This dispute arose out of a “workout” agreement, embodied in four separate documents, which governed the “working out” of debts to First Options that MKI incurred as a result of the October 1987 stock market crash.
In 1989, after entering into the agreement, MKI lost an additional USD 1.5 million. First Options then took control of, and liquidated, certain MKI assets, demanding immediate payment of the entire MKI debt and insisting that the Kaplans personally pay for any deficiency.
When its demands went unsatisfied, First Options sought arbitration before the Philadelphia Stock Exchange, with the Kaplans as parties.
MKI, having signed the only workout document that contained an arbitration clause, accepted arbitration.
The Kaplans, however, who had not personally signed that document, denied that their disagreement with First Options was arbitrable and filed written objections to that effect with the Arbitral Tribunal.
The Arbitral Tribunal decided that it had the power to rule on the merits of the Parties’ dispute, and it did so in favor of First Options.
The Kaplans then asked the Federal District Court to vacate the arbitration award, while First Options requested its confirmation. The District Court confirmed the award.
On appeal, the Court of Appeals for the Third Circuit agreed with the Kaplans that their dispute was not arbitrable, and it reversed the District Court’s confirmation of the award against them. It reasoned that unless there is clear and unmistakable evidence that the parties agreed to arbitrate the question of arbitrability, the courts had jurisdiction to decide on the question. Besides, the standards of the review were ordinary and not special or restrictive.
Finally, the US Supreme Court granted Certiorari regarding the standards used by the Court of Appeals to review if “the dispute was arbitrable” and confirmed the Court of Appeals’ decision.
The Court also held that the arbitrability of the Kaplan/First Options dispute was subject to independent review by the Courts and that, rather than a special “abuse of discretion” standard, Courts of Appeal should instead apply ordinary standards when reviewing District Court decisions upholding arbitration awards.