Arbitrability: Can Your Dispute Be Resolved in Arbitration?

“Arbitrable”: Of or relating to a dispute that is eligible to be resolved by arbitration. Not too informative. So what makes a dispute arbitrable? Very simply, arbitrability arises by agreement. If all parties to a dispute agree that the dispute can be resolved by arbitration, then the dispute is said to be arbitrable. Conversely, if one or more parties to a dispute refuse to agree to arbitration, then the dispute is not arbitrable. Simple? Usually. But wrinkles can arise.

Consider a dispute involving more than two parties--three, for example. Two agree to arbitrate, the third refuses. In that situation, the two who agree can maybe resolve by arbitration that portion of the dispute that concerns only those two, if that portion is separable from the remainder of the dispute. The unresolved aspects of the dispute would then have to be resolved through means other than arbitration.

Let's consider an example: Michael buys a car from Best Motors. He finances his purchase through First Country Bank. The sales agreement between Michael and First Motors has an arbitration clause. The financing agreement between Michael and First Country does not. A dispute arises. Michael contends that the car he bought had defects. He stops making payments. He demands arbitration against Best Motors and against First Country.

The arbitrability of Michael's claim against First Motors is clear: Both agreed to such arbitrability, as reflected in papers each signed when Michael bought the car. But what about First Country? It never agreed to arbitrate any disputes. So First Country argues that the arbitration forum cannot require his participation; it lacks jurisdiction.

Under these facts as presented, First Country is correct. Thus First Country can refuse to arbitrate. There are several ways it can do this. First, it can just disregard Michael's demand for arbitration. If Michael moves forward and obtains an award against First Country, then First Country can oppose any later application that Michael might make to the court to confirm that award. The court should agree, and dismiss Michael's court application. Note that this dismissal does not resolve the underlying merits of Michael's claim against First Country. Nor does it resolve a claim that First Country might assert against Michael for the payments that Michael has stopped making. Thus Michael can still sue First Country, and First Country can sue Michael but, unless both agree otherwise, their suits must be in court, not in arbitration.

First Country's second option is to acknowledge the demand, but then ask the arbitrator to dismiss Michael's claim as to it on the ground of non-arbitrability. Under these facts, the arbitrator should agree, and release First Country from the arbitration. If the arbitrator refuses First Country's dismissal request, First Country can file a court complaint at that time. Its complaint would seek a court declaration that the dispute against First Country is not arbitrable.

A third option is for First Country to disregard the absence of an agreement to arbitrate, and fully participate in the proceedings as if it had originally agreed, never mentioning absence of an agreement. First Country could later oppose Michael's application to confirm in court an award unfavorable to it. First Country would move to vacate the arbitrator's award, citing lack of arbitral jurisdiction. The court might decide in that situation that, by fully participating without objecting in the arbitration, First Country waived the jurisdictional issue. Phrased differently, the court might state that, in fully participating without objection, First Country implicly agreed to arbitrate the dispute.

Now let's look at another aspect of arbitrability: Same facts as above, but Michael sues Best Motors in court, despite Michael's prior agreement to arbitrate disputes that he might have with that dealer. Best Motors then has two options. It can ask the court to dismiss Michael's suit, telling the court that the arbitration agreement deprives the court of jurisdiction. Best Motors application for dismissal should succeed. Michael would then have to pursue whatever claim he might have against Best Motors in an arbitration forum.

Alternatively, Best Motors could disregard the arbitration agreement and simply defend itself in court against Michael's law suit. In that situation, both parties will be bound by the outcome reached in court on the merits of the case. In actively litigating the merits of the dispute in court without raising the arbitrability issue, Best Motors would be deemed to have waived the arbitrability issue, thus conferring jurisdiction on the court.

Now we'll consider more wrinkles. (This does not exhaust the inventory of wrinkles.) Suppose the parties disagree on whether the dispute is arbitrable: Who resolves that threshold issue? If the arbitrator finds arbitrability, may the court revisit that issue? Suppose the party resisting the finding of arbitrability maintains that the entire agreement is invalid. Or can the arbitrator find that the agreement itself is valid, except for the arbitration clause. If a party disputes arbitrability, can that party still participate in the proceedings without waiving the objection? These are questions that actually arise from time to time. This page cannot provide guidance other than to observe that resolution of such issues is extremely fact sensitive.

Note that existence of an arbitrability provision as to one party (Best Motors, in the example above) and not the other (First Country) could force Michael to litigate his dispute twice: Against Best Motors in arbitration, and against First Country in court. Michael will certainly be less than happy over having to do this. The other two parties may similarly be unhappy, since the rights and duties of all three are interconnected. Despite being interconnected, inconsistent results are possible. In most cases, this situation can be avoided simply by having arbitration clauses in both the sales agreement and the financing agreement. Then an arbitrator, in a single proceeding, can resolve the dispute as to all parties.

Once a dispute becomes arbitrable, can it become unarbitrable? The answer is yes. If all parties to the dispute agree (we cannot imagine why) that they prefer to battle it out in court, nothing prevents them from doing so. Note, too, that arbitrability can be waived implicitly. If a party to an arbitration agreement files a law suit in court and the remaining parties do not object, arbitrability will be deemed waived. Parties to an arbitrable dispute objecting to court jurisdiction must do so at or very near the outset of the court case in order to avoid this waiver.

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Arbitrability: Can Your Dispute Be Resolved in Arbitration?