May 8, 2015

May 8, 2015:

Fifth Circuit holds that parties agreed by their conduct to arbitrate an issue of contract formation by briefing the issue before the arbitrator and by disputing the issue throughout the arbitration proceeding, "with the plaintiffs never contesting the arbitrator's authority to decide contract formation until he issued an adverse award."  OMG, L.P. v. Heritage Auctions, Inc., No. 14-10403, 2015 WL 2151779 (5th Cir. May 8, 2015) (unpublished).

Heritage, an auction house, and OMG submitted to arbitration a dispute concerning the commissions that OMG should receive for the sale by Heritage of certain collectibles.  Heritage argued that there was no "meeting of the minds" on the provisions in the relevant agreement concerning commissions and asked for rescission of the agreement.  The arbitrator agreed, cancelling the contract on the grounds that the provisions in the agreement concerning commissions were ambiguous and there was no way to resolve the ambiguity.  OMG filed a vacatur action in federal court, contending that the arbitrator exceeded his authority in deciding the contract formation issue.  The district court vacated the award, adopting the recommendation of a magistrate who found that "a court was the proper decision-maker as to contract formation issues in this case, not the arbitrator."  2015 WL 2151779, at *2.  The Fifth Circuit reversed and remanded with instructions to the district court to confirm the arbitration award.  

"[B]y their actions, the parties may agree to arbitrate disputes that they were not otherwise contractually bound to arbitrate."  Id. at *3.  The Fifth Circuit found that throughout this arbitration, from the first pleadings to post-arbitration briefing, the parties disputed the contract formation issue and whether rescission would be an appropriate remedy if there was no meeting of the minds.  "OMG never contested the arbitrator's authority to resolve this issue.  Instead, OMG disputed the meeting of the minds issue.  As such, the parties agreed to arbitrate contract formation."  Id.  "If OMG did not believe the arbitrator had the authority to decide those issues, it should have refused to arbitrate, leaving a court to decide whether the arbitrator could decide the contract formation issue.  . . .  OMG simply cannot wait until it receives a decision with which it disagrees before challenging the arbitrator's authority."  Id. at *5.    

The lesson of OMG is straightforward:  If you dispute an arbitrator's power to decide a particular issue, make that position known at the outset.  Do not contest the issue on the merits and then challenge the arbitrator's authority to decide the issue only after receiving an adverse ruling.  AAA Commercial Arbitration Rule R-7(c) embodies a similar, speak now approach:  "A party must object to the jurisdiction of the arbitrator or to the arbitrability of a claim or counterclaim no later than the fling of the answering statement to the claim or counterclaim that gives rise to the objection."

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