AAA Commercial Rule 8 Enforced

Dispute Resolution Journal, May-Jul 2006

COMMERCIAL

By incorporating the Commercial Arbitration Procedures of the American Arbitration Association, the parties clearly and unmistakably agreed that the arbitrator should decide whether certain arbitration clauses with remedial restrictions made the arbitration clauses invalid, the 11th Circuit recently held.

Palmer Ranch and Terminix were parties to 20 separate contracts for termite services, each containing an arbitration clause. There were three types of clause. One provided for arbitration of any controversy or claim arising out of or relating to the agreement. The other two called for arbitration of all matters in dispute between the parties. One clause carved out indirect, special or consequential damages or loss of anticipated profits. The other two removed the arbitrator's power to hold Terminix responsible for repair or replacement of termite damage; loss of anticipated rents or profits; loss of quiet enjoyment; direct, indirect, special, incidental, consequential, exemplary or punitive damages; or damages or penalties relating to or arising out of any deceptive trade practice claim. The agreements said each party would bear its own attorneys' fees.

When Palmer Ranch sued Terminix, claiming numerous violations of state statutes and common law claims, Terminix moved the court to compel arbitration. Palmer Ranch opposed, asserting that remedial restrictions in the arbitration agreements made these agreements unenforceable. The district court agreed, holding that the arbitration clauses were unenforceable because they lacked a severability clause.

The 11th Circuit reversed. Relying on the Supreme Court decision in PacifiCare Health System v. Book, the appeals court held that an arbitrator should first decide whether, as Palmer Ranch argued, the agreements actually excluded treble damages or declaratory or injunctive relief, since they were silent as to these forms of relief. The court pointed out that declaratory and injunctive relief are not generally thought of as damages or penalties. Moreover, it noted that arbitrators generally are empowered to fashion equitable remedies and AAA rules allow such relief. Furthermore, it cited the contract interpretation rule that ambiguous contract terms are construed against the drafter.

The 11th Circuit then clarified the procedures district courts should follow when an arbitration agreement is challenged because it contains allegedly illegal remedial restrictions: It said that a district court first must determine whether those restrictions are unenforceable. If some or all are unenforceable, then the court must determine whether those provisions are severable as a matter of state law. If severable, then the court must compel arbitration. It should refuse to compel arbitration only where the invalid terms of the arbitration clause render the entire clause void as a matter of state law.

However, the 11th Circuit said these procedures did not apply in this case because the parties agreed to arbitrate under the AAA Commercial Arbitration Rules, which provide in Rule 8(a) that the arbitrator has the power to rule on his or her own jurisdiction, including any objections regarding the existence, scope or validity of the arbitration agreement. The appeals court said that by incorporating AAA rules, the parties clearly and unmistakably agreed that the arbitrator should decide whether the arbitration clause was valid.

Terminix International Co. LP v. Palmer Ranch Ltd. Partnership, 432 F.3d 1327 (11th Cir. 2005).