Some arbitration clauses include a “delegation provision” where the parties grant to the arbitrator – instead of a court – the authority to determine validity and enforceability of the arbitration clause itself. A recent decision by the West Virginia Supreme Court of Appeals held a delegation provision that did not “clearly and unmistakably reflect an intention by the parties to assign to the arbitrator all questions about the enforceability of the arbitration clause” to be an improper delegation. As such, the court and not the arbitrator would determine enforceability of the arbitration clause. The clause in question included the following: “The arbitrator(s) shall determine all issues regarding the arbitrability of the dispute.”
This was a homeowner-contractor dispute. Unhappy with defects in their new house, the homeowners filed suit. The contractor moved to stay pending arbitration, and the homeowners responded that the arbitration clause was unconscionable and unenforceable. The contractor argued that it was for the arbitrator to decide those defenses, due to the delegation provision, and the court should defer. But the delegation argument was made only orally, as an apparent last-minute thought. The trial court refused to stay the case pending arbitration, adopting the homeowners’ position that the clause was procedurally and substantively unconscionable, and did not address the delegation issue. The case is Schumacher Homes of Circleville, Inc. v. Spencer, 2015 W.Va. LEXIS 562 (April 24, 2015).
The West Virginia high court closely examined and parsed various U.S. Supreme Court decisions on arbitration, including the decision on a delegation provision in Rent-A-Center, Inc. v. Jackson. In Rent-A-Center the Supreme Court held that, with a valid delegation provision, a trial court must leave any challenge to the validity of the agreement as a whole (including the arbitration clause) to the arbitrator. Per that decision, the trial court can consider only a challenge “that is directed at the validity, revocability or enforceability of the delegation provision itself.”
Turning to the delegation provision, the WV court held that it did not achieve the standard required under normal principles of contract interpretation to vest sole authority in the arbitrator to determine validity of the arbitration clause. The clause referred only to “arbitrability,” which the WV court – with more than a little support from prior U.S. Supreme Court decisions – noted was an ambiguous term. The clause at issue also failed to mention validity, revocability or enforceability of the arbitration clause. Thus, the purported delegation clause “does not ‘clearly and unmistakably’ confer authority to the arbitrator to decide the gateway questions regarding the validity, revocability and enforceability of the arbitration clause.” The WV court upheld the decision to refuse to compel arbitration.
So the West Virginia court hewed to the authority of the U.S. Supreme Court on matters concerning the Federal Arbitration Act, while noting its skepticism for the U.S. high court’s decision-making. It referred to the decision in Rent-A-Center: “We recognize that this rule seems absurd …” Also: “It is an ivory-tower interpretation of the FAA ‘that is as dubious in principle as it is senseless in practice.’” (quoting from Justice Scalia’s dissent in Young v. United Parcel Service, concerning a different law). Indeed, the outcome was forecast in the opening paragraph, where the WV court referred to the U.S. Supreme Court line of decisions under the FAA as “an eye-glazing conceptual framework for interpreting contracts with arbitration clauses that is politely described as ‘a tad oversubtle for sensible application.’” Consistent with the prediction in our prior blog entries – see hereand here – the U.S. Supreme Court decisions on the FAA will have far-ranging impact, down to the state court level. Except where the state courts have facts to prove an exception.