The general presumption in favour of arbitration is well documented. However, it is not absolute. Notably, in the U.S., the presumption does not apply to the question of the arbitrability of arbitrability issues themselves, at least in the Fourth Circuit.
The United States Court of Appeals for the Fourth Circuit (the "Fourth Circuit"), in its recent decision in Berkeley County School District v. HUB International Limited, 2025 WL 727837 ("Berkeley"), considered this very question.
In Berkeley, the Court addressed allegations by a school board that it had been the target of a massive insurance fraud scheme perpetrated by an insurance agency and the board's own CFO (among others). Significantly, the alleged scheme involved Brokerage Services Agreements ("BSAs") containing arbitration provisions with delegation clauses. In considering the existence and applicability of the delegation clauses, the Court concluded that where threshold arbitrability questions have been delegated to an arbitrator, the determination of the claim's arbitrability rests with the arbitrator. This principle applies even if the Court considers the argument in favour of arbitrability to be entirely without merit.
Below, we review the Court's decision and consider its implications.
Factual Background
In January 2018, the Berkeley County School Board of Trustees (the "Plaintiff") filed suit against multiple defendants – collectively referred to as HUB International (the "Defendants") – alleging that from 2001 to 2016 the Defendants had perpetrated a massive insurance contract steering and kickback scheme, defrauding the Plaintiff of millions of dollars.1
In March 2018, the Defendants moved to compel arbitration of the claims under the Federal Arbitration Act (the "FAA"). The Defendants alleged that between 2002 and 2011, Knauff Insurance ("Knauff") (a defendant insurance agency purchased by HUB International) and the Plaintiff entered six BSAs – dated 2002, 2003, 2005, 2006, 2009, and 2011. The BSAs provided that in exchange for annual fees, Knauff would provide insurance-related services to the Plaintiff. The BSAs contained an arbitration clause which read in relevant part:2
All disputes, claims or controversies relating to [these Agreements], or the services provided, which are not otherwise settled, shall be submitted to a panel of three arbitrators and resolved by final and binding arbitration, to the exclusion of any courts of laws, under the commercial rules of the American Arbitration Association.
The Defendants moved to compel arbitration on the grounds that the Plaintiff's complaints were covered by the arbitration clauses contained within the BSAs.
Trial History
The Defendant's motion to compel moved between the District Court for the District of South Carolina (the "District Court") and the Fourth Circuit three times before finally being reversed by the Fourth Circuit in 2025. As the progression of the motion through the Courts is relevant to understanding the Fourth Circuit's ultimate decision to reverse, a brief summary of the trial history is included below:
- In January 2019, on the initial hearing of the motion, the District Court denied the Defendant's motion to compel arbitration. The District Court found that the BSAs had been signed by the Plaintiff's CFO for the purpose of receiving kickbacks. Since the CFO had sought to defraud the Plaintiff, the Court held that the BSAs were not binding on the Plaintiff.3 The Defendants appealed.
- On appeal, in December 2019, the Fourth Circuit vacated and remanded the denial order. The Court found that since factual issues existed concerning the making of the arbitration agreement, Section 4 of the FAA required the District Court to conduct trial proceedings to resolve the factual questions before resolving the arbitration motion.4
- On remand, in June 2021, the District Court conducted a bench trial and again denied the Defendants' motion to compel arbitration. First, following the Fourth Circuit's prior ruling, the District Court held that since the operative complaint only alleged the CFO began receiving kickbacks in 2005, the 2002 and 2003 BSAs, which terminated before the alleged complaint occurred, could not provide grounds to compel arbitration.5 Further, the District Court held that (1) Knauff and the Plaintiff never agreed to the 2005 BSA and (2) the Plaintiff had no knowledge of, and therefore did not assent to, the 2006, 2009, and 2011 BSAs. Accordingly, the District Court concluded that the Plaintiff was not bound by the arbitration provisions contained in any of the BSAs. The Defendants appealed the decision with respect to the 2002 and 2003 BSAs only.6
- On appeal, in December 2022, the Fourth Circuit found that as the District Court had been presented with substantially different evidence at trial concerning the applicability of the 2002 and 2003 BSAs, it was not bound by the Fourth Circuit's earlier decision, and therefore, erred by failing to consider the new evidence. Consequently, it vacated the District Court's denial and remanded the matter for further proceedings.7
- On remand, in March 2024, the District Court once again denied the Defendant's motion to compel. Notably, the District Court found that both the Plaintiff and Defendants had constructively ratified the 2002 and 2003 BSAs by performing their obligations in the agreements. It also found that pursuant to the commercial rules of the American Arbitration Association (the "AAA") (which the BSAs had incorporated), the question of arbitrability was reserved to the arbitrator. Nevertheless, the Court refused to compel arbitration. Rather, the District Court held that the questions of whether the parties had agreed to arbitrate at all, and if so, whether the agreement had expired, were threshold issues to be determined by the Court and not the arbitrator. Therefore, although the District Court held that the parties had agreed to the arbitration clauses in the 2002 and 2003 BSAs, it refused to find an agreement to arbitrate on the basis that the alleged misconduct occurred after the BSAs' termination.8 The Defendants appealed the decision.
The Fourth Circuit's Decision
In March 2025, on the motion's third appearance before the Fourth Circuit, the Court reversed the District Court's denial of the motion and remanded it with instructions to compel arbitration. Ultimately, the Fourth Circuit concluded that the District Court, having found the parties formed enforceable agreements to arbitrate which delegated arbitrability questions to the arbitrator, erred by deciding itself whether the disputes fell within the scope of those agreements. That determination, the Court held, should have been reserved for the arbitrator.
In arriving at its decision, the Fourth Circuit considered three issues: (1) whether a valid arbitration agreement existed, (2) if so, whether the arbitration agreement delegated arbitrability questions to an arbitrator, and (3) if so, whether the question of the applicability of the arbitration clause to a particular dispute was a question of arbitrability.
On the first issue, the Court concluded that the 2002 and 2003 BSAs, along with their respective arbitration provisions, were enforceable contracts. The Court began its analysis by affirming the principles that (1) "Before referring a dispute to an arbitrator, . . . the court determines whether a valid arbitration agreement exists" and (2) "[P]rovisions requiring the arbitration of arbitrability questions do not . . . preclude a court from deciding that a party never made an agreement to arbitrate any issue".9 "Any issue", the Court explained, includes questions of arbitrability. Noting that neither Party challenged the validity and enforceability of the 2002 and 2003 BSAs, the Court found the BSAs, and the arbitration agreements within them, to be enforceable.
On the second issue, the Court concluded that the Parties, in the 2002 and 2003 BSAs, agreed to refer the issue of arbitrability to the arbitrator. The Court observed that the general presumption in favour of arbitration is not to be applied "as a rule of contract interpretation to resolve questions of the arbitrability of arbitrability issues themselves".10 Rather, the Court held that there must be "clear and unmistakable" evidence that the Parties delegated arbitrability questions to the arbitrator.
In this case, the Court observed that the arbitration provisions in the BSAs incorporated the AAA commercial rules, and that the rules grant arbitrators the authority to rule on jurisdictional questions, including those related to the arbitrability of a claim. The Court further noted that neither Party challenged the District Court's holding that the arbitration clauses delegated arbitrability to the arbitrator. As such, the Court found that the Parties agreed to arbitrate questions of arbitrability.
On the third issue, the Court concluded that the question of the arbitrability of the Plaintiff's claims was reserved for the arbitrator, not a court. The Court noted that the Parties disputed whether the arbitration provisions of the BSAs governed the claims set out in the lawsuit. In particular, the Plaintiff argued that the 2002 and 2003 BSAs terminated before the dispute arose, and that this gave rise to a question of formation for the Court to decide, not an arbitrator.
The Court disagreed. Rather, the Court held that the question of whether an arbitration agreement applies to a particular dispute is a threshold arbitrability question (a question of duration and scope, not formation). Consequently, the Court declined to affirm the District Court's finding that the alleged complaints did not arise under the 2002 and 2003 BSAs. Instead, the Court held that where a court is satisfied that the parties have formed an agreement to arbitrate, and that the agreement delegates questions of arbitrability to an arbitrator, it has no authority to decide issues of arbitrability.
Therefore, having held that (1) the Parties formed a valid arbitration agreement, (2) the agreement delegated the determination of arbitrability issues to the arbitrator, and (3) the question of whether the arbitration agreement applied to the Plaintiff's claims was reserved for the arbitrator, the Fourth Circuit reversed the District Court's decision and remanded it with instructions to compel arbitration.
Commentary
Although Berkeley is an American case, applying the Federal Arbitration Act and the commercial rules of the American Arbitration Association, it will nevertheless be of interest to Canadian readers given the prevalence of similar threshold arbitration issues that continue to arise in the Canadian case law, and given the fact that many contracts in Canada are governed by US law and/or compel arbitration under the AAA's commercial rules.
In particular, the Fourth Circuit's decision provides guidance as to the jurisdiction of an arbitrator to determine gateway issues concerning the existence of an arbitration agreement and the arbitrability of a given claim. The Fourth Circuit, in Berkeley, offers the following principles:
- Berkeley makes clear that the determination of the existence of a valid arbitration agreement is to be made by a Court. This is true even of a clause delegating questions of arbitrability to an arbitrator, as this is an issue as to the existence of what is essentially an agreement to arbitrate questions of arbitrability.
- Berkeley distinguishes between questions as to the existence of an arbitration agreement (which include issues surrounding the formation of a contract) and questions as to arbitrability (which include issues concerning duration, breadth, and scope).
- Berkeley confirms that parties may agree to have an arbitrator decide questions of arbitrability. However, Berkeley explains that the presumption in favour of arbitration does not apply to the question of the arbitrability of arbitrability issues. That is to say, the Courts are not to assume that the parties agreed to arbitrate arbitrability issues unless "clear and unmistakable" evidence is available that they have.
- Berkeley, acknowledging the precedent set by other circuits, affirms that the incorporation of the AAA commercial rules is "clear and unmistakable" evidence that the parties agree to reserve questions of arbitrability for an arbitrator.
- Berkeley underscores that where it is "clear and unmistakable" that the parties have agreed to delegate questions of arbitrability to an arbitrator, a Court has no authority to decide arbitrability issues. This is so even where, in the Court's view, a claim that the arbitration agreement applies to a particular dispute is groundless.
Consequently, Berkeley raises certain interesting issues.
First, readers may note an apparent inconsistency between the AAA commercial rules and the Court's holding that the question of the existence of an arbitration agreement should be made by a Court. Of note, the rules state, "The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim".11 However, while the Court found incorporation of the AAA commercial rules to be an unmistakable expression of a parties' intent to reserve questions of arbitrability for an arbitrator, it declined to reach the same conclusion with respect to the question of existence.
Readers will recall from our previous discussion of ONE Lodging Holdings LLC v American Hotel Income Properties REIT (GP) Inc., 2024 BCSC 2179, that the Court in ONE took a similar approach. Notably, the Court held that on an application for a stay, where the existence of an arbitration agreement is in dispute, the competence-competence principle is not engaged, and the issue must be decided by the Court.12
However, Article 16 of the Model Law, which has been incorporated into most Canadian arbitration legislation (including Ontario's International Commercial Arbitration Act and mirrored in the Arbitration Act, 1991) states that "the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement".13 Therefore, it is worth contrasting the foregoing against the holdings in Berkeley and ONE.
Finally, readers may find, like the Plaintiff, that the decision gives rise to a concern that parties may opportunistically use the existence of delegation provisions to "make frivolous motions to compel arbitration".14 This could occur, for example, where parties make claims under expired agreements or even claims unrelated to or outside the scope of an agreement altogether. Interestingly, this is not unlike ONE Lodging, where we cautioned that the Court's application of the Sport Maska criteria could be abused by litigants seeking to avoid arbitration. Consequently, there is the potential for inconsistencies in both decisions to be exploited by strategic litigants.
Ultimately, Berkeley serves as a caution concerning the challenges of disputing an agreement to arbitrate arbitrability and of drafting arbitration agreements more broadly. It remains incumbent upon parties, when drafting arbitration clauses, to be clear about whether they agree to arbitrate a particular dispute, and if so, who should have authority to determine questions of arbitrability.
Footnotes
1 Berkeley Cnty Sch Dist v HUB Int'l Ltd, 363 F Supp (3d) 632 at 636 (DSC, 2019); Berkeley Cnty Sch Dist v HUB Int'l, Ltd, 944 F (3d) 225 at 228 (4th Cir 2019).
2 Berkeley Cnty Sch Dist v HUB Int'l, Ltd, 944 F (3d) 225 at 228-229 (4th Cir 2019).
3 Berkeley Cnty Sch Dist v HUB Int'l Ltd, 363 F Supp (3d) 632 at 651 (DSC, 2019).
4 Berkeley Cnty Sch Dist v HUB Int'l, Ltd, 944 F (3d) 225 at 241-242 (4th Cir 2019).
5 Berkeley Cnty Sch Dist v HUB Int'l, Ltd, 2021 WL 2253265 at paras 145-147 (DSC 2021).
6 Berkeley Cnty Sch Dist v HUB Int'l, Ltd, 2021 WL 2253265 at paras 169-175 (DSC 2021).
7 Berkeley Cnty Sch Dist v HUB Int'l, Ltd, 2022 WL 17974626 at 5-6 (4th Cir 2022).
8 Berkeley Cnty Sch Dist v HUB Int'l, Ltd, 2024 WL 1349226 at 37, 47-49 (DSC 2024).
9 Berkeley Cnty Sch Dist v HUB Int'l, Ltd, 2025 WL 727837 at 7 (4th Cir 2025).
10 Berkeley Cnty Sch Dist v HUB Int'l, Ltd, 2025 WL 727837 at 8 (4th Cir 2025).
11 American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures, R-7(a).
12> Arbitration Act, 1991, SO 1991, c 17, s. 17(1); International Commercial Arbitration Act, 2017, SO 2017, c 2, Schedule 2, Chapter IV, Article 16.
13 UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006 at Article 16.
14 Berkeley Cnty Sch Dist v HUB Int'l, Ltd, 2025 WL 727837 at 14 (4th Cir 2025).
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