Morrison Law Journal


The Morrison Law Journal May 2018 Volume XIII, Edition 5 When It Is A Matter For The Court To Decide: Court Of Appeal Affirms Trial Court's Ruling That Trial Court – Not The Arbitrator - Is To Determine Question of Arbitrability Involving "Delegation" Clause By: Edward F. Morrison, Jr., Esq. Larry A. Schwartz, Esq.
As many are aware, California law strongly supports the arbitration of private contractual disputes where the parties have agreed to arbitrate. One question that has arisen over time is which forum decides whether the arbitration contract can be enforced in the first place. In many arbitral contracts, a clause, sometimes known as a "delegation clause", is inserted and provides that the arbitrator, not the court, determines whether the arbitration clause is enforceable (i.e. the arbitrator, and not the court, determines whether the arbitration clause is enforceable to begin with). There is United States Supreme Court precedent that holds that, where the challenge is to the arbitration clause as a whole, it is the arbitrator, not the trial court, that determines whether the arbitration contract is enforceable (if there is a delegation clause). See, Rent-A-Center, West, Inc. vs. Jackson (2010) 130 S.Ct. 2772. However, a question remains as to situations where there is a challenge to the enforceability of the delegation clause itself. That question was considered under California law in the recent case of Nielsen Contracting, Inc. v. Applied Underwriters, Inc. (2018) Case No. D072393 ("Nielsen case"). In the Nielsen case, a California contractor obtained workers compensation insurance from an entity which then provided an endorsement which called for program benefits to be administered and paid by a third party. The endorsement had not been filed with and approved by the California Insurance Commissioner as required by law. In a matter involving another contractor, the California Insurance Commissioner determined that the endorsement was not enforceable and did not comply with California law. The contractor, Nielsen Contracting, Inc. ("Nielsen"), filed suit against insurer/underwriter, Applied Underwriters, Inc. ("Applied") and two entities affiliated with Applied for breach of contract and other claims arising from a workers compensation insurance program which Nielsen had agreed to be bound to. Applied, citing an arbitration clause in the endorsement with a subsidiary of Applied (which in turn called for all matters to be arbitrated in the British Virgin Islands), moved the Trial Court to compel arbitration. Nielsen then argued that, while there was a delegation clause in the endorsement (which called for any question of arbitrability to be ruled on by the arbitrator), the insurance contract and the endorsement were unenforceable under California law. The Trial Court agreed. 1 On appeal, the Court of Appeal affirmed and ruled that, where the challenge is directed at the delegation clause itself, and not merely the arbitration contract as a whole, it is the Trial Court, and not the arbitrator, that decides and rules upon the enforceability of the delegation clause. The Nielsen case will have significant impacts for arbitration in that, even where there is a delegation clause (calling for the arbitrator to determine the arbitrability of a matter), there may be a role for the Trial Court in determining whether the delegation clause is enforceable. About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com. Publication Note: The Morrison Law Group wishes to disseminate this publication to all clients and colleagues of the Firm who wish to receive it. Should any recipient desire to be removed from the distribution list, or wishes to have a colleague added, please contact Jim Van Dusen at The Morrison Law Group at 213 356-5504 or vandusen@morrisonlawgroup.com. Disclaimer Note: The legal article presented above is intended to provide general information which may be of interest or use to clients and colleagues of The Morrison Law Group and should not be construed as legal advice on any matter. 2

As many are aware, California law strongly supports the arbitration of private contractual disputes where the parties have agreed to arbitrate. One question that has arisen over time is which forum decides whether the arbitration contract can be enforced in the first place. In many arbitral contracts, a clause, sometimes known as a "delegation clause", is inserted and provides that the arbitrator, not the court, determines whether the arbitration clause is enforceable (i.e. the arbitrator, and not the court, determines whether the arbitration clause is enforceable to begin with).

There is United States Supreme Court precedent that holds that, where the challenge is to the arbitration clause as a whole, it is the arbitrator, not the trial court, that determines whether the arbitration contract is enforceable (if there is a delegation clause). See, Rent-A-Center, West, Inc. vs. Jackson (2010) 130 S.Ct. 2772. However, a question remains as to situations where there is a challenge to the enforceability of the delegation clause itself. That question was considered under California law in the recent case of Nielsen Contracting, Inc. v. Applied Underwriters, Inc. (2018) Case No. D072393 ("Nielsen case"). In the Nielsen case, a California contractor obtained workers compensation insurance from an entity which then provided an endorsement which called for program benefits to be administered and paid by a third party. The endorsement had not been filed with and approved by the California Insurance Commissioner as required by law. In a matter involving another contractor, the California Insurance Commissioner determined that the endorsement was not enforceable and did not comply with California law.

The contractor, Nielsen Contracting, Inc. ("Nielsen"), filed suit against insurer/underwriter, Applied Underwriters, Inc. ("Applied") and two entities affiliated with Applied for breach of contract and other claims arising from a workers compensation insurance program which Nielsen had agreed to be bound to. Applied, citing an arbitration clause in the endorsement with a subsidiary of Applied (which in turn called for all matters to be arbitrated in the British Virgin Islands), moved the Trial Court to compel arbitration. Nielsen then argued that, while there was a delegation clause in the endorsement (which called for any question of arbitrability to be ruled on by the arbitrator), the insurance contract and the endorsement were unenforceable under California law. The Trial Court agreed.

On appeal, the Court of Appeal affirmed and ruled that, where the challenge is directed at the delegation clause itself, and not merely the arbitration contract as a whole, it is the Trial Court, and not the arbitrator, that decides and rules upon the enforceability of the delegation clause.

The Nielsen case will have significant impacts for arbitration in that, even where there is a delegation clause (calling for the arbitrator to determine the arbitrability of a matter), there may be a role for the Trial Court in determining whether the delegation clause is enforceable.

About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com.

Publication Note: The Morrison Law Group wishes to disseminate this publication to all clients and colleagues of the Firm who wish to receive it. Should any recipient desire to be removed from the distribution list, or wishes to have a colleague added, please contact Jim Van Dusen at The Morrison Law Group at 213 356-5504 or vandusen@morrisonlawgroup.com.

Disclaimer Note: The legal article presented above is intended to provide general information which may be of interest or use to clients and colleagues of The Morrison Law Group and should not be construed as legal advice on any matter.