You can imagine that with seven young children in our house, there are a substantial number of arguments on any given day. When both my wife and I are at home, the question becomes, Who decides disputes: Mom or Dad? In the construction arena, the same types of questions arise.
Recently, in Bechtel Do Brasil Construcoes Ltda v. UEG Araucaria, Ltda., 638 F.3d 150 (2d Cir. 2011), this same issue arose in the context of whether the owner’s claims were barred by the applicable statute of limitations. Almost six years after completion of the power plant, the steam-turbine failed. The owner filed a demand for arbitration against the contractor.
The contractor filed a motion in court to permanently stay the arbitration because it argued that the claims were beyond the statute of limitations. The owner filed a response, arguing that the arbitrator (and not the court) should decide the issue of the limitations period.
Who decides arbitrability? Whether the court or the arbitrator decides the statute of limitations issues depends on the parties’ contractual agreement. In this case, the disputes clause stated that: "Any dispute, controversy, or claim arising out of or relating to the Contract, or the breach, termination or validity thereof … shall be finally settled by arbitration…" However, another provision in the contract stated that "the validity, effect and interpretation of this agreement to arbitrate shall be governed by the laws of the State of New York" and that "the law governing the procedure and administration of any arbitration instituted … is the law of the State of New York." Can you see the dilemma now? In the end, the appeals court concluded that the arbitrator (and not the court) was required to decide the statute of limitations question.
The takeaways. The real lesson here is to understand that the parties’ agreement will determine who decides arbitrability of disputes. When you use phrases like "any and all disputes" in your contract, then it is likely that the arbitration or dispute provision is elastic enough to encompass every imaginable dispute, including statute of limitation defenses. This exercise is more than academic because there may be strategical reasons for you wanting a court, as opposed to an arbitrator, deciding gateway issues and defenses. So choose your words wisely in your contracts.