The Agreement Has An Arbitration Clause

This was originally posted on the SGR Blog.

But Who Is Bound And Is Dispute Arbitrable?

Many commercial agreements contain what appears to be an unambiguous clause mandating the arbitration of all disputes. But, as a recent case illustrates, a Court nevertheless may be called upon to determine who is bound to arbitrate and what issues are covered by that mandate.

On September 1, 2016, Bromberg & Liebowitz entered into an agreement with Pat O’Brien to purchase her accounting practice. The agreement provided that Pat O’Brien would provide consulting services to the practice during a transition period and that Jennifer O’Brien would work for the practice for at least one year. The agreement contained an arbitration clause. It was signed by B&L and Pat O’Brien and had a signature line for Jennifer O’Brien, but she did not actually sign the agreement.

On August 24, 2020, B&L sued and alleged that, between September 2016 and June 2020, the O’Briens diverted client fees from the practice to themselves through 328 Main LLC. The complaint contained nine causes of action including, breach of contract, fraud, conversion, and unjust enrichment. Pat O’Brien and 328 Main LLC moved to dismiss the complaint or stay the action and compel B&L to proceed to arbitration if the complaint was not dismissed. Jennifer O’Brien cross-moved for the same relief. In opposition, B&L contended that the scope of the arbitration clause did not include the misconduct alleged in the complaint and that the firm could not be compelled to arbitrate with Jennifer O’Brien and 328 Main LLC because they did not sign the agreement.

The arbitration clause in the agreement is provided as follows:

“Any controversy or claim arising out of or relative to this [Agreement], or the breach thereof, shall be submitted to arbitration before a single arbitrator, subject to the commercial arbitration rules of the American Arbitration Association . . . .”

The Commercial Arbitration Rules of the American Arbitration Association provided as follows:

“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.”

The question of arbitrability is generally an issue for the Court–but when the parties’ agreement specifically incorporates by reference the rules of the AAA and employs language referring “all disputes” to arbitration, judges will leave the question of arbitrability to the arbitrators. The agreement incorporated the rules of the AAA and provided that “any controversy or claim arising out of or relative to” the agreement shall be submitted to arbitration. Thus, the scope of the parties’ arbitration agreement, including issues of arbitrability, was for the arbitrator to determine.

“Questions of arbitrability” is a term of art covering disputes about (1) whether the parties are bound by a given arbitration clause, as well as disagreements about (2) whether an arbitration clause in a concededly binding contract applies to a particular controversy. Both disputes involve the arbitration agreement’s scope. Thus, whether the arbitration clause applied to B&L’s claims was an issue to be resolved by the arbitrator and not the Court.

The issue of whether Jennifer O’Brien and 328 Main LLC, who were not signatories to the agreement, may compel arbitration was also an issue properly resolved by the arbitrator. And, as a signatory to a contract containing an arbitration clause incorporating by reference the AAA rules, B&L could not disown its agreed-to obligation to arbitrate “any controversy or claim arising out of or relative to” the agreement, including the question of arbitrability with Jennifer O’Brien and 328 Main LLC.

A signatory to an arbitration agreement is estopped from avoiding arbitration with a non-signatory when (i) there is a close relationship between the parties and controversies involved and (ii) the signatory’s claims against the non-signatory are intimately founded in and intertwined with the underlying agreement containing the arbitration clause. The Court found that these two requirements were met. Accordingly, the lawsuit was stayed and the parties were directed to proceed to arbitration.

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