Lumbermans v. Broadspire: Why an arbitrator should decide questions of procedural arbitrability

by Charles Ott November 5 2010, 14:11

    On October 13, 2010, the Seventh Circuit handed down their ruling in Lumbermans Mutual Casualty Company v. Broadspire Management Service, Inc, LLC. In Lumbermans, the parties had a contract for Broadspire to purchase an Insurance Administration business from Lumbermans. The purchase agreement set out specific procedures for Lumbermans to submit a “disagreement notice” to the regularly submitted price reports created by Broadspire stemming from the transaction. The contract required that these disagreement notices have “reasonable detail” and an alternative determination of the payment required. Lumbermans submitted four disagreement notices. Broadspire refused to arbitrate the claim under the section of the contract which controlled the choice of dispute resolution for disputes arising from the disagreement notices. It was their contention that the disagreement notices did not comply with the contract and therefore should fall under the general arbitration clause which had different procedures. The court found that the dispute between the parties related to a question of procedural arbitrability. Therefore, the section of the contract which related to price report disputes governed whether or not the claim was arbitrable and that the arbitrator was only person competent to decide the question.
    It is easy to criticize this decision at first glance because the court is essentially asking the arbitrator to decide whether or not a claim meets the requirements under the contract for arbitration. It is possible that an arbitrator may seek to maximize his relevance by interpreting the scope of the contract in a way which transforms non-arbitrable claims into arbitrable ones or impose a form of arbitration which is not appropriate to the dispute under the contract. However, Lumbermans and its predecessors vests the power to decide those dangerous questions in the court. In Howsam v. Dean Witter Reynolds, Inc, 537 U.S. 79 (2002), the Supreme Court delineated procedural questions of arbitrability from substantive ones. Procedural questions are ones of gateway procedure disputes such as a statute of limitations. In contrast, substantive questions are ones which define the scope of the arbitrability clause.
    In Lumbermans, the court determines that the dispute the plaintiff demanded arbitration for was a procedural question. In their decision, the court implicitly answers the substantive arbitrability question at issue when they determine which section of the contract the dispute falls under. What the court leaves for the arbitrator is whether or not the disagreement notices that Lumbermans submitted comply with the contract. This is a question which is substantially similar to timely filing and should be decided by the arbitrator.
    It is important to note that in this case, whoever determines the arbitrability of the claim could be making determinations which are dispositive to the underlying claim. Broadspire contends that the reports are not sufficient because they do not have the required “reasonable detail” and do not provide an alternative payment. However, Lumbermans has stated that part of the deficiency in the price reports is a lack of sufficient information. Should the court state that this excuses Lumbermans deviation from the procedures, they have decided that Lumbermans' disagreement notices have merit. Under the contract this is a question solely for the arbitrator because the parties bargained for such a procedure. The court is barred by the contract from answering the question and the panel of arbitrators that Broadspire wishes to employ under the general arbitration clause should be barred as well.
    The precedent which Lumbermans and its predecessors set is just part of a long line of Federal cases which favors arbitration of claims. By allowing the arbitrator to determine questions of procedural arbitrability, the court is furthering a policy which encourages parties to go to the arbitrator. If this was not the case, parties to a contract could essentially use alleged technical deficiencies to take the ultimate decision out of the hands of the arbitrator. Unlike the court, the arbitrator has more freedom when making decisions under the contract. Therefore a claim which the court may dismiss on procedural grounds, the arbitrator may allow to go forward for a decision on the merits because of other outside evidence that can be read into the contract. The parties bargained for this result when they bargained for arbitration as a method of dispute resolution. To allow a party to make an end run around the arbitrator would defeat the purpose of the agreement.
    While arbitration does not afford the same degree of protection that a lawsuit in the District Court does, it serves an important purpose and should be encouraged. Arbitration is cheaper, less formal and much faster than filing suit. Further, it unclogs the increasingly busy courts and allows them to focus on complicated issues of law where their expertise is necessary or where having a jury has been deemed important. It also allows for adjudication by an expert in the field in the same way we allow the Executive Branch create administrative agencies which adjudicate their claims. In Lumbermans, the Court deferred, in part, to the arbitrator/audit firm because the arbitrator had knowledge that the court or a general dispute arbitration panel could not possibly have. For these reasons the Court made the correct decision in Lumbermans and kept arbitration jurisprudence on the correct path.

Comments (1) -

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