Arbitral Determinations of Arbitrability

Courts continue to struggle with the question of how to allocate, between judges and arbitrators, power to decide questions of arbitrability (including the existence, vel non, of a valid agreement to arbitrate). The difficulty is acute in international arbitration cases where recognition and enforcement are sought under the New York Convention and its statutory implementing legislation in the U. S. , Chapter Two of the Federal Arbitration Act.
A recent case in point is Four Seasons Hotels and Resorts v. Consorcio Barr, S.A., 2009 U. S. Dist. LEXIS 39802 (S. D. Fla. May 12, 2009). In this case, the Court refused to confirm that portion of a final award, made by an ICDR tribunal sitting in Miami, that awarded $9 million of money damages, interest, and costs to Four Seasons Hotels. The Court found that the claim arose under a contract that did not contain an arbitration clause, rejecting the completely opposite conclusion that had been reached by the arbitral tribunal in a carefully reasoned section of its final award.
But the Court did not even pause to consider what effect, if any, it was required to give to the arbitrators’ decision on the arbitrability issue.
One might have expected the Court to begin (but it did not) with reference to the Supreme Court’s decision in First Options, Inc. v. Kaplan, 514 U. S. 938 (1995), where the Court held that if there is clear and unmistakable evidence that the parties agreed to arbitrate issues of arbitrability, then the arbitrators’ arbitrability decisions are entitled to the same high level of judicial deference that is normally accorded arbitral determinations of the merits. In those circumstances, “the court’s standard for reviewing the arbitrator’s decision about that matter should not differ from the standard courts apply when they review any other matter that the parties have agreed to arbitrate. ”
One would have further expected the Court to consider (but it did not) the First Options jurisprudence of the Eleventh Circuit federal appellate court, whose decisions were binding precedent for this federal district court in Miami. That Court’s decisions have held that there is indeed “clear and unmistakable evidence” of an agreement to arbitrate arbitrability when the parties in their contract adopt arbitration rules that give arbitrators power to rule on challenges to their own jurisdiction. (E.g., Terminix Intl Co. v. Palmer Ranch Limited Partnership, 432 F.3d 1327 (11th Cir. 2005). Here the parties had agreed, in one of the contracts involved in the case, to arbitrate under AAA/ICDR rules, and those rules of course do give arbitrators such powers.
Application of these principles to the facts of the Four Seasons case should have resulted in enforcement of the tribunal’s final award. The arbitration clause was found in a Hotel Management Agreement between Four Seasons and Consorcio. Certain claims in the arbitration arose directly under that Agreement. Initially that Agreement contained a provision concerning a credit facility made available to the hotel manager by Four Seasons. Later, that provision was superseded by a Loan Agreement that did not contain an arbitration clause.
Thus, the question of arbitrability addressed by the tribunal was not whether a valid agreement to arbitrate existed, but whether the Loan Agreement was (i) separate and independent from the Management Agreement, or (ii) in effect a modification of the Management Agreement, such that arbitration clause of the Management Agreement applied.
The arbitral tribunal adopted the latter construction. It seems quite remarkable that the district court judge would have simply rejected this conclusion and substituted a different view, as he did, without examining the scope of his power to do so.
This would seem to have been an instance where deference to the arbitrators’ arbitrability determination was in order: the arbitrability decision involved a factual determination of the relationship between a contract that clearly provided for arbitration, and another agreement that at least arguably was an amendment of the first one.
Perhaps this decision will be corrected on further appeal to the Eleventh Circuit. But final determnation is already long overdue — the tribunal having rendered its final award in March 2004. (The reasons for this delay apparently relate to prior US court proceedings concerning the effect, upon an earlier Partial Award in the case, of a Venezuelan court decision that purported to nullify that award).