April 27, 2015 Practice Points

Three State Courts Follow Federal Decisions on Procedural Arbitrability

By Liz Kramer

In March, the highest courts of Montana, Texas, and Wisconsin all held that, when parties have a valid arbitration agreement, the issue of whether an arbitration demand was timely is presumptively for the arbitrator to decide. That legal principle has been established under the FAA at least since the Howsam decision in 2002 (and confirmed in BG Group in 2014), but it now seems to be firmly taking hold in state courts, even when those courts are interpreting state arbitration acts.

In Montana Public Employees’ Assoc. v. City of Bozeman, __ P.3d __, 2015 WL 895731 (Mont. March 3, 2015), the City of Bozeman fired a building inspector. The collective bargaining agreement had a four-step grievance procedure, with time limits, and stated that any grievance not filed within the time limits "shall be deemed permanently withdrawn." The inspector did not complete all the steps within the required time period. Based on that, the city refused to arbitrate. The union sued to force the city to arbitrate, and the city asked the court to find the dispute was time-barred. The Montana Supreme Court noted that it has adopted the distinction between procedural and substantive arbitrability from Howsam (and John Wiley), and that the issue of whether the inspector's claims were time-barred was a "classic question of procedural arbitrability that is for an arbitrator and not for a court to decide."

In G.T. Leach Builders, LLC v. Sapphire V.P., __ S.W.3d __, 2015 WL 1288373 (Tex. March 20, 2015), a developer sued three insurance brokers who had allowed its builder's risk insurance to expire just before a hurricane hit its condominiums (which were still under construction). Later, the developer added the general contractor and others as third parties. The general contractor moved to compel arbitration, and the developer responded that the demand was untimely, because the arbitration agreement incorporated a statute of limitation. The Texas court of appeals ruled that the general contractor's arbitration demand was untimely, but the Texas Supreme Court reversed. Citing to BG Group and Howsam, it held that "courts must defer to the arbitrators to determine the meaning and effect of the contractual deadline."

Addressing the developer's argument that the limitations question was actually one of substantive (not procedural) arbitrability, the Texas court said that it was not substantive because "the parties' dispute over the meaning and effect of the contractual deadline does not touch upon the issue of whether an enforceable agreement to arbitrate [the developer's] claims exists." (The court conceded that timeliness could turn into a substantive issue of arbitrability if the challenger asserted that the contractual deadline made the agreement unconscionable.) Therefore, the Texas Court of Appeals erred by deciding whether the dispute was arbitrable.

Similarly, in First Weber Group, Inc. v. Synergy Real Estate Group, LLC, __ N.W.2d __, 2015 WL 1292570 (Wis. March 24, 2015), the Wisconsin Supreme Court held that the timeliness of an arbitration demand was an issue for the arbitrator. Weber involved a brokerage firm that filed an arbitration demand against another broker. The broker refused to arbitrate, and the firm moved a court to compel arbitration. The trial court found the firm's demand for arbitration was untimely, because the governing agreement required arbitration to be demanded within 180 days after the transaction closed. Citing to Howsam, the Wisconsin Supreme Court held that the broker's "timeliness and estoppel defenses against arbitration are to be determined in the arbitration proceedings, not by a court" under Wisconsin's arbitration act. And more broadly, the court adopted the holdings of BG Group and Howsam, so that Wisconsin law now also requires that procedural arbitrability must be decided by an arbitrator, unless the parties agreed otherwise.

These cases should help increase awareness among parties and their counsel that courts can address very limited issues when the parties have a valid arbitration agreement. Essentially, if the arbitration agreement exists, covers the present dispute, is valid under state law and has not been waived by litigation conduct, every other potential dispositive issue is presumptively for the arbitrator to decide.

Keywords: alternative dispute resolution, litigation, procedural, substantive, defenses, time limits, timeliness, state law, state arbitration acts

Liz Kramer is with Stinson Leonard Street in Minneapolis, Minnesota.

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