Re-examining the presumption in favor of arbitration in complex commercial cases.

• Author: Hauser, Robert J.

One of the hornbook principles of contract litigation is the judicial presumption in favor of arbitrating disputes. Arbitration, courts tell us, is more expedient and economical than litigation in the courts. (1) As a result, courts indulge every reasonable presumption in favor of the arbitrability of a dispute. (2)

This article will discuss some of the ways that arbitration can be delayed or obstructed with litigation. It is the position of the authors that because of the possibility of litigation, arbitration of complex commercial disputes is often less efficient, less expedient, and more expensive than litigation in the courts. Arbitration was originally endorsed as a means of resolving labor disputes and thereby avoiding "industrial strife." (3) Today, it may be an unworthy and expensive substitute for a state or federal court in a complex commercial case. If so, the stated judicial preference for arbitration may no longer be appropriate in complex commercial cases.

Litigation Over the Scope and Meaning of the Arbitration Clause

If a party is willing to breach a contract, that same party may also dishonor its obligation to arbitrate, which arises out of the very same contract. As a result, a party seeking to enforce an arbitration agreement may be forced to file suit to enforce it in court, or seek to stay an existing, inappropriate lawsuit, in order to compel the arbitration process to begin. (4) Accordingly, although arbitration is intended to avoid litigation, it may actually create it.

Litigation to compel arbitration or to stay a lawsuit in favor of arbitration is supposed to be expedited. A mandatory, statutory directive exists for courts to "summarily" determine whether matters are subject to arbitration. (5) However, the prescribed litigation process is subject to the availability of scarce judicial resources. A commercial arbitration dispute is not more urgent than other pressing matters that confront courts, such as injunctions, criminal cases, child custody matters, and other emergencies. Accordingly, the litigation over the scope or applicability of an arbitration clause may take months or years, yet it is paradoxically undertaken in the name of avoiding the time and expense of commercial contract litigation.

Even if the matter is promptly resolved at the trial level, an appeal as of right now may be taken from any order compelling or denying arbitration

in a Florida state court. (6) An appeal from any order denying arbitration, or staying an arbitration, is also appealable as of right in federal court. (7) Depending on the forum, such an appeal is likely to consume months or years, during which time the parties will lack a final judicial determination of whether they are bound to arbitrate. (8)

Because arbitration is a creature of contract, a party resisting arbitration is entitled to raise defenses to arbitration under state contract law, including fraud, duress, illegality, waiver, (9) or unconscionability. (10) Disputes over the construction, meaning, and scope of the arbitration clause and/or the jurisdiction of the arbitrators are also possible. (11) Even though arbitration is held to be a favored means of dispute resolution, arbitration cannot be compelled if an objecting party has not agreed to arbitrate the dispute at hand. (12) Certain claims, including tort claims not directly arising out of the parties' agreement, may be deemed outside the scope of the arbitration clause. (13) An ambiguous arbitration clause is subject to judicial interpretation. Depending on the matters in dispute, a trial court may be required to hold an evidentiary hearing. (14) Evidence on the meaning or scope of the arbitration clause may be required. (15)

Litigation to enforce an arbitration clause, or to stay litigation pending arbitration, is distinct from litigation on the merits of the underlying dispute. The issues in such litigation are solely whether the parties entered into a written agreement to arbitrate, whether an arbitrable issue exists, and whether arbitration has been waived. (16) Accordingly, the time, legal fees, and judicial labor expended to resolve the arbitration question do not help resolve the underlying dispute.

In 1999, the Florida Supreme Court arguably narrowed Florida's judicial presumption of arbitration in tort cases. In Seifert v. U.S. Home, 750 So. 2d 633 (Fla. 1999), the Supreme Court limited the types of claims, particularly tort claims, that are deemed to fall under the aegis of a contract's arbitration clause. (17) In order to be arbitrable, a "significant relationship" must exist between the claim and the agreement containing the arbitration clause. (18) It was not sufficient that the contractual relationship between the parties (there, the construction of a home) was the reason that the tort claim arose. (19)

The effect of Seifert, unfortunately, has been to further muddy the waters: Litigants seeking to avoid arbitration in business cases may now argue that the business torts sought to be arbitrated are not directly related to the performance or construction of the agreement in question. Not surprisingly, after Seifert, certain tort claims have been held on appeal to be outside of an arbitration clause. (20)

Also in 1999, the American Arbitration Association (AAA) attempted to curtail preliminary litigation in commercial cases by enacting

Commercial Arbitration Rule R-7. (21) Under Rule R-7, arbitrator(s) are charged with the task of determining the scope of their own jurisdiction. However, this rule unwittingly created even more questions to litigate:

* Absent a court order compelling arbitration, how can a litigant be compelled to submit to the AAA rules in the first instance?

* Does Rule R-7 trump the general rule that the courts, not the arbitrators, determine the scope of arbitrability? Courts require "clear and unmistakable" evidence of intent to permit arbitrators to rule on arbitrability. (22)

* What if the arbitration contract was drafted before Rule R-7 existed? Can it still be said with certainty that the parties intended for the

arbitrators to determine arbitrability?

* Can the courts review the arbitrators' determination of arbitrability? When? What is the standard of review? (23)

* What if a party has potentially waived arbitration through words or actions? Can arbitrators resolve the waiver issue under Rule R-7?

* What if the arbitrators truly have no jurisdiction, but conclude to the contrary? Does their determination create jurisdiction which does not otherwise exist?

In Brandon Jones v. MedPartners, 203 F.R.D. 677 (S.D. Fla. 2001), Commercial Arbitration Rule R-7 was enforced by a U.S. district court, even though it did not exist at the time the arbitration agreement was forged, and, therefore, was not part of the original agreement to arbitrate. (24) The court reasoned that under AAA Commercial Arbitration Rule R-1, the AAA's Commercial Arbitration Rules, and any subsequent amendments thereof, were incorporated into the arbitration agreement at the time the arbitration demand was made to commence the proceedings. (25) The Brandon Jones decision to compel arbitration was affirmed, but the 11th Circuit did not reach the issue of whether Rule R-7 was enforceable or applicable to the question. (26) Five years later, in Terminix International v. Palmer Ranch Ltd. Partnership, 432 F.3d 1327 (11th Cir. 2005), the 11th Circuit explicitly held that AAA Rule R-7, as incorporated into the parties' agreement by the AAA Commercial Arbitration Rules, granted jurisdiction to the arbitrators to decide questions of arbitrability. (27)

In Brandon Jones, two years of trial and appellate litigation preceded the district court's order compelling arbitration on the merits. (28) In Terminix, arbitration was finally compelled by the 11th Circuit 21 months after the complaint was filed. (29) As a practical matter, the goal of the arbitration statutes and public policies favoring arbitration failed in both cases: Neither resulted in a quick or efficient result for the litigants.

Additional Possibilities for Litigation

Arbitration may fail to prevent litigation where nonparties to the arbitration clause are involved in the dispute. Some appellate decisions have held that nonparties, including shareholders and parent corporations, are not bound by an agreement to arbitrate. (30) Other cases, however, hold that nonparties, such as agents, shareholders, and parent corporations, can invoke an arbitration clause or be ordered to arbitration if sued in their capacity as agents of party to arbitration agreement, or where the same set of operative facts involves parent corporations, employees, or and shareholders. (31) Third-party beneficiaries of a contract may also be bound to arbitration. (32) These initial issues are ripe for collateral litigation and appeals.

Even after the arbitration process begins, disruptive litigation is possible. In Hospitality Ventures v. American Arbitration Association, 755 So. 2d 159 (Fla. 4th DCA 2000), the plaintiff sued the AAA in court and obtained an ex parte final judgment and injunction by default, prohibiting arbitration. Seven months later, the Fourth District Court of Appeal held that the judgment and injunction were erroneous because "[the plaintiff's opponent in arbitration] was obviously an indispensable party to this lawsuit ... No judgment could be entered without affecting its interest." (33)

In Brandon Jones, the respondents in a Florida arbitration contended that the arbitrators were wrongfully considering an amended arbitration claim. (34) The respondents sued the AAA in Alabama to enjoin the arbitration. (35) They also sued the Florida claimants in Alabama for fraud and breach of contract, arising out of the same issues that were the subject of the arbitration. (36) Two years later, the cases were transferred to Florida by the 11th Circuit Court of Appeals. (37) The lawsuits were eventually dismissed, (38) but only...