Arbitrator to Decide Issues of Arbitrability under ICC Rules

Arbitrator to Decide Issues of Arbitrability under ICC Rules

ADR, Contracts
July 21, 2017

In a July 10, 2017 decision, the Ninth Circuit held that when a contract requires arbitration under International Chamber of Commerce (ICC) procedural rules, the arbitrator should decide the arbitrability of a dispute that arises out of the same transaction with an impleaded third party.

The case involved three contracts – a construction contract between owner Portland General Electric Company (PGE) and several related contracting companies (Contractor) to build a power plant in Oregon (Construction Contract); a performance bond between the Contractor and Sureties (Bond); and a guaranty of performance issued by the Contractor’s parent company (Abengoa) to PGE (Guaranty). The Construction Contract and the Bond required any disputes to be litigated under Oregon Substantive law. But both parties agreed in the Guaranty to submit any disputes “in connection with this Guaranty” to binding arbitration by the ICC under its procedural rules. The Guaranty further provided that “either party may implead any other person or entity (with such person or entity’s consent) … provided such claim arises out of or in connection with an agreement with a Subcontractor or this Guaranty.”

After PGE declared the Contractor in default and terminated the Construction Contract, Abengoa filed for arbitration with the ICC naming PGE as the respondent and the Contractor as the impleaded party. Abengoa contended that the termination was wrongful and that it did not owe anything to PGE under the Guaranty. Abengoa also filed a request to join the Sureties in the arbitration, invoking both the impleader provision of the Guaranty and the ICC rules. Sureties denied liability to PGE and consented to arbitration. PGE then filed an action against the Sureties in the United States District Court for the District of Oregon, alleging breach of the Bond and bad faith, and sought a preliminary injunction prohibiting the Sureties from arbitrating their claims against PGE. The Sureties moved to stay the litigation pending the resolution of the ICC arbitration. The District Court refused to stay the litigation and granted the preliminary injunction, and the Sureties appealed.

The Ninth Circuit ruled that “gateway” questions of arbitrability are presumptively reserved for the court, unless the parties “clearly and unmistakably” agree to delegate the adjudication of these issues to the arbitrator. Agreeing with the First and Second Circuits, the Ninth Circuit held that the incorporation of the rules of the ICC into an arbitration agreement constitutes clear and unmistakable evidence of delegation of gateway issues to the arbitrator. (The Ninth Circuit previously reached a similar decision when American Arbitration Association (AAA) rules were incorporated into the arbitration agreement). Noting that the liability of both the Sureties and Abengoa turned on the same issue as to whether the Contractor defaulted under the Construction Contract, and that Abengoa and the Sureties have signed an indemnification agreement, the Ninth Circuit found that it is at least arguable that the Sureties’ claim against PGE arises out of or in connection with the Guaranty. The court expressly refused to decide on the issue that has split the Circuits -- whether such delegation applies only to claims that are at least arguably covered by the agreement to arbitrate.

This is another reminder that courts will broadly interpret arbitration clauses, and that incorporating specific procedural rules into an arbitration agreement may have implications beyond that agreement. Here PGE finds itself arbitrating its disputes with the Sureties, even though neither the Bond nor the underlying Construction Contract contained a requirement to arbitrate. ​