Standardized clauses, privacy, speed, and expertise are great reasons to handle payment disputes without going to court. However, when lien and bond claims are involved, arbitration clauses can create a mess. But before discussing the merits of using arbitration in construction, it may be helpful to know just who determines if claims go to arbitration when there’s an objection. A recent Oregon case sheds some light on the subject.
Which Claims Go To Arbitration?
For obvious reasons, the arbitration clause itself is a pretty great indicator of which claims go to arbitration. But the buck doesn’t stop there. Generally speaking, if there’s a dispute as to whether a specific claim is arbitratable or not, the arbitrability will be determined by a court. However, depending on the language of the arbitration clause, and depending on the jurisdiction, the arbitrator may actually have the power to decide if the claim is bound to arbitration. A recent case, Portland General Electric Company v. Liberty Mutual Insurance Company, helped clear this up some. Remember, though, this will vary depending on your state and whether you’re in federal or state court.
For a great in-depth look on this subject, check out Deciding Who Decides Questions of Arbitrability from Quinn Emanuel.
For the sake of brevity, we won’t go too deep into the weeds regarding the facts of the case. What’s important is the court’s treatment of the arbitration clause anyway, not the claims themselves.
A contractor was hired on a project in Oregon. Pursuant to the contract, bonds were provided by the contractor. Also, the contractor’s parent company provided a guaranty to the owner. While the original contract between the owner and the contractor only passively mentioned arbitration, the guaranty between the parent company and the owner called for binding arbitration if disputes arose. Eventually…disputes arose. The owner filed suit while the parent company (along with the sureties and the contractor) called for arbitration.
The district court found that this decision (“Who determines which claims go to arbitration?”) should fall to the court. Naturally, the case was appealed. The Ninth Circuit Court of Appeals found that depending on the language of the arbitration agreement, the arbitrator may have the power to decide if they can hear the case.
First, the court noted that according to the Federal Arbitration Act, doubts should be settled in favor of arbitration. However, the court stated, whether there is a valid arbitration agreement, or whether a claim is arbitratable, typically goes to the courts. There is an exception, though, when this power is transferred to an arbitrator “clearly and unmistakably.”
The court found that the “clearly and unmistakably” standard is met when the rules of the ICC (International Chamber of Commerce) or AAA (American Arbitration Association) are incorporated by reference. This was the first time the Ninth Circuit had decided such a case, but the court looked to decisions from the First and Second Circuits for guidance. Those courts had previously determined that the AAA rules declared the arbitrator was entitled to determine whether arbitration was appropriate. While this case involved the ICC rules, the Ninth Circuit found the language between the AAA and ICC rules to be similar enough to warrant the decision.
If the phrase “by reference” sounds familiar, we just wrote about incorporating arbitration rules by reference days ago.
It seems a little awkward saying that “arbitrators can determine whether they have the power to arbitrate,” but this follows the same jurisdictional principle that courts follow. At the start of every case, a court will determine whether they have the power to hear and decide the case. However, considering the AAA rules were only incorporated by reference, it was a little odd to see the court give so much deference. Since the purpose of including an arbitration clause is to use arbitration (not the court system), it’s hard to question the court here.