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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: April 19, 2019

Court Cannot Rule on Whether Dispute is Arbitrable When Agreement Explicitly Assigns That Task to the Arbitrator

On March 26, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in SM Sydell Hotels LLC v. Yucaipa U.S. Hospitality Partners Holdings, Inc., 2019 NY Slip Op. 30918(U), holding that a court cannot rule on whether a dispute is arbitrable when an agreement explicitly assigns that task to the arbitrator, explaining:

The central issues before the Court are: (1) whether the buyout procedures of Section 10.6 of the Agreement are subject to the broad arbitration provisions contained in Section 13 .4; and (2) whether such an issue should be determined in the California Arbitration or by this Court.

If the buyout procedures of Section 10.6-whereby the parties select a neutral arbitrator to determine the value of Yucaipa’s interests in the Company-are not further subject to Section 13.4’s broad, general arbitration provision purporting to govern all disputes arising under the Agreement, then Sydell’s motion to compel a closing should be granted. If, however, the broad arbitration provisions of Section 13.4 govern disputes arising out of Section 10.6’s potentially separate valuation arbitration, then a closing should be stayed and the parties compelled to participate in the California Arbitration.

Sydell argues that Section 10.6 of the Agreement provides a streamlined valuation arbitration procedure in the event that Sydell exercises its right to redeem Yucaipa’s interest in the Company and the parties disagree about the valuation. Thus, Sydell argues that Section 10.6 contains its own arbitration process that is not subject to further JAMS arbitration under the Agreement’s broader dispute resolution provisions in Section 13.4.

Yucaipa, in its opposition and cross motion, asserts that the issue of whether disputes arising from the valuation arbitration-specifically, Yucaipa’s allegation that Sydell corrupted the valuation proceeding-is an issue of arbitrability that the California arbitrator, and not this Court, must determine. Thus, Yucaipa argues that the threshold issue of arbitrability must be determined in the California Arbitration.

It is undisputed that Section 13.4 of the Agreement provides:

All disputes, claims and controversies arising out of or relating to this Agreement, including any and all disputes, claims or controversies arising out of or relating to (i) the Company, (ii) any Member’s rights and obligations hereunder, (iii) the validity or scope of any provision of this Agreement, (iv) whether a particular dispute, claim or controversy is subject to arbitration under this Section 13.4 and (v) the power and authority of any arbitrator selected hereunder, that are not resolved by mutual agreement shall be submitted to final and binding arbitration before JAMS pursuant to the Federal Arbitration Act.

Thus, as Yucaipa asserts, the threshold issue of arbitrability must be decided by the California arbitrator before this Court can resolve the issue of whether the valuation should be confirmed and Yucaipa compelled to close on the buyout.

Ordinarily, a gateway dispute about whether the parties are bound by a given arbitration clause raises a ‘question of arbitrability for a court to decide. However, a court must defer to an arbitrator’s arbitrability decision when the parties submitted that matter to arbitration. This exception to the rule applies only when the parties’ arbitration agreement clearly and unmistakably provides that the question of arbitrability is to be determined by the arbitrator. Thus, the Federal Arbitration Act allows parties to agree by contract that an arbitrator, rather than a court, will resolve threshold arbitrability questions as well as underlying merits disputes.

Here, it is clear that Section 13 .4 of the Agreement provides that any and all disputes, claims and controversies arising out of or relating to whether a particular dispute, claim or controversy is subject to arbitration must be determined by a JAMS arbitrator. Thus, the California Arbitration must determine whether Yucaipa’s claims are arbitrable.

(Internal quotations and citations omitted).

Complex commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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