Affording Arbitration: Kavanaugh’s First Majority Opinion Further Strengthens the Enforceability of Contractual Arbitration Clauses

January 30, 2019

shutterstock_529874140

Justice Brett Kavanaugh made headlines earlier this month when he issued his first majority opinion for the United States Supreme Court. The opinion resolved a circuit split over whether the Federal Arbitration Act permits a court to decline to enforce arbitration agreements that delegate arbitrability questions to an arbitrator.  

The opinion, issued in the case Henry Schein v. Archer and White Sales, vacated and remanded a Fifth Circuit decision that relied on the so-called “wholly groundless” exception to arbitrability. That exception allowed courts to determine arbitrability of a dispute if the argument for arbitrability was “wholly groundless,” even where the contract delegated such authority to the arbitrator. 

Justice Kavanaugh reiterated the well-established principle that “courts must enforce arbitration contracts according to their terms.” He continued that “when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract, even if the court thinks that the arbitrability claim is wholly groundless.”

The opinion follows a long line of Supreme Court opinions signaling the ever-strengthening acceptance and enforceability of arbitration agreements in the United States. This domestic trend is also apparent internationally, where globalization has caused continuous growth of international arbitrations, and cross-border contracts increasingly mandate arbitration over in-court dispute resolution.

Just as arbitration has increased in prevalence, so has the availability of resources designed to facilitate the process. Large international cities are vying for positions as the most popular arbitral venues. Particularly the newer entrants to the scene—such as Hong Kong and Singapore—are actively creating policies and infrastructure designed to attract arbitrating parties to their jurisdictions.

One key industry that has grown significantly as a result of increasing arbitration is litigation funding, which provides access to capital that can help parties shoulder the often-substantial expenses involved in arbitration. Some common arbitration expenses—such as daily or hourly arbitrator fees, filing fees, and ongoing administrative costs—are not present in traditional litigation, and are typically borne by the parties directly, rather than by attorneys. As these expenses add up, even simple matters can become expensive to arbitrate. Accordingly, funding may be essential for parties who could not otherwise bear the significant risks and financial burdens implicit in arbitration.

Even absent financial necessity, litigation funding can be a useful resource for parties facing arbitration. Well-heeled, sophisticated companies may seek arbitration funding to share risk and remove the cost of the arbitration from their balance sheets. Bentham’s Oliver Gayner and Noah Wortman recently addressed why well-capitalized companies should consider litigation funding in an article for the International Corporate Governance Network’s ICGN Yearbook 2018. As Gayner and Wortman noted, funding “can be a sensible way of managing risk, as giving some equity in the success of a particular litigation or arbitration provides certainty instead of exposure.”

Likewise, law firms with robust international arbitration practices are increasingly using litigation funding to help them compete for business. Law firms can team with a funder on a single case or portfolio basis. Portfolios allow firms to finance several clients’ cases at once and generally contain three or more cases with strong merits, damages, and collectability. You can read more about the basics of portfolio funding here.

We recognize the increased use of funding in arbitrations and the need to have experienced counsel help claimants and lawyers through the funding process. To that end, Dana MacGrath recently joined our New York office as an Investment Manager to focus on funding international arbitration matters. For more information on various funding options for arbitration, contact us for a consultation.