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In an entertaining decision, the California Court of Appeal for the Fourth District urges “the desideratum that parties actually think about the idea of replacing the judge with an arbitrator as far as the threshold issue of arbitrability is concerned.”  Gilbert Street Developers, LLC v. La Quinta Homes, LLC (June 11, 2009) 2009 DJDAR 8496.  The decision explains why doing so is a good idea. 
 
In 1998, the parties formed an LLC to buy property in Garden Grove.  Their agreement contained an all-too common provision calling for arbitration “to be conducted in accordance with the Rules of the American Arbitration Association at the date thereof.”  At the time of the agreement, the AAA Rules did not provide that arbitrators had jurisdiction to decide their own jurisdiction. Ten years later a dispute developed over whether to sell the property.  One group of Members commenced an arbitration proceeding.  The other party objected on the ground that the dispute was not subject to arbitration.  By this time, the AAA Rules did provide that arbitrators could rule on their own jurisdiction, and the arbitrators determined that the dispute was arbitrable.  The objecting party did not appear at the arbitration. The arbitrators found in favor of the Claimants on all points. 
 
The trial court refused to confirm the award, and the Court of Appeal affirmed.  “California common law is settled that parties to an arbitration contract must clearly and unmistakably agree that arbitrators will have power to decide their own jurisdiction; otherwise the question of whether arbitrators have jurisdiction is for the court.”  (8497).  The Court noted (with some skepticism) two decisions holding that the incorporation by reference of the AAA Rules did authorize arbitrators to decide their own jurisdiction – but in both, the AAA Rule providing such authorization was in effect at the time of the parties’ agreement.  Here, the Court concluded, “incorporating the possibility of a future rule by reference simply doesn’t even meet the basic requirements for a valid incorporation by reference under simple state law.  Most basically, what is being incorporated must actually exist at the time of the incorporation, so the parties can know exactly what they are incorporating.”  Id. at 8498 (emphases in original).  “Prediction,” the Court quoted Niels Bohr as saying,”is very difficult, especially about the future.” 
 
The decision’s applicability may be limited to the issue decided.  However, the incorporation by reference principles on which the decision is based may provide arguments for parties wishing to avoid arbitration under the ubiquitous provision at issue.

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