Dispute resolution clauses are found in nearly every construction contract, and the pros and cons of the options have been well debated. A December 20, 2017, decision from the Wisconsin District II Court of Appeals adds a new wrinkle if you are considering these clauses, as the court addressed its own rhetorical question: “Who determines whether an arbitration provision applies?”
The Case: Midwest v. Great Lakes
In Midwest Neurosciences Associates LLC v. Great Lakes Neurosurgical Associates LLC1, Midwest brought suit against Great Lakes (one of its former members) and its president for an alleged violation of a non-compete provision in the parties’ operating agreement.
Matthew R. McClean, Marquette 2002, is shareholder at Davis & Kuelthau in Milwaukee, where he serves as the chair of the litigation team and has considerable experience in all aspects of construction law.
A threshold issue was whether the mandatory arbitration clause in the operating agreement still applied, since the parties had subsequently signed a redemption agreement ending the membership relationship. The redemption agreement had no mandatory arbitration provision, but had a merger clause.
Midwest sought to compel arbitration pursuant to the original operating agreement. The circuit court denied that request, and granted Great Lakes’ motion for declaratory judgment that the provision was inapplicable based on the subsequent agreement. Midwest appealed.
In analyzing the issue, the court of appeals made several useful reminders about the fundamental elements of arbitration:
arbitration under Wis. Stat. chapter 788 reflects the “sensible policy … to promote arbitration as a viable and valuable form of alternative dispute resolution” (¶ 10);
Wisconsin courts will only compel a party to arbitrate a dispute if it has agreed to do so (¶ 11);
when the courts determine that the parties have agreed to submit a dispute to arbitration, the courts will not consider the merits of the dispute, even if the dispute appears on its face to be frivolous (¶ 11); and
if a contract contains an arbitration clause, there is a strong presumption that a dispute under the contract should be submitted to arbitration and any doubts are resolved in favor of arbitration (¶ 11).
Also this: “[w]hether a dispute must be arbitrated is ordinarily a question for the court, but parties may agree by contract to arbitrate arbitrarily.” (¶ 11).
Trial Court Reversed
The court of appeals ultimately reversed the trial court and found that the question of whether the redemption agreement superseded the operating agreement went to the merits of the dispute, which, as noted above, the courts could not address (¶ 18).
The court of appeals also found significant that the parties’ arbitration clause adopted JAMS arbitration rules, which rules explicitly give the arbitrator “the authority to determine jurisdiction and arbitrability of issues as a preliminary matter.” (¶ 19).
Thus, the parties had to go to arbitration to determine if the case was properly in arbitration. This seems rather circular and self-defeating.
And didn’t the court itself acknowledge that whether a matter is appropriately submitted to arbitration, is “ordinarily a question for the court”?
Substantive vs. Procedural Arbitrability
Why then shouldn’t the trial court determine whether a party’s subsequent agreement effectively meant a matter can’t be arbitrated?
Perhaps the answer lies in recent analysis by the Wisconsin Supreme Court. In First Weber Group, Inc. v. Synergy Real Estate Group, LLC2, Justice Annette Ziegler described a difference between substantive arbitrability and procedural arbitrability. Quoting secondary sources, she noted that “substantive arbitrability refers to whether the dispute involves a subject matter which the parties have contracted to submit to arbitration,” whereas “procedural arbitrability concerns issues such as whether certain procedures apply to a particular dispute, whether such procedures were followed or excused, and whether unexcused failure to follow procedure avoids the duty to arbitrate” (¶ 34).
Justice Ziegler then noted “the distinction between substantive arbitrability and procedural arbitrability issues is important because issues of substantive arbitrability generally are decided by courts, whereas issues of procedural arbitrability generally are determined during the arbitration process” (¶ 35).
The court found the issues of timeliness and estoppel were procedural matters to be decided by the arbitrator “unless the parties agreed otherwise” (¶35).
The Midwest Neuroscience case was not framed in these terms. In fact, it never mentions the First Weber case. Had it been, would the result be the same?
Whether a subsequent agreement is a substantive or procedural issue does not appear to be an easy question to answer. Does it fit under “unless the parties agree otherwise” from First Weber and stay a court decision?
And where does one draw the line between “the subject matter which the parties have contracted to submit to arbitration” (i.e., substantive arbitrability) and the merits of the case itself?
Whether the redemption agreement superseded the operating agreement and eliminated mandatory arbitration seems to fit squarely into whether the parties agreed to submit to arbitration, making it substantive. Judge Reilly’s concurrence at least acknowledged that contracting parties should be free to change their minds about the dispute forum (¶25), but took the issue no further.
Ultimately, the case’s analysis is thin, and the failure to tackle the procedural/substantive distinction creates confusion. I know “who determines whether an arbitration provision applies,” but I’m still fuzzy as to why.
The Lesson: Draft Clauses Mindfully
Be mindful in drafting a dispute resolution clause and be sure it provides the process and procedure that your client expects.
Because arbitration is a result of agreement, and courts allow you to “arbitrate arbitrarily,” you have the ability to define what will and will not be determined by an arbitrator.
This might include narrowing the scope of which types of disputes can be decided by arbitration, but also permits defining who has authority to decide whether arbitration is appropriate or not.
Suffice it to say: if your client does not want a dispute to be decided in arbitration, you do not want to have to go to arbitration to seek that result.
This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.
1 2017 WL 6558706 (slip copy)(final publication decision pending)
2 2015 WI 34, 361 Wis. 2d 496, 860 N.W.2d 498