“Divided En Banc Court Holds Arbitrators Must Decide Arbitrability When Arbitration Agreement Incorporates AAA Rules”

Prestonwood Tradition, LP v. Jennings is a fascinating 7-6 decision recently issued by an en banc panel of a Texas appellate court. Robert Fountain of Carrington Coleman summarizes the competing majority and dissenting opinions in this article available at JD Supra.

The issue before the court is one that often is litigated: when parties disagree as to whether a contract requires a particular dispute to be arbitrated, who decides? Is it up to the court to decide, or is the question one for the arbitrator? With respect to contracts that incorporate the commercial rules of the American Arbitration Association, the generally prevailing view is that the arbitrator should decide. This is because AAA rules provide that “an arbitrator is empowered to determine his “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim, without any need to refer such matters first to a court.”

The Prestonwood Tradition case, however, offered an interesting twist. When presented with the dispute, the AAA made an administrative decision not to proceed with the arbitration, determining that, in the absence of agreement by the parties to proceed with arbitration, a court should decide the arbitrability question. Nonetheless, the majority decision held that, based on the parties’ contract, arbitrability must be decided by the arbitrator and “[w]hen the parties agree to have the arbitrator decide arbitrability, as they did in this case, then the AAA lacks discretion to require something different.”

Thus, there is a standoff. While the court by virtue of its 7-6 decision decreed that a AAA arbitrator should proceed to determine arbitrability, the AAA–an independent administrative agency that was not a party to the litigation–determined that it was not going to administer the arbitration until a court ruled that it was arbitrable.

So, what happens next?

The court cannot order the AAA to administer the arbitration. As a non-party to the litigation, the AAA is not subject to the jurisdiction of the court. Certainly, the AAA voluntarily may alter its non-administration position based upon the court’s decision. If not, the parties to the dispute have a judicial decree with no ability to implement it.