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Whether it’s an employment agreement, a partnership agreement or a non-disclosure agreement between the President of the United States and an adult film actress, parties frequently turn to arbitration as a cheaper, faster and more confidential way to resolve business disputes.  But in New York, parties seeking to avoid the courthouse steps may be in for a rude awakening when it comes to certain preliminary matters. While courts routinely enforce contractual arbitration provisions, especially when the contract is subject to the Federal Arbitration Act (“FAA”), the authority to decide certain conditions precedent to arbitration may lie with the court rather than the arbitrator.

The Federal Arbitration Act

The FAA embodies Congress’ intent that contractual arbitration provisions be enforced by the courts.  The FAA provides that:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.  (9 U.S.C.A. § 2) (emphasis added)

The United States Supreme Court has explained that the “basic purpose of the [FAA] is to overcome courts’ refusals to enforce agreements to arbitrate.”  Allied-Bruce Terminix Cos., Inc. v. Dobson, 115 S. Ct. 834, 838 (1995) (citation omitted).  The Supreme Court has liberally construed the term “involving commerce” as the “functional equivalent” of “affecting” commerce, which language “signals Congress’ intent to exercise its Commerce Clause powers to the full.”  Id. at 839 (citation omitted).  Accordingly, the Supreme Court has held that the FAA “encompasses a wider range of transactions than those actually ‘in commerce’ – that is, within the flow of interstate commerce.”  Citizens Bank v. Alafabco, Inc., 123 S. Ct. 2037, 2040 (2003) (quotation and citation omitted).  Indeed, the FAA applies even where there is no “specific effect upon interstate commerce if in the aggregate the economic activity in question would represent a general practice . . . subject to federal control.”  Id. (quotation and citation omitted).  See also Cusimano v. Schnurr, 26 N.Y.3d 391, 399 (2015) (same).    

When Does the Arbitrator Decide Conditions Precedent to Arbitration?

Even if the FAA applies, New York courts may retain jurisdiction to decide certain issues.  Under the FAA, “the presumption is that the arbitrator should decide allegations of waiver, delay or a like defense to arbitrability.”  In re. Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp., 4 N.Y.3d 247, 252 (2005) (quotation, citation and alterations omitted).  See also Wellstone Mills, LLC v. Dillon Yarn Corp., 63 A.D.3d 550, 551 (1st Dep’t 2009).  However, parties to an agreement that is subject to the FAA may elect to have the court, rather than the arbitrator, decide such issues by including a choice of law provision “providing that New York law will govern the agreement and its enforcement.”  Diamond Waterproofing, 4 N.Y.3d at 253 (emphasis added) (citation omitted).  See Volpe v. Interpublic Grp. of Cos., Inc., 118 A.D.3d 482 (1st Dep’t 2014) (waiver decided by court where choice of law provision called for New York law to govern the agreement and its enforcement).    

Including this “enforcement” language is critical.  In the absence of “critical language concerning enforcement” of the contract, the arbitrator decides all preliminary issues related to arbitration including waiver and statute of limitations defenses.  Diamond Waterproofing, 4 N.Y.3d at 253.  See also All Metro Health Care Servs., Inc. v. Edwards, 25 Misc.3d 863 (Sup. Ct. N.Y. Cnty. 2009) (waiver decided by arbitrator where choice of law provision called for New York law to govern the agreement but not its enforcement); In re Nokia Holding Inc., 9 Misc.3d 1103(A), at *3 (Sup. Ct. N.Y. Cnty. 2005) (arbitrator decided issue of timeliness where choice of law provision only provided that “the agreement shall be deemed to be made in and in all respects shall be interpreted, construed and governed by and in accordance with the law of the State of New York”); Penrod Mgmt Grp. v. Stewart’s Mobile Concepts, Ltd., No. 07 Civ. 10649, 2008 WL 463720 (S.D.N.Y. Feb. 19, 2008) (waiver decided by arbitrator where choice of law provision provided only that the agreement “shall be construed in accordance with New York law”).

While the magic word “enforcement” need not be used in a choice of law provision, there must be “critical language” that clearly expresses an intent to have the court, rather than the arbitrator, decide conditions precedent to arbitration.  See In re. ROM Reins. Mgmt. Co., Inc. v. Cont’l Ins. Co., Inc., 115 A.D.3d 480 (1st Dep’t 2014) (choice of law provision providing that the “arbitration laws of New York State” governed the agreement was sufficient evidence that the parties intended for the court to decide issues of timeliness).    

What about Waiver by Litigation Conduct?

To make matters more complicated, recent case law suggests that the court decides issues of waiver of the right to arbitrate by litigation conduct regardless of the language in a New York choice of law provision.  In Cusimano v. Schnurr, the Court of Appeals held that the FAA applied to the agreements at issue and proceeded to decide whether plaintiffs waived their right to arbitrate through their litigation conduct.  26 N.Y.3d 391 (2015). In so doing, the Court of Appeals noted:

Despite our previous statement, in dicta, that waiver is generally one of the issues that should be decided by the arbitrator (see [Diamond Waterproofing, 4 N.Y.3d at 252]), courts have held that whether a party has waived arbitration by litigation-related conduct is an issue for the courts. (see In re Pharmacy Benefit Mgrs. Antitrust Litig., 700 F3d 109, 118 [3d Cir 2012]; Joca-Roca Real Estate, LLC v Brennan, 772 F3d 945, 948 [1st Cir 2014]; Grigsby & Assoc., Inc. v M Sec. Inv., 664 F3d 1350, 1354 [11th Cir 2011]; see also Radil v National Union Fire Ins. Co. of Pittsburg, PA, 233 P3d 688, 694 [Colo 2010]; Perry Homes v Cull, 258 SW3d 580, 588 [Tex 2008]). 26 N.Y.3d at 401 n.3.

The Court of Appeals decision in Cusimano was also consistent with New York cases holding that the question of whether a party waived the right to arbitrate is decided by the court, not the arbitrator.  See, e.g., In re Gramercy Advisors LLC v. J.A. Green Dev. Corp., No. 650166/2014, 2015 WL 1623789, at *5 (Sup. Ct. N.Y. Cnty. Apr. 13, 2015) (“dicta in Diamond Waterproofing . . . did not change the long-standing rule under the FAA that the issue of waiver by litigation conduct is for the court”), aff’d 134 A.D.3d 652 (1st Dep’t 2015); In re Guttman v. Diamond, 42 Misc.3d 1221(A), at *3 (Sup. Ct. N.Y. Cnty. Feb. 5, 2014) (under FAA, “courts consider certain factors in determining whether the right to arbitrate has been waived”); 212 Inv. Corp. v. Kaplan, 6 Misc.3d 1031(A) (Sup. Ct. N.Y. Cnty. 2005) (court decided that there was no waiver of the right to arbitrate under an arbitration agreement governed by FAA).  

Does this mean that courts decide issues of waiver by litigation conduct even if the choice of law provision does not provide for New York law to govern enforcement of the agreement?  Maybe. Although the choice of law provisions in Cusimano did not contain the requisite “enforcement” language, (No. 652429/2011, NYSCEF No. 4-4 (“This Agreement shall be construed in accordance with and governed by the laws of the State of New York.”), the Court of Appeals never reached this issue because it was never raised before the motion court and thus was “unpreserved for appellate review.”  Cusimano v. Schnurr, 120 A.D.3d 142, 147 n.6 (1st Dep’t 2014).  Moreover, the precedential value of the Court of Appeals’ statement in a footnote that “courts have held that whether a party has waived arbitration by litigation-related conduct is an issue for the courts” remains to be seen.

Conclusion

Parties wishing to arbitrate should draft their choice of law provisions carefully to ensure that they clearly reflect their intent to have either the court or the arbitrator decide certain conditions precedent to arbitration.  However, even where a contract evinces a clear intent to have the arbitrator decide all issues, the court may nevertheless retain authority to decide whether a party waived its right to arbitrate through its litigation conduct.  

Jonathan M. Sabin is a litigation associate at Kane Kessler in New York City.