{"id":898020,"date":"2020-09-30T12:17:38","date_gmt":"2020-09-30T18:17:38","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=898020"},"modified":"2020-09-30T12:17:42","modified_gmt":"2020-09-30T18:17:42","slug":"arbitration-who-decides","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/arbitration-who-decides\/","title":{"rendered":"Who Decides Who Decides? The Third Circuit Addresses the \u201cQueen of All Threshold Issues\u201d in Arbitration Law"},"content":{"rendered":"\n

Thomas F. Howley and Robert T. Szyba | Seyfarth Shaw<\/a><\/p>\n\n\n\n

Who decides the case: a court or an arbitrator?\u00a0 It\u2019s a simple question at the core of any arbitration dispute<\/a>.\u00a0 Then there\u2019s the question of who decides who decides the case?\u00a0 Typically, the parties decide\u2014they can decide to let an arbitrator decide the case (rather than a court) by entering into a binding arbitration agreement.\u00a0 In a recent case, the U.S. Court of Appeals for the Third Circuit took these seemingly simple questions one level deeper.<\/p>\n\n\n\n

In\u00a0MZM Constr. Co. v. N.J. Bldg. Laborers Statewide Benefit Funds, the Court addressed what it called a \u201cmind-bending question\u201d and the \u201cqueen of all threshold issues\u201d in arbitration law: \u201cWho decides\u2014a court or an arbitrator\u2014whether an agreement exists, when the putative agreement includes an arbitration provision empowering an arbitrator to decide whether an agreement exists?\u201d<\/p>\n\n\n\n

Under the circumstances here, the Court gave this \u201cmind-bending\u201d question a simple answer: \u201cthe court.\u201d<\/p>\n\n\n\n

The Federal Arbitration Act (FAA) empowers courts to decide issues concerning the making of an agreement \u201cunless the parties have clearly and unmistakably referred those issues to arbitration in a written contract whose formation is not in issue<\/em>.\u201d  In this instance, the plaintiff claimed fraud in the execution of the contract\u2014thereby disputing its very existence\u2014so the court, not an arbitrator, had authority to decide the existence of the agreement.<\/p>\n\n\n\n

While the questions presented may be esoteric, the Court\u2019s decision highlights a simple principle: every contract dispute begins with showing the existence of a contract.  An arbitration provision may delegate certain decisions to an arbitrator but, like any contract, it has no effect unless you can show that the parties actually formed an agreement.  Simply put, without an agreement<\/em> to arbitrate, there can be no arbitration.<\/p>\n\n\n\n

The Third Circuit\u2019s Decision<\/u><\/strong><\/p>\n\n\n\n

In 2001, Plaintiff, a New Jersey construction company, hired union labor for a construction project at Newark Liberty International Airport.  One year later, a union representative asked the employer to sign a one-page, short-form agreement (\u201cSFA\u201d), which incorporated by reference a collective bargaining agreement (\u201cCBA\u201d).  The union representative allegedly said he would pull the workers if the construction company did not sign and that the SFA was \u201conly for the Newark Airport job.\u201d  The company signed and, from 2001 through 2018, used union labor for various jobs and remitted more than $500,000 in contributions to the union\u2019s benefit funds (the \u201cFunds\u201d wound up being the defendant in this case).<\/p>\n\n\n\n

In 2018, the Funds audited the company\u2019s records and determined that the company owed $230,000 in additional contributions.  When the company balked at the demand for payment, the Funds initiated arbitration, citing the CBA\u2019s arbitration provision.  In response, the company sued in the federal District Court to enjoin the arbitration, arguing that there was fraud in the execution of the SFA and therefore, no agreement existed and the parties were not required to arbitrate.  The Funds argued that this issue should be decided by the arbitrator because the CBA stated: \u201c[t]he Arbitrator shall have authority to decide whether an Agreement exists, where that is in dispute.\u201d  The District Court enjoined the arbitration, holding that issues of \u201carbitrability\u201d were for the court to decide.<\/p>\n\n\n\n

The Court of Appeals broke the issue into two questions.  First, does the District Court have the power to resolve questions about the formation of a contract when the putative contract delegates \u201cthe authority to decide whether an Agreement exists\u201d to the arbitrator?  Second, did the Plaintiff construction company put formation of the arbitration agreement \u201cin issue\u201d by claiming fraud in the execution<\/p>\n\n\n\n

1.  The District Court\u2019s Power<\/u><\/em><\/p>\n\n\n\n

Arbitration agreements often include a \u201cdelegation provision,\u201d which gives the arbitrator authority to decide issues of arbitratbility\u2014as the Supreme Court described it, \u201c[t]hink of a delegation provision as a mini-arbitration agreement within a broader arbitration agreement within a broader contract, something akin to Russian nesting dolls.\u201d  Here, the delegation provision gave the arbitrator (not the court) authority to decide whether an agreement existed, but the company argued that the parties never formed a valid agreement due to fraud in the execution.<\/p>\n\n\n\n

These facts presented a \u201ccatch-22.\u201d  If the Court took up the issue of arbitratbility and determined that there was a valid contract, then the parties were denied their contractual right to have an arbitrator decide that issue.  On the other hand, if the Court enforced the delegation provision and later the arbitrator determined that there was no valid contract, then the parties were compelled to arbitration based on an agreement that never existed!<\/p>\n\n\n\n

Ultimately, the Court here turned to section 4 of the FAA\u2014which provides that a federal court must compel arbitration \u201cupon being satisfied that the making of the agreement for arbitration \u2026 is not in issue\u201d\u2014and precedent that this section \u201caffirmatively requires\u201d a court to decide questions about the formation of a contract.  This \u201ctilts the scale in favor of a judicial forum\u201d when a party contends that it never agreed to arbitrate at all.  The Court held that, unless the parties clearly and unmistakably agreed to arbitrate questions of contract formation in a contract whose formation is not in issue<\/em>, those gateway questions are left for the courts to decide.  In so holding, the Third Circuit joins its sister circuits in the Fourth, Fifth, Sixth, and Eighth Circuits, as well as district courts in the Seventh Circuit.<\/p>\n\n\n\n

2.  Putting Formation of the Contract \u201cIn Issue\u201d<\/u><\/em><\/p>\n\n\n\n

Next, the Court resolved the question of whether the company put the formation of the arbitration agreement \u201cin issue\u201d by stating a claim of fraud in the execution.<\/p>\n\n\n\n

It was undisputed that the construction company signed the SFA, which created a presumption that it \u201cread, understood, and assented to\u201d the terms of that document.  Generally, failure to read is not by itself sufficient to avoid the legal effects of a signature.  There is an exception, however, when there is fraud in the execution, which may be present \u201cwhen a party executes an agreement with neither knowledge nor reasonable opportunity to obtain knowledge of its character or its essential terms\u201d by reason of \u201cexcusable ignorance.\u201d  \u201cExcusable ignorance\u201d typically involves misconduct that cuts off the signer\u2019s opportunity to read, such as \u201csignificant time pressure\u201d and reliance on an erroneous \u201cassurance.\u201d<\/p>\n\n\n\n

The Court found that the construction company adequately claimed fraud in the execution because the union representative\u2019s \u201cthreat of halting construction\u201d created a heightened sense of urgency and the company relied on his assurance that the SFA \u201cwas only for the Newark Airport job\u201d and not a statewide CBA.  Fraud in the execution<\/em> renders the entire agreement \u201cvoid ab initio\u201d as if it never existed\u2014this is in contrast to a claim of fraud in the inducement<\/em>, which presumes the existence of a contract and merely renders it \u201cvoidable.\u201d  Here, the formation of the delegation provision was put in issue, thereby triggering the District Court\u2019s power to adjudicate the claim.<\/p>\n\n\n\n

Key Takeaways<\/u><\/strong><\/p>\n\n\n\n

The Court covered some complicated issues in this case\u2014it unpacked a mini-arbitration provision, within a broader arbitration agreement, within a collective bargaining agreement, incorporated by reference in a short-form agreement.  The underlying principles, however, provide practical takeaways for contract negotiations and any ensuing litigation (or arbitration):<\/p>\n\n\n\n