When Parties Agree Only to a Narrow Agreement to AAA Arbitration, it is For the Court, Not to AAA, to Decide if a Claim is Arbitrable

On April 23, 2021, Justice Cohen of the New York County Commercial Division issued a decision in Metropolitan Transp. Auth. v. Westfield Fulton Ctr., LLC, 2021 NY Slip Op. 31367(U), holding that when parties agree only to a narrow agreement to AAA arbitration, it is for the court, not the AAA, to decide if a claim is arbitrable, explaining:

As an initial matter, the parties dispute whether this Court or the arbitrator should determine whether Westfield's claims are covered by the arbitration provisions of the Lease. The Court agrees with the MIA that this is a question for the Court.

Whether a dispute is arbitrable is generally an issue for the court to decide unless the parties clearly and unmistakably provide otherwise. Westfield contends that because the Lease adopts AAA rules governing arbitration, and because those rules provide that the arbitrator has the power to determine arbitrability, the parties clearly and unmistakably agreed that the arbitrator (not the Court) would decide whether Westfield's claims are subject to arbitration under the Lease.

As the First Department has observed, where there is a broad arbitration clause and the parties' agreement specifically incorporates by reference the AAA rules providing that the arbitration panel shall have the power to rule on its own jurisdiction, courts will leave the question of arbitrability to the arbitrators.

However, if the parties' agreement contains a narrow arbitration provision, the reference to the AAA rules does not constitute clear and unmistakable evidence that they have intended to have an arbitrator decide arbitrability. Thus, that question is for the court to decide in the first instance.

The rationale for this distinction is clear. When the parties include a broad arbitration provision covering all or substantially all disputes under the agreement, it is reasonable to conclude that they clearly and unmistakably agreed to refer disputes regarding the scope of the arbitration provision itself to the arbitrator as well. When the arbitration provision is more limited, as it was in Zachariou (where the arbitrator was limited to determining the amount of certain distributions), there is no such clarity as to whether the parties agreed to defer the question of arbitrability to the arbitrator. Thus, in such cases, the default rule controls (i.e., the Court decides).

Although the arbitration provisions in the Lease cover more territory than the provision at issue in Zachariou, they are nevertheless limited in scope. Most importantly, the default rule under Section 29 of the Lease is that "any case or controversy arising from, under or in connection with this Lease" are to be resolved exclusively in litigation unless the dispute is expressly directed to arbitration elsewhere in the agreement. Although there are several provisions in the Lease directing the parties to arbitrate specific substantive disputes, including Section 3.1 upon which Westfield relies, there are no provisions stating clearly and unmistakably that the question of arbitrability is to be decided by the arbitrator. Accordingly, the Court must decide whether the instant dispute comes within the scope of the arbitration provision contained in the Lease.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.