitration agreement] sufficed to render the question of arbitrability itself arbitrable" (WL id., LEXIS id.). Nonetheless, citing Cap Gemini, the court broadly stated that when a party challenges "the existence or validity of the arbitration clause itself, courts must determine whether the arbitration clause exists, and whether it is valid" (WL id., LEXIS id. at *22-23). Cap Gemini does not purport to hold that all issues concerning the validity of an arbitration agreement are invariably for the courts. To the contrary, the Second Circuit limited its holding to validity questions "relating to the unconscionability of the underlying arbitration agreement" (346 F3d at 365). Moreover, a sweeping rule that all questions relating to the validity of an arbitration agreement must be resolved by the courts would entail a startling proposition: parties to an arbitration agreement lack the power (freedom of contract) to agree that any issues relating to the validity of the agreement should be submitted to arbitration. That this proposition is contrary to settled law is apparent when one considers a hypothetical arbitration agreement that both envisions the possibility the Supreme Court might rule as it did in Hall Street and expressly provides that in the event of such a holding the question of the ...