Buyer Beware: Should Delegating Arbitrability to an Arbitrator Require Disclosure and Parties’ Consent?

Photo by Cytonn Photography on Unsplash

Nathaniel Kinman, Associate Member, University of Cincinnati Law Review

I. Introduction

For good reason, millions of business contracts submit to arbitration as a means to resolve disputes extrajudicially.[1] Indeed, thoughtful construction of an arbitration clause can provide parties with procedural certainty when disputes arise, often expediting resolution through an established, streamlined process.[2] With arbitration mirroring the growth of commercial transactions,[3] a large number of parties commonly assent to the arbitration procedures provided by the American Arbitration Association (AAA).[4]

The AAA is a not-for-profit, public service corporation that, in relevant part, provides standardized procedures designed to structure conflict management between contracting parties.[5] If a contract explicitly dictates that arbitration is to be conducted according to the AAA Rules, a dispute arising out of the contract can trigger the arbitration process, even enabling the chosen arbitrator (not the court) to decide whether an issue is in fact arbitrable.[6] Importantly, although arbitration is generally regarded as an economical alternative to litigation in a courtroom, neutral arbitrators are nonetheless compensated for their services.[7]

While arbitration expedites resolution in a cost-effective manner under certain circumstances,[8] its utility becomes unclear when parties fail to contemplate threshold issues such as who decides whether the subject matter of the dispute is arbitrable. Although courts have acquiesced to the AAA Rules when the parties explicitly agree to AAA procedures,[9] contracting parties and courts alike have under-analyzed the inherent conflict presented when an arbitrator is delegated to determine the arbitrability of an issue.[10] Specifically, because an arbitrator has the authority to decide whether an issue proceeds to arbitration, her level of compensation is directly implicated by that determination. The question becomes whether the arbitrator remains a neutral third-party unencumbered by a financial interest in the outcome.

Accordingly, this article first reviews how courts examine the question of who determines arbitrability when parties disagree about an arbitration provision. Next, this article details arbitrators’ roles in dispute resolution and discusses the relevant ethical standards implicated by their position. Part III then argues that arbitrators determining whether an issue is arbitrable should disclose that their compensation is affected by their decision and that a party should therefore be permitted to submit such questions to the court as an alternative, irrespective of the arbitration agreement. Finally, this article summarizes the conflict presented when parties designate an arbitrator to decide arbitrability and suggests parties should be aware of the implications moving forward.

II. Background

With commercial arbitration taking various forms, it is unsurprising that courts have grappled with how to evaluate an arbitrator’s decision on whether parties approved arbitrating a specific issue. The Supreme Court has nonetheless provided ample guidance, with lower courts settling on congruent issues relating to the construction of arbitration provisions referencing the AAA Rules. As a preview to the issue, this section first details decisions that identify how courts generally treat agreements to arbitrate, while similarly providing context to the role of an arbitrator. Next, this section recognizes the role of an arbitrator and the ethical standards governing neutrality.  

A. Courts’ Guidance

Courts must defer to an arbitrator’s conclusion on the arbitrability of an issue if the parties agreed to submit that authority to an arbitrator.[11] In First Options, the Supreme Court considered who should have the ability to determine whether the parties agreed to arbitrate a specific issue.[12] In short, the Court decided whether an arbitrator or a court should be granted the primary power to determine arbitrability when one party resists arbitration.[13] The Court  reasoned “that arbitration is simply a matter of contract between the parties.”[14] Consequently, the question of who decides arbitrability (the court or the arbitrator) turns on the obligations of the contract, whether the parties agreed that an arbitrator should decide arbitrability. [15]

However, the question of who decides arbitrability is only one half of the equation.[16] The other half, how a court determines whether two parties agreed to arbitrate arbitrability, hinges on contract formation, particularly, clear and unmistakable evidence that the parties intended to submit arbitrability questions to an arbitrator.[17] Additionally, the Court noted that apprehension regarding the scope of arbitrability should err in favor of arbitration.[18]

But what constitutes clear and unmistakable evidence? When considering that narrow question, the Sixth Circuit noted that incorporation of the AAA Rules into the contract constituted clear and unmistakable evidence of parties’ intent to designate questions of arbitrability to an arbitrator in eleven out of the twelve circuits.[19] Consequently, the Sixth Circuit concluded that an arbitration provision dictating arbitration in accordance with the AAA Rules provided the court with clear and unmistakable evidence of the parties’ intent to submit arbitrability questions to an arbitrator, not a court.[20]

For context, the AAA Rules permit and arbitrator to rule on her own jurisdiction.[21] Likewise, the AAA Rules give an arbitrator the authority to rule on any objection to the validity of an arbitration agreement as well as the arbitrability of any claim brought under the auspices of such agreement.[22] Additionally, even if an arbitrator determines that an entire contract is null and void, nullity on its own is not enough to invalidate an otherwise enforceable arbitration clause.[23]

Importantly, arbitrators are not judges despite having to decide congruently complex legal issues.[24] Where the judicial process relies on procedural continuity of judges, arbitrators are generally appointed either by the parties themselves or by some arbitral institution such as the AAA to govern a single dispute.[25] Further, unlike the judiciary, arbitrating parties seek a less formal dispute resolution process that is not designed to wholly separate arbitrators from the industry where they serve as arbitrators.[26] Indeed, an arbitrator’s association with an industry in which she serves sometimes proves vital in managing the dispute effectively.[27] However, when an arbitrator takes on the decision making role, there are a plethora of rules governing her neutrality throughout the arbitration process.

B. Arbitrators’ Ethical Considerations

Standards influencing an arbitrator’s conduct are numerous and varied across jurisdictions, often dictated by a party’s agreement, applicable ethics rules, and local law.[28] Consequently, arbitrators must be diligent about familiarizing themselves with the standards governed by their respective arbitral associations as well as the requisite arbitration agreement to discern the scope of permissive conduct.[29] Given that numerous circumstances might affect a particular arbitration, the following only identifies relevant standards under the AAA, although such standards are not exclusive.

Importantly, CANON II calls on arbitrators to disclose any interest that might affect an arbitrator’s impartiality or create the appearance of partiality.[30] Specifically, the AAA requires disclosure of “any known direct or indirect financial or personal interest in the outcome of arbitration.”[31] Further, the obligation to make such disclosures is ongoing, and doubts concerning whether to disclose any interests should be resolved in favor of disclosure.[32] While an arbitrator’s personal or financial interest in the outcome does not necessarily preclude her from arbitrating the dispute, such interests must be disclosed to the parties involved, giving them an opportunity to consent to or decline the arbitrator’s continued services.[33]

III. Discussion

While there is considerable diversity of opinions relating to what an arbitrator must disclose in order to remain impartial,[34] guidance from the Supreme Court and the framework of ethical principles from the AAA establishes a sufficient basis to require that arbitrators disclose the conflict that arises when deciding questions of arbitrability. Further, parties, unliterally or otherwise, should be given the authority to submit arbitrability to a court when an arbitration agreement merely references administration according to the AAA.

In the alternative, parties contracting out dispute resolution should be mindful that when arbitrators decide issues of arbitrability, their impartiality might be implicated because such a decision directly impacts their level of compensation for services. Nevertheless, because of the inherent conflict involved with assigning arbitrability to an arbitrator and the fact arbitrability calls for legal questions relating to principles of contract formation, a party should be able to unilaterally submit such questions to the court when arbitrability is in dispute.

The Supreme Court has recognized the significant issue of delegating arbitrability questions to an arbitrator.[35] As the Court noted, parties likely give consideration to the breadth of arbitration with respect to which issues they want to arbitrate.[36] However, those same parties may not have fully contemplated the significance of giving arbitrators the capacity to “decide the scope of their own powers.”[37] In its recognition, the Court discerned that interpreting silence or ambiguity as definitive of intent to submit arbitrability questions to an arbitrator might force reluctant parties to arbitrate a dispute they would have reasonably expected a court to decide.[38]

It’s likely the Court understood the conflict and wanted to ensure that parties fully assessed the consequences prior to a dispute arising.[39] Because an arbitrator’s neutrality might be compromised when given the ability to decide the scope of her own authority, the Court indicates that mutual consent should be the primary determination of parties’ intent to entrust an arbitrator with that level of control over the process.[40]

To be sure, the foundational principle derived from Supreme Court decisions is that “[a]rbitration is strictly a matter of consent.”[41] Consent is integral because arbitrators may only exercise the authority they are given by the parties.[42] Consequently, when a party has not fully contemplated the ramifications of designating arbitrability questions to an arbitrator, that authority has not been wholly conveyed.

Realistically, it is unlikely that mere reference to an arbitration’s administration according to the AAA provides parties with the necessary information needed to inform adequate consent. It is true that even if a party lacks legal sophistication, obtaining advice from an attorney prior to signing a contract with an arbitration provision sufficiently notifies an individual of the meaning and effect of the AAA Rules if included therein.[43] However, retaining such advice does not obviate the need for an arbitrator to disclose the inherent conflict that arises when given the authority to determine the scope of her powers and degree of compensation.

Indeed, the AAA calls on arbitrators to disclose any interest likely to affect impartiality, including personal and financial interest in the arbitration’s outcome.[44] Further, if an arbitrator has any doubts about whether to disclose a potential conflict, she should favor disclosure.[45] Per the AAA’s instruction, parties should be entitled to know that a financial interest is implicated when arbitrators decide whether or not to proceed through the arbitration process. Of course, when parties have fully contemplated the consequences of submitting such authority to the arbitrator, disclosure might not be necessary. However, as the Supreme Court noted, it’s unlikely that parties give thoughtful consideration to having an arbitrator determine the scope of her powers.[46]

Accordingly, the equitable solution is that arbitrators should have to disclose that they have a financial interest in continuing arbitration when they have been assigned arbitrability questions. It should then be up to the parties to decide whether to enable an arbitrator or the court to decide the arbitrability issue. Such a proposal is entirely consistent with the ethical guidance provided by the AAA.[47] Thus, even where a conflict exists with an arbitrator’s continued services, the parties’ informed consent following full disclosure does not render the arbitrator’s service unethical.[48]

Notwithstanding any ethical implications, questions of arbitrability are likely best left to the decision making of the courts. Of course, arbitrators are not judges despite having to grapple with complex legal issues.[49] Arbitrators are often purposely selected from a trade or industry in order to bring a degree of expertise to their services as arbitrators,[50] and their utility in circumstances navigating trade customs to resolve a dispute is not in question. However, given that arbitrability turns on whether parties contractually agreed to submit a particular issue to the arbitration process,[51] familiarity with the industry seems significantly less important than a deeply entrenched knowledge of contract formation. Accordingly, a judge’s skillset under such circumstances likely provides the most fair outcome when an arbitrability dispute arises.

While parties have the capacity to fully contemplate whether they want to submit questions of arbitrability to an arbitrator, merely referencing administration according to the AAA Rules may not provide a sufficient basis to determine they did so informedly. Consequently, forcing the two parties to arbitrate an issue they reasonably thought a court would decide might lead to adverse outcomes for those involved in commercial transaction. Although arbitration is proven to expedite resolution in an efficient, cost-effective manner under certain circumstances, it should not be compelled absent informed consent.

IV. Conclusion

When parties understand the potential consequences of arbitrating arbitrability and nonetheless agree that arbitration is the best route to resolve a dispute, courts should not interfere. However, given that parties often do not often assess the full effect of having arbitrators determine the scope of their powers or recognize that arbitrators have a financial interest in continuing arbitration, the power to decide arbitrability should be delegated by the parties themselves, only after being fully informed of the risks and rewards. Moreover, a party should have the ability to stay arbitration and submit arbitrability to a court if it has a reasonable basis for questioning the impartiality of an arbitrator.

In the absence of judicial direction or ethical guidance on whether the foregoing conflicts need to be disclosed by arbitrators, parties should take it upon themselves to retain counsel that effectively communicates meaning of the AAA Rules. Otherwise, a frustrated party might very well find itself compelled to arbitration despite its desire to have a particular issue resolved according to the expertise of a court.

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[1]American Arbitration Association, Drafting Dispute Resolution Clauses – A Practical Guide 5 (2013), https://www.adr.org/sites/default/files/document_repository/Drafting%20Dispute%20Resolution%20Clauses%20A%20Practical%20Guide.pdf [hereinafter AAA Drafting]. “Arbitration is a private, informal process by which all parties agree, in writing, to submit their disputes to one or more impartial persons authorized to resolve the controversy by rendering a final and binding decision called an Award.” Id. at 8.

[2] Id. at 3, 9.

[3]See Henry Gabriel & Anjanette H. Raymond, Ethics for Commercial Arbitrators: Basic Principles and Emerging Standards, 5 WYO. L. Rev. 453 (2005).

[4] See AAA Drafting, supra note 1, at 3.

[5] Id.

[6] See American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures R-7 (2016), https://adr.org/sites/default/files/Commercial%20Rules.pdf [hereinafter AAA Rules]; see also Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 844 (6th Cir. 2020) (parties may agree to submit the question of arbitrability to an arbitrator) (citing Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 529 (2019)

[7]See AAA Rules, supra note 6, at R-55.

[8] See Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1416 (2019) (“[P]arties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes”)(quoting Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 685 (2010))(internal quotation omitted).

[9] See Schein, 139 S. Ct. at 531.

[10] Jennifer Schulz, Arbitrating Arbitrability: How the U.S. Supreme Court Empowered the Arbitrator at the Expense of the Judge and the Average Joe, 44 Loy. L.A. L. Rev. 1269, 1270 (2011) (citing Richard C. Reuben, First Options, Consent to Arbitration, and the Demise of Separability: Restoring Access to Justice for Contracts with Arbitration Provisions, 56 SMU L. Rev. 819, 828 (2003)).

[11] First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995).

[12] Id. at 942.

[13] Id.

[14] Id. at 943.

[15] Id. at 944.

[16] Id.

[17] Id. (citing AT&T Techs. v. Communs. Workers of Am., 475 U.S. 643, 649 (1986); United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 592 n.7 (1960)).

[18] Id. (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 626 (1985)).

[19] Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 846 (6th Cir. 2020) (citation omitted).

[20] Id. at 851.

[21] See AAA Rules, supra note 6, at R-7(a).

[22] Id.

[23] Id. at R-7(b).

[24] Gabriel, supra note 3, at 453.

[25] See id. at 454 (citation omitted).

[26] Id. (citing Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 148-49 (1968)).

[27] Id. at 455.

[28] American Arbitration Association, The Code of Ethics for Arbitrators in Commercial Disputes (2004), Notes on Construction, https://www.adr.org/sites/default/files/document_repository/Commercial_Code_of_Ethics_for_Arbitrators_2010_10_14.pdf [hereinafter AAA Code of Ethics].

[29] David Allen Larson, Conflicts of Interest and Disclosures: Are We Making a Mountain out of a Molehill, 49 S. Tex. L. Rev. 879, 919 (2008).

[30] See AAA Code of Conduct, supra note 27, at CANON II.

[31] Id. at CANON II A(1).

[32] Id. at CANON II C, D.

[33] Id. at CANON I C.

[34] Larson, supra note 29 at 918.

[35] First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945 (1995).

[36] Id. (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 626 (1985)).

[37] Id. (citing United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 583 n.7 (1960)).

[38] Id. (citing Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 219-220 (1985)).

[39] See id.

[40] See id.

[41] Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1415 (2019) (quoting Granite Rock Co. v. Teamsters, 561 U. S. 287, 299 (2010))(internal quotation omitted).

[42] Id at 1416.

[43]Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 851 (6th Cir. 2020).

[44] See AAA Code of Conduct, supra note 28, at CANON II A.

[45] Id. at CANON II C.

[46] First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945 (1995) (citing United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 583 n.7 (1960)).

[47] See AAA Code of Conduct, supra note 27, at CANON I C.

[48] See id.

[49] See Gabriel, supra note 3, at 453,

[50] See AAA Code of Conduct, supra note 28, Preamble.

[51] Schulz, supra note 10, at 1270 (citing Richard C. Reuben, First Options, Consent to Arbitration, and the Demise of Separability: Restoring Access to Justice for Contracts with Arbitration Provisions, 56 SMU L. Rev. 819, 828 (2003)).