A court’s jurisdiction is established by statute. It sets forth the limitiations and powers of
the court to decide cases that come before it. For example, small claims courts and district courts
have a dollar amount limits on judgments they can award. Similarly, the state Court of Claims
can only decide cases brought against the state. Determining whether a case fits within a court’s
particular jurisdiction, is decided by that court.
Arbitration is different. In arbitration, the arbitrator’s jurisdiction is established by the
parties’ arbitration agreement, not by statute. Determination of whether a particular dispute is
arbitrable – that is, within the arbitrator’s jurisdiction – was a question for the courts to decide.
Recently, New York’s highest court, the Court of Appeals, ruled that where empowered
by the parties, an arbitrator can decide questions of his or her own jurisdiction. The case is Life
Receivable Trust v. Goshawk Syndicate 102 at Lloyd’s.1
Life Trust owned a portfolio of life insurance policies. It purchased contingency cost
insurance from Goshawk as a hedge on payments that would have to be made on those policies.
Life Trust paid premiums for the contingency cost insurance to Goshawk, however, Goshawk did
not pay any claims. The contingency cost insurance agreements contained an arbitration
agreement. Goshawk commenced arbitration before the American Arbitration Association’s
International Center for Dispute Resolution. Life Trust, not wanting to arbitrate the dispute,
made a motion in court to stay the arbitration based upon arbitrability grounds.2
The lower court denied Life Trust’s motion, noting that the contingency cost insurance
agreements contained an arbitration provision indicating that “All disputes and differences arising
under or in connection with this Insurance shall be referred to arbitration under the American
Arbitration Association Rules.” The lower court further found that the arbitration provision was
plain and expansive and indicated that the parties agreed to arbitrate their disputes under the AAA
rules. Those rules, said the court, gave the arbitrator, not the court, the authority to decide the
“existence, scope, or validity” of the arbitration agreement.
Life Trust appealed the denial of its motion to stay the arbitration to the Appellate
Division (First Department). The appellate court upheld the lower court, by a 4 – 1 majority,
indicating that although questions of arbitrability are generally ruled upon by the court,
when the parties arbitration agreement specifically incorporates the AAA rules, which
give the arbitrator the power to rule on his or her own jurisdiction, including challenges
1
2008 WL 4461446 (N.Y. Sup.), affirmed, 66 A.D.3d 495, 888 N.Y.S.2d 458 (1st Dept. 2009),
affirmed, 14 N.Y.3d 850, 901 N.Y.S.2d 133 (2010).
2
Life Trust argued that the U.S. Supreme Court’s decision in Hall Street Assoc. LLC v. Mattel,
Inc., 128 US 1396 (2008), nullified the arbitration agreement with Goshawk because the arbitration
agreement expanded the scope of the court’s review beyond the grounds of review set forth in the Federal
Arbitration Act. Life Trust also argued that Goshawk’s obligation to pay claims was absolute and the
agreement precluded Goshawk from asserting any defense. Goshawk argued that the parties unequivocally
agreed that the arbitrators, and not the Court, would decide issues of arbitrability.
to the existence, scope or validity of the arbitration agreement itself3
and the agreement
uses expansive “all disputes” language, the courts will leave the question of arbitrability
to the arbitrator.
Life Trust appealed to the Court of Appeals, however that court agreed with the
lower courts.
What is the ramification of this on the construction community?
If you are using AIA forms of contracts, or contracts containing broad arbitration
clauses incorporating the AAA Construction Industry Arbitration Rules, what is or is not
arbitrable under the contract will be decided by the arbitrator, not by a court. Contractors
should therefore be mindful of any arbitration agreement in their contracts. They must be
alert, when it comes time to select an arbitrator. If the dispute involves questions
pertaining to whether or not a particular issue is subject to arbitration, additional
consideration should be given to select an arbitrator who has experience with arbitrability
questions. Merely selecting an arbitrator based upon his or her construction or design
background may put significant questions of whether an issue is arbitrabile in the hands
of someone without experience or knowledge of such jurisdictional matters. In such
situations the parties may want to have an attorney with construction law background as
their arbitrator.
This alert provides general information only. It is not intended to provide legal advice.
We encourage you to contact an attorney should you desire to discuss specific situations
for which you may need legal advice.
