When Is An Arbitration Agreement Not An Agreement to Arbitrate?

Abitration agreements

By Stephen E. Hyam, Esq.

This year, the California Court of Appeal issued a published decision in Rice v. Downs concluding that a contract requiring arbitration of claims “arising out of” the agreement did not include tort claims that were based on a duty that is separate from the contractual relationship. This holding signaled a shift (some may call it a clarification) in the interpretation of arbitration clauses.

Rice and Downs were members of a limited liability company. The company’s Operating Agreement stated: “…any controversy between the parties arising out of this Agreement shall be submitted to the American Arbitration Association for arbitration in Los Angeles, California or San Francisco, California.” Years after entering into the Operating Agreement, Rice sued Downs in Superior Court alleging that Downs committed torts based on a purported relationship that pre-existed the Operating Agreement. Relying on language in the Operating Agreement, Downs successfully compelled those claims into binding arbitration. The parties then engaged in a lengthy and expensive arbitration proceeding and the arbitrator ruled in Downs’ favor. When Downs entered judgment based on the arbitrator’s decision, Rice appealed the Court’s order compelling certain of the tort claims into arbitration. The Court of Appeal partially reversed the judgment, concluding that some of Rice’s tort claims fell outside of the operating agreement’s arbitration provision.

In evaluating whether the claims were subject to arbitration, the Court of Appeal focused on the scope of the arbitration provision, in particular, the “arising out of” language. The Court of Appeal analyzed broad and narrow arbitration provisions, holding that broad arbitration provisions use language such as “any claim arising from or related to the agreement” or arising in connection with the agreement. These broad provisions were found to encompass tort claims that “have their roots in the relationship between the parties which was created by the contract” and are included in the arbitration provision. The Court of Appeal found that narrow arbitration provisions, including those that use “arising from” or “arising out of” language only encompass disputes that relate to the interpretation and performance of the agreement. Since contract and tort claims may both be subject to arbitration, any dispute about the arbitrability of claims requires a specific evaluation to determine if they “arise out of” the agreement (and, thus, would be arbitrable).

Acknowledging that Rice’s tort claims fall within the “any controversy” language, the Court evaluated the particular claims asserted to determine if they were properly compelled into arbitration. Although the Court found that the particular phrase in the operating agreement (“any controversy…arising out of the Agreement”) was a more narrow arbitration provision, the Court of Appeal concluded that Rice’s tort claims, which were based on violations of “an independent duty or right originating outside of the agreement,” were not subject to arbitration. This analysis led to the Court vacating the judgment of certain of Rice’s claims that pre-dated and were independent of the Operating Agreement. Those claims that fell outside of the arbitration provision were ordered to be tried in Superior Court, even though they had already been litigated during the arbitration proceeding.

Rice v. Downs stands as a reminder that the terms of agreements you read, understood, and entered into years ago may be interpreted differently than you originally expected. This emphasizes the importance of a periodic review of your agreements to identify areas that may need to be revised.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions about arbitration agreements, please feel free to contact Stephen E. Hyam at shyam@clarktrev.com by email or telephonically at (213) 629-5700.

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