Businesses agree to arbitration to stay out of the courtroom and avoid the delay and expense that come with it. Yet a clause that calls for arbitration under “the rules of the American Arbitration Association,” without saying which rules, can leave a judge in charge of the first question in any dispute: whether the case belongs in arbitration at all. A few additional words in the contract can prevent that.
Most business owners who sign a contract with an arbitration clause assume they've settled where disputes will be decided. If something goes wrong, it goes to an arbitrator, and the courthouse is out of the picture. That assumption is often mistaken. A Florida appellate decision, Holdings JJJ, LLC v. Rand, shows how an ordinary-looking clause can put a party right back in front of a judge.
The Fight Before the Fight
When one side wants to arbitrate, and the other does not, someone must decide whether the dispute falls under the arbitration clause. That preliminary fight can take months. It involves motions, hearings, and often an appeal, all before anyone gets to what the dispute is actually about.
Florida law gives the judge that decision unless the contract clearly gives it to the arbitrator. Many lawyers assume that any reference to the American Arbitration Association takes care of this. The assumption traces to the Florida Supreme Court’s decision in Airbnb, Inc. v. Doe, which held that a contract adopting AAA rules that give the arbitrator this power is sufficient.
The important words are “rules that give the arbitrator this power.”
The AAA (and other Panels) Has More Than One Rulebook
The AAA (and other similar panels) does not have a single set of rules. It has separate rules for commercial disputes, consumer disputes, construction disputes, employment disputes, and others. Some give the arbitrator the power to decide what is arbitrable. Some apply only to certain kinds of contracts. At least one set has been retired.
A clause that says only “the rules of the American Arbitration Association” does not tell anyone which of these applies. If a court cannot tell which rules the parties chose, it cannot tell whether they agreed to let the arbitrator decide what gets arbitrated. When the contract is unclear on that point, the judge keeps the decision. Another Florida appellate court reached the same conclusion several years ago, and the Florida Supreme Court has not said otherwise.
The Uncertainty in the Law
In Holdings JJJ, the buyers of a property sued the seller over problems they discovered after closing. The purchase contract required arbitration “in accordance with the arbitration rules of the American Arbitration Association.” It did not name any particular set of rules.
The seller asked the court to send the case to arbitration and argued that the arbitrator, not the judge, should decide whether the buyers’ claims were covered. To support that argument, the seller relied on the AAA’s consumer rules. The trouble was that the consumer rules, by their own terms, do not apply to real estate sales. The seller offered no alternative. The trial court kept the question for itself, and the appellate court would not let the seller switch to a different argument on appeal.
The seller eventually won the right to arbitrate, because the appellate court found that the buyers’ claims fell within the clause. But it got there only after losing in the trial court, appealing, and still facing a remand on whether it had given up its right to arbitrate by litigating in the meantime. That is a great deal of courtroom time for a party whose contract was supposed to keep it out of court.
The Words That Decide What Gets Arbitrated
The case carries a second lesson, about which disputes an arbitration clause covers.
Florida courts pay close attention to a short phrase. A clause covering disputes “arising out of or relating to” a contract is treated as broad and reaches nearly any claim connected to the deal. A clause covering disputes “arising out of” the contract, without the words “or relating to,” is treated as narrow and reaches only claims tied directly to the contract’s terms. That difference can decide whether an arbitrator or a jury hears a fraud claim, or a dispute over a related document.
The clause in Holdings JJJ used the narrower phrase, and the trial court treated that as the end of the matter. The appellate court disagreed, in part because the clause covered disputes arising out of “the transaction, sale, contract, or closing,” not just the contract. Those extra words widened the clause enough to reach the buyers’ claims, including a claim that the seller had hidden a problem with the property before the sale.
The drafter decides how far the clause reaches. If broad coverage is the goal, “arising out of or relating to” is the language Florida courts recognize. If narrower language is used, the words that follow it matter.
Four Things to Check
These are inexpensive corrections, and you can make most of them the next time you update a contract form or negotiate a new agreement.
First, name the rules. For example, if you want to use AAA, consider being specific in your language and saying “The Commercial Arbitration Rules of the American Arbitration Association” is one word longer than “the rules of the American Arbitration Association,” and that word may determine who decides your dispute.
Second, say it directly. If the goal is for the arbitrator to decide whether a dispute is covered, the contract should say so in its own sentence rather than leaving it to whatever the chosen rules provide. That protects the clause even if the arbitration panel later changes or retires those rules.
Third, choose the scope on purpose. If the clause is meant to reach every dispute connected to the relationship, consider using “arising out of or relating to.”
Fourth, if a dispute has already arisen and arbitration is on the table, confirm which rules actually apply before filing anything. The seller in Holdings JJJ chose the wrong rulebook, argued nothing else, and was held to that choice. The same clause is worth a close look from the other side, too, because a party that would rather be in court may find the contract gives it more room than expected.
An arbitration clause is supposed to settle where disputes will be resolved before any dispute arises. One that leaves the basic questions open invites exactly the litigation it was written to avoid.
Alex P. Rosenthal and Rosenthal Law Group represent clients in commercial litigation and appellate matters throughout Florida. This commentary is for informational purposes only and does not constitute legal advice. You may contact our office at 954-384-9200 or www.rosenthalc