| Life Receivables Trust v Goshawk Syndicate 102 at Lloyd's |
| 2009 NY Slip Op 07322 [66 AD3d 495] |
| October 13, 2009 |
| Appellate Division, First Department |
| Life Receivables Trust, Appellant, v Goshawk Syndicate102 at Lloyd's, Respondent, and Life Settlement Corporation, Doing Business as Peach Tree LifeSettlements, Appellant. |
—[*1] Greenberg Traurig, LLP, New York (Jesus E. Cruz of counsel), for Life SettlementCorporation, appellant. Barger & Wolen LLP, New York (Evan L. Smoak of counsel), for respondent.
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 AmericanArbitration Association (AAA), affirmed, without costs.
The arbitration agreement at issue requires that "[a]ll disputes and differences arising underor in connection with this [contract] . . . be referred to arbitration under theAmerican Arbitration Association Rules." The AAA rules authorize the arbitration tribunal torule on its own jurisdiction, including objections with respect to the existence, scope or validityof the arbitration agreement. Although the question of arbitrability is generally an issue forjudicial determination, when the parties' agreement specifically incorporates by reference theAAA rules, which provide that "[t]he tribunal shall have the power to rule on its ownjurisdiction, including any objections with respect to the existence, scope or validity of thearbitration 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 vSacharow, 91 NY2d 39, 47 [1997] [internal quotation marks omitted]). Thus, the motioncourt was correct in finding that the scope and validity of the arbitration agreement, necessarilyincluding 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 thearbitration 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 StatesSupreme 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 (seeHall [*2]St. Assoc., L.L.C. v Mattel, Inc., 552 US 576, 128 SCt 1396 [2008]), 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 issueis necessarily included among the arbitrability issues that the parties' agreement reflects wouldbe decided by the arbitrators (see Contec Corp. v Remote Solution, Co., Ltd., 398 F3d205, 211 [2d Cir 2005]).
The policy of this State, like the federal policy discussed in Hall St. Assoc., favorsarbitration "with just the limited review needed to maintain arbitration's essential virtue ofresolving disputes straightaway," and therefore seeks to avoid "the full-bore legal andevidentiary appeals that can render informal arbitration merely a prelude to a more cumbersomeand time-consuming judicial review process . . . and bring arbitration theory togrief in post-arbitration process" (552 US at—, 128 S Ct at 1405 [citations, internalquotation marks and brackets omitted]). "[T]his State favors and encourages arbitration as ameans 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 ofconsenting parties to submit disputes to arbitration" (Smith Barney, 91 NY2d at 49-50[citation and internal quotation marks omitted]). Permitting the arbitration to proceed at thisjuncture fully comports with that policy. Concur—Saxe, J.P., Buckley, DeGrasse andFreedman, JJ.
McGuire, J., concurs in a separate memorandum as follows: The parties agree that theirarbitration 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 appealerrors of law to a court of law having jurisdiction in the matters addressed herein." In Hall St.Assoc., L.L.C. v Mattel, Inc. (552 US 576, 128 S Ct 1396 [2008]), an arbitration agreementcontained a similar provision, purporting to authorize judicial review of any erroneousconclusions of law by the arbitrator; and the Supreme Court held that the grounds for judicialreview specified in the FAA cannot be supplemented by contract. Thus, Hall St. Assoc.renders unenforceable the provision in the arbitration agreement providing for judicial review oferrors of law by the arbitrator. The principal issue on this appeal is whether a court or thearbitration panel should decide if the arbitration agreement is invalid because of theunenforceability 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. vKaplan (514 US 938 [1995]) should be reviewed. As the Supreme Court reiterated, "[w]hendeciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courtsgenerally . . . should apply ordinary state-law principles that govern the formationof 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 intentto submit the arbitrability issue to arbitration" (id.). The Court stressed, however, that"[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is clearand unmistakable evidence that they did so" (id. [brackets and internal quotation marksomitted]). As the Court explained, "[i]n this manner the law treats silence or ambiguity about thequestion 'who (primarily) should decide arbitrability' differently from the way it treatssilence or ambiguity about the question 'whether a particular merits-related dispute isarbitrable because it is within the scope of a valid arbitration agreement' " (id. at944-945).[*3]
Although a presumption in favor of arbitrability applieswhen the latter question is at issue, the Court provided two reasons supporting a presumptionagainst arbitration when the former question is at issue. First, because the question of " 'who(primarily) should decide arbitrability' . . . is rather arcane," "[a] party often mightnot focus upon that question or upon the significance of having arbitrators decide the scope oftheir own powers" (id. at 945 [internal quotation marks omitted]). Second, "given theprinciple that a party can be forced to arbitrate only those issues it specifically has agreed tosubmit to arbitration," courts are hesitant "to interpret silence or ambiguity on the 'who shoulddecide arbitrability' point as giving the arbitrators that power" (id.). After all, so tointerpret silence or ambiguity "might too often force unwilling parties to arbitrate a matter theyreasonably 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 thevalidity of the arbitration agreement in light of the Supreme Court's decision in Hall St.Assoc.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 thoughthe current dispute about the validity of the arbitration agreement is one that "arises" both"under" and "in connection with" the contingent cost insurance [CCI] contracts of which thearbitration agreement is a part), the parties also agreed in each of the four CCI contracts that allsuch disputes and differences would be referred to arbitration under the rules of the AmericanArbitration Association (AAA). Article 15.1 of the AAA International Arbitration Rulesspecifies that "[t]he tribunal shall have the power to rule on its own jurisdiction, including anyobjections with respect to the existence, scope or validity of the arbitration agreement."
Appellants, commercially sophisticated entities, do not claim they were unaware of thecontent of the AAA rules to which they expressly agreed to be bound. Thus, far from being silentor ambiguous about the question of who should decide arbitrability, the arbitration agreementprovides 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" (FirstOptions, 514 US at 945). Indeed, the Second Circuit has held that "when . . .parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, theincorporation serves as clear and unmistakable evidence of the parties' intent to delegate suchissues to an arbitrator" (Contec Corp. v Remote Solution, Co., Ltd. (398 F3d 205, 208[2005]). Thus, in Contec, where the arbitration agreement incorporated a rule identical inrelevant part to article 15.1, the Second Circuit rejected the claim of Remote Solution, asignatory to the arbitration agreement, that it could not be compelled to arbitrate with anonsignatory, 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 ApolloComputer, Inc. v Berg (886 F2d 469 [1989]), the Second Circuit concluded that becauseRemote Solution "agreed to be bound by provisions that clearly and unmistakably allow thearbitrator to determine her own jurisdiction over an agreement to arbitrate whose continuedexistence and validity is being questioned, it is the province of the arbitrator to decide whether avalid arbitration agreement exists" (Contec, 398 F3d at 211 [internal quotation marksomitted]).[FN1][*4]
Relying principally on Cap Gemini Ernst & Young,U.S., L.L.C. v Nackel (346 F3d 360 [2003]) and Nichols v Washington Mut. Bank(2007 WL 4198252, 2007 US Dist LEXIS 85936 [ED NY 2007]), appellants advance aformidable argument in support of their position that judicial resolution of their challenge to thevalidity of the arbitration agreement is necessary. In Cap Gemini, the employmentagreement between the parties contained an arbitration clause that broadly provided forarbitration 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 n 3). It appears (id. at 364 n 3, 366), and we are informed by appellants,that those rules included a provision identical in relevant part to article 15.1. The employeeargued he could not be compelled to arbitrate his claims against Cap Gemini because thearbitration agreement was invalid as unconscionable under California law (id. at 364).Although the Second Circuit remanded to the District Court to determine, inter alia, whetherNew York or California law governed the validity of the arbitration agreement, the panel heldthat "before proceeding to determine the scope of the arbitration agreement, the court must firstconfirm that the agreement is valid and enforceable" (id. at 366; see also id. at365 ["(i)t is clear that questions of contractual validity relating to the unconscionability of theunderlying arbitration agreement must be resolved first, as a matter of state law, beforecompelling arbitration pursuant to the (Federal Arbitration Act [9 USC § 16])"]).
In Nichols, the arbitration agreement was similarly broad—it provided forarbitration of " '[a]ny controversy or claim arising out of or relating to th[e] contract, or thebreach thereof' " (2007 WL 4198252, *6, 2007 US Dist LEXIS 85936, *20)—and it alsoincorporated an AAA rule identical in relevant part to article 15.1 (2007 WL 4198252, *7, 2007US Dist LEXIS 85936, *22). Nichols, the party resisting arbitration, challenged the validity ofthe arbitration agreement on the ground that it was unconscionable under New York law (and ontwo other grounds that are noted below), and the District Court agreed that judicial resolution ofher challenges was necessary. The court recognized that in Contec the Second Circuit"expressly found that an arbitration clause incorporating [a provision authorizing the arbitrator torule on objections with respect to the existence, scope or validity of the arbitration agreement]sufficed to render the question of arbitrability itself arbitrable" (2007 WL 4198252, *7, 2007 USDist LEXIS 85936, *22). Nonetheless, citing Cap Gemini, the court broadly stated thatwhen a party challenges "the existence or validity of the arbitration clause itself, courts mustdetermine whether the arbitration clause itself exists, and whether it is valid" (2007 WL4198252, *7, 2007 US Dist LEXIS 85936, *22-23).
Cap Gemini does not purport to hold that all issues concerning the validity of an[*5]arbitration agreement are invariably for the courts. To thecontrary, the Second Circuit limited its holding to validity questions "relating to theunconscionability of the underlying arbitration agreement" (346 F3d at 365). Moreover, asweeping rule that all questions relating to the validity of an arbitration agreement must beresolved by the courts would entail a startling proposition: parties to an arbitration agreementlack the power (freedom of contract) to agree that any issues relating to the validity of theagreement should be submitted to arbitration. That this proposition is contrary to settled law isapparent when one considers a hypothetical arbitration agreement that both envisions thepossibility the Supreme Court might rule as it did in Hall St. Assoc.and expresslyprovides that in the event of such a holding the question of the validity of the arbitrationagreement would be submitted to arbitration. Such an agreement surely would be enforceable,given that "it is settled that the validity of an arbitration agreement is to be determined by the lawapplicable to contracts generally" (Sablosky v Gordon Co., 73 NY2d 133, 137 [1989]),public policy strongly favors arbitration (Smith Barney, 91 NY2d at 49) and "New Yorkcourts interfere as little as possible with the freedom of consenting parties to submit disputes toarbitration" (id. at 49-50 [internal quotation marks omitted]).
In light of the holding in Hall St. Assoc., the conclusion that the issue of the validityof the arbitration agreement is one the parties agreed to arbitrate is not as indisputable in thiscase as it is in the hypothetical case. But it nonetheless is supported by clear and unmistakableevidence (Contec, 398 F3d at 208) and should be enforced. The effect of the agreementto arbitrate under the rules of the AAA was to adopt and incorporate article 15.1 into each of theCCI contracts (Matter of Level Export Corp. [Wolz, Aiken & Co.], 305 NY 82, 86[1953]). Under settled principles of contract law, the contract language stating that disputesabout the validity of the arbitration agreement are to be arbitrated cannot be disregarded(Bretton v Mutual of Omaha Ins. Co., 110 AD2d 46, 49 [1985], affd for reasonsstated 66 NY2d 1020 [1985] [stating that courts should not disregard provisions of contractthat are clear and unequivocal]). Rather, as appellants do not even claim that they failed to readarticle 15.1, they are conclusively bound by its terms (Arnav Indus., Inc. Retirement Trust vBrown, Raysman, Millstein, Felder & Steiner, 96 NY2d 300, 304 [2001] ["a party who signsa document is conclusively bound by its terms absent a valid excuse for having failed to readit"]).
On the other hand, not all questions relating to the validity of an arbitration agreement arefor the arbitrator when an arbitration agreement expressly provides for arbitration of questionsrelating to its validity. Rather, judicial resolution of some such questions is appropriate. If, forexample, a signatory to the agreement did not knowingly agree to arbitration at all (or toarbitration of disputes about its validity) as a result of fraudulent conduct by the other signatory,the assent necessary to enforcement of a contract would be lacking (Joseph Martin, Jr.,Delicatessen v Schumacher, 52 NY2d 105, 109 [1981] ["before one may secure redress inour courts because another has failed to honor a promise, it must appear that the promiseeassented to the obligation in question"]).[FN2]A claim that an arbitration agreement is unconscionable similarly [*6]calls into question the fundamental matter of its enforceability(Matter of State of New York v Avco Fin. Serv. of N.Y., 50 NY2d 383, 390 [1980][noting that claim of unconscionability of contract clause encompasses "deception. . . as to the clause's content or existence, or the presence of language difficultiesor illiteracy affecting its execution, or any other reasons that would have made it unlikelythat consent was freely and knowingly given"] [emphasis added and citations omitted]; see also King v Fox, 7 NY3d 181,191 [2006]).
To be sure, appellants contend that the arbitration agreement is entirely unenforceablebecause they would not have agreed to arbitration if they had known, as Hall St. Assoc.subsequently held, that the provision authorizing appeals of errors of law to a court of law wasinvalid. That contention, however, is inconsistent with the parties' agreement to arbitratequestions relating to the validity of the agreement. The parties did not agree to arbitrate onlymeritless challenges to the validity of the arbitration agreement. Rather, they clearlycontemplated the possibility that the arbitrators might determine to invalidate the arbitrationagreement. It makes no sense to suppose that the parties contemplated that such a determinationitself would be invalid.
It may be that appellants would not have agreed to arbitration if they had known the partiescould not obtain judicial review of errors of law. And it also may be that for this reason theycannot be compelled to arbitrate any substantive disputes with respondent. But it does not followthat the specific agreement to arbitrate disputes over the validity of the arbitration agreement isunenforceable. To the contrary, that agreement should be regarded as a distinct agreement that isenforceable unless a specific challenge to its validity is raised. Because appellants do notcontend that they did not freely and knowingly consent to arbitrate questions relating to thevalidity of the arbitration agreement, their challenge to the validity of the agreement is one forthe arbitrators to determine.
Appellants' additional arguments in support of a stay of the arbitration proceeding aresimilarly not subject to judicial review. Although respondent apparently commenced thearbitration prior to paying the claims in violation of the contract's "pay first"provision,[FN3]the [*7]effect of such a violation raises a question regardingarbitrability that, as discussed above, must be decided by the arbitrators. [See 2008 NYSlip Op 32626(U).]
Footnote 1: Similarly, in Matter ofSmith Barney Shearson v Sacharow (91 NY2d 39 [1997]) the arbitration agreementincorporated the rules of the NASD Code, including a provision that arbitrators are " 'empoweredto interpret and determine the applicability of all provisions under this Code and to takeappropriate action to obtain compliance with any ruling by the arbitrator(s)' " (id. at46-47). Although that provision is surely less unequivocal on the question of who should decidearbitrability than the AAA rule at issue in this case and in Contec, the Court of Appealsnoted with apparent approval that "[c]ourts have interpreted the incorporation of this provision inthe agreements of parties as a clear and unmistakable expression of their intent to leave thequestion of arbitrability to the arbitrators" (id. at 47 [internal quotation marks omitted]).
Footnote 2: Thus, in Nichols,Nichols also claimed that she was unaware of the arbitration clause in the contract and theDistrict Court reviewed (and rejected) that claim (2007 WL 4198252, *7, 2007 US Dist LEXIS85936, *24-25). The District Court also reviewed and rejected Nichols' claim that the arbitrationclause was invalid under General Business Law § 399-c, which prohibits mandatoryarbitration clauses in contracts for the sale or purchase of consumer goods (2007 WL 4198252,*9, 2007 US Dist LEXIS 85936, *29-30). We need not determine whether we agree that such achallenge to an arbitration agreement is one that courts must resolve when the parties agree toarbitrate questions relating to its validity.
Footnote 3: The contract provided thatindemnification from appellant Peachtree is respondent Lloyd's "sole and exclusive remedy" andthat "under no circumstances . . . shall [Lloyd's] be entitled to submit any dispute"regarding its obligation to pay a claim to arbitration "prior to payment of such claim."