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April 17, 2019 Practice Points

Threshold Arbitrability Questions: Who Gets to Decide?

If a contract with a public board is not included in the board’s minutes, do the courts or the arbitrator decide if its arbitration clause is enforceable?

By Arielle Wasserman

In Jackson County v. KPMG, LLP, Case No. 2018-CA-00071-SCT, 2019 WL 242688, (Miss. January 17, 2019) an arbitration clause came into conflict with Mississippi’s “minutes rule” which states, “[P]ublic boards . . . speak only through their minutes, and their acts are evidenced solely by entries on their minutes.”

What this rule means is that if a contract with a public board is not expressly included in the public board’s minutes, that contract is unenforceable because it was never properly formed. In Jackson, a contract with a public board contained an arbitration clause, but the contract did not appear in the board’s minutes. The question was whether the arbitration clause was enforceable and who was entitled to decide that question—the courts or the arbitrator?

The Case

Jackson County owns Singing River, a community hospital governed by a Board of Trustees. For years, Singing River used the auditing services of KPMG.

In 2013, to save costs, Singing River hired Horne, LLP to conduct the hospital's audit. Through Horne, Singing River learned that KPMG's prior audits had resulted in an $88,000,000 overstatement of Singing River's accounts receivable and failed to advise that Singing River’s employee pension plan was underfunded by approximately $150,000,000.

In October 2015, Singing River sued KPMG in Hinds County Circuit Court. In March 2016, Jackson County filed its own lawsuit against KPMG in Jackson County Circuit Court.

KPMG responded to both lawsuits by filing motions to compel arbitration. KPMG argued that Singing River and Jackson County were respectively “bound to the arbitration provisions, including the delegation clauses, contained in the audit engagement letters . . . ” Singing River and Jackson County countered that KPMG’s engagement letters were not included in the hospital board's minutes as required by Mississippi's “minutes rule.” So, they argued, no enforceable contract—and therefore no enforceable arbitration clause—ever came into existence.

The Hinds County Circuit Court agreed with Singing River and denied KPMG's motion to compel arbitration. KPMG appealed, and on October 25, 2018, the Mississippi Supreme Court unanimously affirmed, ruling that the minutes rule prevented an enforceable arbitration agreement from being formed. 

In the Jackson County action, however, the court sided with KPMG. It ruled that the arbitrator, not the court, was the proper authority to decide whether the “minutes rule” applied, and it granted KPMG's motion to compel arbitration. Jackson County appealed. 

The Decision

KPMG argued that the “minutes rule” did not apply for two reasons:

  1. Due to the “delegation clause” contained in the arbitration provisions, any application of the minutes rule went to the enforceability of the contracts, not to formation of the arbitration agreement; and
  2. Singing River stipulated that it accepted KPMG’s engagement letters, meaning the contracts were definitely formed.

According to KPMG, the question whether the contract could be enforced in light of the “minutes rule” was for the arbitrator to decide.

The court was not swayed by KPMG’s arguments. It stated that Singing River could not stipulate to something prohibited by law, i.e. the validity of a contract which the law holds invalid because it did not comply with the “minutes rule.” The court held that since the contract did not comply with the “minutes rule,” the contract never existed and neither did its arbitration provision. The court also stated that questions about a contract’s formation are for the courts to decide, not the arbitrator. It reasoned that if a contract were never formed in the first place, then the arbitrator would not have jurisdiction to decide any questions arising under the contract, because an arbitrator’s authority is derived from the parties’ agreement. The court reversed and remanded with an instruction to deny the motion to compel arbitration.

Essentially, the court decided that if the agreement to arbitrate is not in the minutes, there can be no delegation to the arbitrator, as the contract under which the arbitrator derives authority was never formed.

After the Jackson decision was issued, the U.S. Supreme Court decided Henry Schein, Inc. v. Archer & White Sales, Inc., 2019 WL 122164 (U.S. Jan. 8, 2019). Henry dealt with delegating threshold arbitrability questions to the arbitrator, matters that presumably would include issues about the enforceability of the contract. In a motion for reconsideration, KPMG cited Henry as a supplemental authority.

The Mississippi Supreme Court distinguished Henry, saying that Henry reaffirmed “that parties may delegate threshold arbitrability questions to the arbitrator, so long as the parties' agreement does so by ‘clear and unmistakable’ evidence.” The court stated that there was no “clear and unmistakable” evidence that Singing River ever agreed to arbitrate, let alone delegate arbitrability questions to an arbitrator. Therefore, the court was not bound by Henry’s ruling.

Arielle Wasserman is an associate at Goetz Fitzpatrick LLP in New York, New York.

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