“Freedom of contract” is a bedrock principle upon which commercial transactions are based. Absent legal authority that makes a contract unlawful, courts will honor business parties’ agreements if they are entered into at arms-length and do not violate public policy.

One such agreement that is frequently the subject of court cases is the agreement to arbitrate. Business parties enter into agreements to arbitrate all the time. That does not mean, however, that every dispute they have is subject to arbitration. Furthermore, who decides? Who decides whether the parties have an arbitration agreement? Who decides whether the parties’ specific dispute is subject to that arbitration agreement? Do we look to courts for the answers? Or do we look to an arbitrator or arbitration panel for the answers? 

These are not novel questions; rather, they commonly come up when parties have commercial contract disputes. The Supreme Court of Mississippi recently tackled these questions head on in a breach of contract dispute between a prime contractor and its electrical subcontractor working on the expansion of the University of Mississippi Medical Center Children’s Hospital.

In McInnis Electrical Company v. Brasfield & Gorrie, LLC, Nos. 2021-CA-01115-SCT and 2021-CA-01300-SCT, 2023 WL 6889119 (Miss. Sup. Ct. Oct. 19, 2023), Mississippi’s highest state court considered whether arbitration should be used to resolve a wrongful termination dispute between an allegedly defaulting subcontractor and its prime contractor.

Look to the Contract

Since arbitration is fundamentally a creature of contract, one must look at the parties’ contract and determine if they agreed to arbitrate. Parties must agree to arbitrate before they are eligible to arbitrate — or, before they may be compelled to arbitrate. Moreover, once it is determined that parties entered into an arbitration agreement, one must determine whether the subject matter of the parties’ dispute is subject to that arbitration agreement. Of course, the question for the Supreme Court is, who is the “one” in each question? Who makes these determinations?

Before getting to that point, it is helpful to look at the precise wording of the dispute resolution provision in the parties’ contract. The agreement, signed by both parties, provides, in pertinent part:

“THIS CONTRACT IS SUBJECT TO ARBITRATION  . . . CLAIMS AND DISPUTES; ARBITRATION … [It is] intend[ed] that all claims of Subcontractor … be resolved in accordance with the provisions of the Contract Documents and this Subcontract …. [Under the Contract Documents] any disputes between Contractor and Subcontractor [not resolved under an inapplicable provision] … shall be finally determined by binding arbitration in accordance with the current Construction Industry Rules of the American Arbitration Association [AAA] by one or more arbitrators selected in accordance with said Rules. The parties acknowledge that this Subcontract evidences a transaction involving interstate commerce and that this agreement to arbitrate is enforceable under [the Federal Arbitration Act].”

McInnis Elec. Co., 2023 WL 6889119, at *1.

The crux of the parties’ dispute here was delay claims — delays stemming from COVID-19, lack of coordination, lack of manpower and nearly 1,000 requests for information. The electrical subcontractor was ultimately terminated by the prime contractor, and the former brought a lawsuit for damages. The prime contractor argued that the disputes here should be settled in arbitration. 

Although the trial court temporarily enjoined arbitration for 14 days, it ultimately determined that the matter should be resolved in arbitration. McInnis Elec. Co., 2023 WL 6889119, at *3. The electrical subcontractor appealed, asking the Supreme Court of Mississippi to reverse the trial court’s decision to compel arbitration and stay the litigation. At the end of the day, the Supreme Court agreed with the trial court and affirmed the decision to compel arbitration.

Two-Prong Inquiry

In analyzing the issues, the Supreme Court needed to determine whether (a) the parties entered into a valid agreement to arbitrate; and (b) the subcontractor’s claims are subject to that agreement. This brings us back to the question of who makes these determinations (i.e., who is the “one”?) — the court or the arbitrator(s)?

As a threshold matter, the Supreme Court of Mississippi looked to the United States Supreme Court for guidance in answering the first question. The U.S. Supreme Court has held that “[A] gateway dispute about whether the parties are bound by a given arbitration clause raises a ‘question of arbitrability’ for a court to decide.” Howsanm v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002). Thus, the court is the “one” making this decision. 

The court looks to the language of the parties’ arbitration agreement to ascertain their intentions. Here, the previously quoted language is quite clear that the parties intended to employ arbitration of their disputes. Thus, the Supreme Court of Mississippi held that the parties entered into a binding arbitration agreement based on their intentions (as demonstrated by the language in their agreement). McInnis Elec. Co., 2023 WL 6889119, at *4.

Next, the court had to determine whether the subcontractor’s claims are subject to the arbitration provision in the parties’ contract. However, first, the court had to decide who makes this determination — a court of law or the arbitrator? The answer lies in the parties’ contract.

In this case, the Supreme Court of Mississippi found that the scope of arbitration covers all claims, including those brought by the subcontractor. “Persuasive case law indicates that parties to an agreement to arbitrate are free to delegate scope questions to arbitrators and ‘stipulating that the [AAA] Rules will govern the arbitration of disputes constitutes such ‘clear and unmistakable’ evidence’ if an intent to delegate.” McInnis Elec. Co., 2023 WL 6889119, at *4 (citations omitted).

Indeed, the Mississippi court followed authority in Delaware, where the highest court in that state held, “As a matter of policy, we adopt the majority federal view that references to the [AAA] rules evidences a clear and unmistakable intent to submit arbitrability issues to an arbitrator.” McInnis Elec. Co., 2023 WL 6889119, at *4 (quoting James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006)).

Since the above arbitration provision clearly cites to the AAA rules, those rules are dispositive on this issue. The AAA rules expressly state that arbitrators have the power to rule on questions of arbitrability. Therefore, the “one” to make this determination is the arbitrator.

Ultimately, the Supreme Court of Mississippi agreed with the trial court, concluding:

“Because both parties entered into an arbitration agreement with specific terms invoking the rules of the AAA and because it is within the specific bailiwick of [the AAA] to determine arbitrability, we affirm the trial court’s decision to compel arbitration.”

McInnis Elec. Co., 2023 WL 6889119, at *5.

Takeaways

When it comes to arbitration, it is important to remember to read the contract. Courts give parties wide latitude to structure their own arbitration agreement. Parties may agree on arbitration as a method of dispute resolution. They also may agree on the specific rules to be followed (e.g., the AAA rules). 

Parties may agree on the scope of arbitration — i.e., what disputes are subject to arbitration. Finally, parties may agree on who makes these determinations — i.e., who is the “one”? While courts will analyze all these issues under the framework of the Federal Arbitration Act or state arbitration statutes (whichever is applicable), they will often defer to the express dispute resolution provisions in the parties’ agreement. 

This is because such deference is consistent with the freedom of contract governing commercial transactions. l

Steven Nudelman is a partner at the law firm of Greenbaum, Rowe, Smith & Davis LLP, where he is chair of the firm’s Construction Contracting & Risk Management Practice Group. He also is a member of the firm’s Real Estate and Litigation Department and its Construction Disputes, Community Association, Alternative Dispute Resolution, and Alternative Energy & Sustainable Development Practice Groups. Nudelman is a Charter Fellow of the Construction Lawyers Society of America. You can reach him at 732-476-2428 or snudelman@greenbaumlaw.com.