Do Contractual Arbitration Provisions Apply to All Disputes Between Parties?

When drafting any sort of detailed business contract, a common question is what type of dispute resolution provisions should be included in it. Will the parties require litigation or arbitration? Will the parties require mediation before litigation or arbitration?

Litigation involves a court or a jury deciding the outcome of the case. Arbitration, on the other hand, involves one or more arbitrators resolving the outcome of the case. If the parties to a contract select arbitration, they are typically able to choose the arbitrator to resolve the case. Whereas, in litigation, a judge is randomly selected. This blog focuses on the scope of arbitration provisions and how to craft them to be narrow or broad to cover the claims subject to arbitration.

Arbitration Provisions in General

Three elements to consider when disputes are required to be arbitrated are: “(1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived.” Jackson v. Shakespeare Foundation, Inc. “Arbitration provisions are contractual in nature and remain a matter of contractual interpretation.”  Id. Arbitration provisions are creatures of contract and are a matter of contract interpretation.  Id.

A well-drafted contractual arbitration provision will also indicate who conducts the mediation, where the final arbitration hearing will be held, and the number of arbitrators that will resolve the dispute. The arbitration provision should also articulate what claims will be subject to arbitration.

In some situations, however, the parties’ contractual arbitration provision does not encompass all claims that are in dispute. When that happens, a court may be called on to determine the scope of that arbitration provision. The court in Navarro v. Varela was called upon to do just that.

Navarro: All Claims Are Not Always Subject to Arbitration

In Navarro, a former partner signed an operating agreement that covered his compensation, budgeting for his practice and procedures for leaving the firm. That agreement contained the following arbitration provision:

This Agreement delegates to the Shareholders and the Managing Shareholder the exclusive right to make decisions (or make recommendations) in many areas. None of the matters so reserved for decision, or subject to a vote of the Shareholders, in accordance with this Agreement shall be litigated or submitted to arbitration, except that any unresolved disagreement as to any other matter, including any dispute regarding the interpretation of this Agreement or the rights and obligations of Shareholders and Partners with respect to this Agreement, shall be submitted to an arbitration panel of three arbitrators. Each party to the dispute shall select an arbitrator and the two arbitrators selected shall by mutual agreement chose [sic] the third arbitrator. The decision of the arbitrators as to any matter properly submitted to arbitration shall be final and binding on all Partners, shall be issued to the Shareholders and Partners only and to no one else, and shall remain confidential. The attorneys’ fees and expenses of arbitration shall be reimbursed to the prevailing party or parties by the non-prevailing party or parties. Arbitration shall take place only in Miami-Dade County, Florida.

When the law firm terminated Mr. Navarro, he sued his former law firm and asserted the following six claims:

• Breach of Contract,
• Accounting,
• Intentional Infliction of Emotional Distress,
• Fraudulent Misrepresentation,
• Violation of the Florida Civil Rights Act-Discrimination based on Gender/Pregnancy, and
• Violation of the Florida Civil Rights Act-Discrimination based on Handicap.

In response to the lawsuit, the law firm moved to stay and compel arbitration as to the claims for intentional infliction of emotional distress and statutory violations (Violation of the Florida Civil Rights Act-Discrimination based on Gender/Pregnancy and Florida Civil Rights Act-Discrimination based on Handicap).

In reviewing Mr. Navarro’s claims for statutory violations and for intentional infliction of emotional distress, the appellate court was required to look at the language of the parties’ arbitration agreement to determine whether those specific claims required reference to the parties’ agreement to resolve them.  The appellate court in Navarro found that that those three claims were not subject to arbitration (and instead subject to litigation) because those claims lacked a “sufficient nexus” to the parties’ agreement.

Takeaways from Navarro

According to the appellate court in Navarro, the arbitration agreement at issue was not broad enough to cover all of Mr. Navarro’s claims. As in Navarro, a contractual arbitration provision that applies only to claims “relating to” the operative agreement may not achieve the parties’ desire to have “all” claims resolved in arbitration.

Certainly, the parties can attempt to make an arbitration provision as narrow as they want, subjecting only certain claims to arbitration. If, however, the parties desire a broad arbitration provision, that covers more than just claims “relating” to the operative agreement, the agreement to arbitrate should include broad language.

A broad arbitration provision should include a statement that all claims arising out of or related to the agreement, and claims that are based on common law, contract, tort, federal, state or other statutory claims shall be resolved by arbitration.

Contracting parties should carefully consider the claims encompassed within the dispute resolution provisions of their contract and should consult counsel to properly draft these important provisions.