An issue outside the scope of the arbitration clause? Handle with care!
One of the limited bases to object to an arbitration award, under the Federal Arbitration Act or any of the state arbitration laws, is that the arbitrator ruled on an issue outside the scope of the arbitration agreement. Another concept, supported by case law, is that parties may agree to arbitrate an issue even though that issue was not originally encompassed by an arbitration clause. The intersection of these two concepts raises strategic and legal decision points for parties and their counsel.
The agreement to submit an issue to arbitration (assuming for purposes of discussion that the issue was not originally within the scope of an arbitration clause) may occur explicitly or implicitly. Implicit agreements to proceed with arbitration of the questionably-arbitrable issue present an opportunity and a concern to parties. There is case law support for the premise that a party may agree to have the arbitrator rule on the issue of arbitrability. And this “agreement” may be explicit, or may be implicit. (As an aside, much has been written about whether the courts or the arbitrator are to decide arbitrability, and this entry does not delve into that point.)
What does this mean, in practice? Parties A and B have an arbitration clause that is tailored to a contract or dispute. Party B attempts to inject a claim or issue into the arbitration that Party A believes was not part of the original arbitration clause. If Party A says nothing at the time, it may have implicitly agreed to arbitration of that issue. If Party A files an objection with the arbitrator and asks the arbitrator to determine that the issue is outside the scope of arbitration, Party A may have inadvertently submitted itself to the outcome of the arbitrator’s decision on arbitrability. Thus, if Party A asks the arbitrator to rule that the issue is beyond the arbitrator’s jurisdiction, and the arbitrator rules otherwise, Party A has submitted an issue to arbitration and lost – at least on the issue of arbitrability. Courts will uphold an arbitrator’s decision on an issue that the parties submitted to the arbitrator.
Thus, a party confronted by a claim that it believes to be outside the scope of the arbitration – and assuming the arbitration clause is not clear that the arbitrator is to determine arbitrability in all events – must take steps to avoid having this claim submitted to arbitration either explicitly or implicitly. Instead, the party must advise the arbitrator, in effect: it is our position that the issue is outside the scope of the arbitration clause, and we do not even agree that you can rule on arbitrability. If the arbitrator accepts that position, the issue remains outside of arbitration. If the arbitrator does not, or disagrees, the party will have preserved its defense and its ability to argue down the road that the award must be vacated as being outside the scope of the arbitration clause.