Originally from Dispute Resolution Journal

Drafters of arbitration agreements should take note of the 2nd Circuit’s latest ruling on arbitrability. Here the most active federal appeals court on the subject of U.S. arbitration law discredits a 40-year-old key decision on arbitrability that is the foundation for narrowly construing the phrase “arising under the contract.” Author Marc Goldstein comments on the lengths the court has gone to criticize this decision and cast doubt on its precedential value.

Debate intensifies in corporate executive suites and the offices of general counsel about the relative costs and efficacy of traditional litigation versus arbitration and other alternative dispute resolution processes. In this environment, lawyers who prepare international commercial contracts are being called upon by their clients to draft arbitration clauses that provide substantial certainty about which disputes will be subject to the arbitration requirement and which will be excluded from arbitration in order to reserve the right to litigate in court. The jurisprudence of “arbitrability,” therefore, is a body of law with increasing practical importance. As a result, a recent decision on arbitrability by the U.S. Court of Appeals for the 2nd Circuit—arguably the most active appellate forum on the subject of federal arbitration law—is of substantial interest.

Interpreting a reinsurance contract calling for arbitration “with respect to any transaction involved,” the 2nd Circuit held in ACE Capital Re Overseas Ltd. v. Central United Life Insurance Co., that the arbitration clause was a “broad” one that applied to a claim that the contract was fraudulently induced.1 In so holding, the court rejected the lower court’s view that this language limited arbitrability to disputes “arising under the contract,” which would have excluded this fraudulent inducement claim.