Construction: Claim to a hearing on arbitrability

Dispute Resolution Journal, Feb-Apr 2003 by Carson, Liz

Claim to a Hearing on Arbitrability

The 2nd Circuit held that a party who challenged the appointment of an arbitrator was not entitled to a prior court hearing on the validity of the arbitration agreement.

In 1999, Transact International subcontracted with defendant American Engineering Corp. (AEC) for the building construction portion of Transacts contract with the Air Force for an air cargo system at a base in Japan. The agreement stipulated that "[i]n the event of disagreement between the parties to this agreement, arbitration shall be conducted pursuant to the laws of and in the State of Connecticut." In April of 2000, Transact assigned its rights in the agreement to ACEquip Ltd. When a dispute later arose between AEC and ACEquip, Transact and ACEquip jointly moved in state court for the appointment of an arbitrator, a procedure authorized under Connecticut law. AEC removed the case to federal court, where it argued that the case against it should be dismissed because Transact, having assigned its rights to ACEQuip, lacked standing to sue. Both Transact and ACEQuip opposed the motion to dismiss and AEC alleged that it never accepted Transact's offer to assign its rights.

The court denied AEC's motion to dismiss and instead dismissed Transact as a party. It reasoned that Transact did not object to the dismissal since AEC had offered "no objection" to the assignment of rights to ACEQuip. The court also ordered AEC to show cause why an arbitrator should not be appointed. AEC argued against the appointment on the ground that an arbitrator appointment at this time would be premature. AEC further stated that it wished to prove that Transacts assignment to ACEquip was invalid, and that time was needed for discovery and a hearing on the validity of the assignment. The district court held that an agreement to arbitrate existed, and ordered that an arbitrator be appointed to determine the validity of the assignment. AEC appealed.

The 2nd Circuit first held that the dispute was governed by the Federal Arbitration Act. Then it vacated the dismissal of Transact. The court found that AEC had not waived its right to protest Transacts assignment to ACEquip since it had challenged this assign- ment in its pleadings and appearances before the district court. Accordingly, Transact was reinstated as a party.

Next the appeals court affirmed the district court's appointment of the arbitrator, since with Transact back in the case supporting the motion for the appointment, there was no question that it was appropriate.

Then the court rejected AEC's contention that where the validity of an arbitration agreement is in dispute, the district court must hold a hearing to address the validity of the arbitration agreement before an arbitrator is appointed. The court found nothing in the FAA or in Connecticut law to support this argument. The court distinguished 2nd Circuit precedent involving motions to appoint an arbitrator from cases involving motions to compel. It concluded that whereas a motion to compel arbitration would have brought the question of the validity of the arbitration before the court, that was not the case where the issue was the appointment of the arbitrator, as long as an agreement to arbitrate existed (with Conn. Gen. Stat. 52-411 requiring a written agreement). Following the reinstatement of Transact as a party, there was no doubt that an agreement to arbitrate existed. Thus, a court need not become involved unless or until a valid complaint is made following the appointment of an arbitrator.

Finally, the court held that the district court was incorrect in listing the issues the arbitrator should address because the arbitrator's task might evolve into something broader or narrower than the court's mandate.

ACEQuip Ltd. v. American Engineering Corp., LLC, No. 01-9166 (2d Cir. Jan. 3., 2003).

- Liz Carson