Don't Bet the Business

We are living and working in a time when even the courts tend to want parties to find different, non-judicial ways to settle their disputes. 

Arbitration is certainly not new, but it is finding a renewed appeal as a supposedly more efficient and less expensive dispute resolution tool.  Whether that is actually true is a topic for another day. Today, we touch on a seemingly obvious but surprisingly confusing question at times – what claims are actually subject to arbitration and who makes that call?

Arbitration is a creature of contract. Parties decide for themselves that, should a dispute arise, they choose to resolve that dispute through the arbitration process rather than in the courts. Of course, disputes are sometimes complex and whether they fit within the scope of the parties’ arbitration agreement is not always clear. So who decides - the judge or the arbitrator?

In Michigan, under the terms of the state’s version of the Uniform Arbitration Act, MCL 691.1681 et seq., it is generally the trial judge who decides “whether an agreement to arbitrate exists or a controversy is subject to an agreement to arbitrate.” MCL 691.1686(2). If there is a question over whether a dispute is subject to arbitration, a court will decide that issue, and the court will “order the parties to arbitrate unless it finds that there is no enforceable agreement.” MCL 691.1687(1)(b). See also, MCR 3.602(B)(2) (“On motion of a party showing an agreement to arbitrate and the opposing party's refusal to arbitrate, the court may order the parties to proceed with arbitration and to take other steps necessary to carry out the arbitration agreement.”).

After a matter has been referred to arbitration, it will be for the arbitrator to decide if a condition precedent to arbitrability exists and has been satisfied. Examples of such claims include a statute of limitations defense, a waiver of arbitration or any other contractual condition to enforcement of the arbitration agreement.  MCL 691.1686(3).

As with most things, there are exceptions to the rules. For example, the Legislature has provided that the parties to an arbitration agreement “may waive or... vary the effect of the requirements of this act to the extent permitted by law.” MCL 691.1684(1). The courts have interpreted this legislative right to include allowing the parties to alter §1686(2) by empowering the arbitrator to decide if an arbitration agreement exist and if a given dispute falls within the scope of that agreement. See, MCL 691.1684(2)(a) and (3). This is referred to as a “delegation provision.” 

A delegation provision will be enforced except on grounds found in contract law dealing with contract revocation. Because of this, the courts have required that delegation provisions be clear and unequivocal. In other words, the parties must unmistakably demonstrate their intention to have an arbitrator decide questions of arbitrability. Such intention can be express in the arbitration clause or agreement, or it can be shown through the incorporation of rules – such as the American Arbitration Rules – empowering an arbitrator to decide these threshold questions.

As with most things legal, arbitration agreements need to be carefully considered and drafted. Cutting and pasting from an internet search rarely will suffice. We can help.