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California Court Parses Wording of Arbitration Agreement Very Carefully

Your arbitration provision might not be as broad as you think. Many agreements contain arbitration provisions stating that the parties agree to arbitrate “any dispute arising out of this agreement.” One might expect such a provision would cover any dispute, even torts, relating to the parties’ relationship. In California, you might be wrong.

In Rice v. Downs, 2016 Cal. App. LEXIS 446, the plaintiff, the defendant and two other partners agreed to form an LLC to develop affordable housing properties. The defendant had previously acted as the plaintiff’s counsel. The operating agreement for the LLC contained an arbitration provision stating, “Except as otherwise provided in this Agreement, any controversy between the parties arising out of this Agreement shall be submitted to the American Arbitration Association for arbitration in Los Angeles, California.” Eventually, disputes arose, and the plaintiff filed a lawsuit against the defendant alleging legal malpractice and other claims. The defendant then filed his own complaint, consolidated the cases and moved to compel arbitration of all claims. The trial court granted the motion. The defendant succeeded on most of his claims in arbitration, the trial court entered judgment and both sides appealed.

On June 1, 2016, the Court of Appeal for the Second District of California reversed the judgment holding that the arbitration provision in the operating agreement was not broad enough to cover the plaintiff’s claims for legal malpractice, breach of fiduciary duty and rescission. The Court reasoned that arbitration provisions calling for arbitration of all disputes “arising from or related to this agreement” or “arising in connection with this agreement” are broad arbitration provisions that extend to tort claims that have their roots in the parties’ relationship created by the contract. (Id. at *15.) Conversely, a provision that merely provides for arbitration of disputes “arising out of the agreement” is narrower in scope and governs disputes pertaining to the interpretation and performance of the parties’ contract. (Id. at *16.)

In Rice v. Downs, the plaintiff alleged claims of legal malpractice, breach of fiduciary duty and rescission stemming from the defendant’s conduct as the plaintiff’s counsel, a relationship that preceded the operating agreement. In addition, the operating agreement contained a clause whereby all parties submitted to jurisdiction in California for “any action on a claim arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement.” (Id. at *20.) Thus, according to the Court, the parties could have copied this same broad language into the arbitration clause. That they did not shows they intended to arbitrate a narrower scope of claims. 

Bottom line: if you want your arbitration provision to govern both contract and tort disputes, make sure it is broadly worded to cover disputes beyond just those “arising from” the agreement.

© 2021 Dinsmore & Shohl LLP. All rights reserved.National Law Review, Volume VI, Number 175
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About this Author

Litigation is both complex and fluid.  Decisions made at the outset impact available options weeks, months and even years later.  However, the information necessary to choose the best path is oftentimes available only after extensive discovery and review.  Determining the extent of the exposure, potential impact to existing and future business operations and even the effect on the company’s image are all important points of consideration.

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