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Michigan Court Enforces Oral Agreement to Arbitrate

In a recent franchise dispute concerning the ownership of a Subway franchise, the Court in Namari v Subway Real Estate Corp, 2013 WL 5450283 (Mich App October 1, 2013) enforced an oral agreement to arbitrate all disputes between the parties that was entered into by counsel on the record in the 36th District Court in Detroit, Mich. In reaching this decision, the Court dismissed the plaintiff’s lawsuit seeking injunctive relief, declaratory relief, and money damages under the parties’ franchise agreement and held that the oral agreement to arbitrate was binding and enforceable. The Court of Appeals considered several factors in determining whether an oral agreement to arbitrate was enforceable under Michigan law.

The Court first began with an analysis of the oral agreement itself to determine whether it was a binding contract under Michigan law. The agreement stated on the record was broad and included the following statement by counsel:

As far as those two cases, request for possession…. This is all part of a much larger issue that we’ve been dealing with for several years, Subway and [plaintiff]. We decided to take all the issues and lump them into an arbitration. So those two outstanding cases, along with, your Honor … All of those—all the money issues and the two possession issues … now will be arbitrated.

Based on this acknowledgment by counsel, the trial court held that “under this agreement in the 36th District Court, everything’s going to be arbitrated pursuant to that agreement…. Alright. That’s my ruling…. There’s to be one arbitrator.” The Namari Court applied basic state law principles that govern the formation of contracts in reaching this decision, including “the cardinal rule in the interpretation of contracts to ascertain the intention of the parties. Where the language of the contract is clear and unambiguous, the intent of the parties will be ascertained according to its plain sense and meaning.”

In regards to whether the dispute itself was subject to the parties’ agreement to arbitrate, the Court applied the test set forth in Fromm v Meemic Ins Co, 264 Mich App 302, 305-306; 690 NW2d 528 (2004). In Fromm, the court considered the following factors in determining the arbitrability of an issue:

(i) Whether there was an arbitration provision in the parties’ contract;

(ii) Whether the disputed issue was arguably within the arbitration clause; and

(iii) Whether the dispute is expressly exempt from arbitration by the terms of the contract.

When considering any one of these factors, the Fromm court noted that all conflicts are resolved in favor of arbitration. In regards to the first prong, the Court held that it was met by the parties’ oral agreement to arbitrate all disputes in the 36th District Court. The Namari Court reasoned that the agreement clearly encompassed all of the issues raised in the lawsuit because the parties agreed to arbitrate “all disputes and issues and lump them into a single arbitration.” As such, the oral agreement reflected the parties’ unambiguous intention to arbitrate all of their disputes.

With respect to the second prong of the Fromm test, whether the disputed issues arguably fall within the arbitration agreement, the Court reasoned that the parties’ agreement to arbitrate “all disputes” encompassed any and all disputes concerning the enforceability of the franchise agreement. The oral agreement was to arbitrate “all of the issues” between the parties. Regardless of whether those issues were raised outside litigation or not, the Court held that the agreement to arbitrate encompassed those issues.

With respect to the last prong of the Fromm test, which addresses whether “the dispute is expressly exempt from arbitration by the terms of the contract,” the Court held that there was nothing in the oral agreement or in the written record to indicate that the parties intended to exempt the issue of the enforceability of the franchise agreement from the scope of the arbitrator’s review. Moreover, even if there was a dispute concerning the enforceability of the substantive provisions of the franchise agreement, Michigan courts have recognized “a presumption of arbitrability unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage.”

In sum, the Court’s decision in Namari reflects Michigan’s strong public policy in favor of arbitration unless a clear and convincing showing can be made that the arbitration clause does not cover the asserted dispute.

© 2021 BARNES & THORNBURG LLPNational Law Review, Volume III, Number 338

About this Author

Scott R. Murphy, Barnes Thornburg Law Firm, Grand Rapids, Construction and Litigation Law Attorney

Scott R. Murphy is a partner in the Grand Rapids, Michigan, office of Barnes & Thornburg LLP, where he serves as vice chair of the firm’s Construction Law Practice Group. He is also a member of the firm’s Commercial Litigation practice group, where he concentrates his practice on business torts, contract disputes and securities fraud as well as shareholder oppression claims. A seasoned litigator, Mr. Murphy has experience in numerous forums, including state and federal courts, arbitration tribunals and appellate courts. His representative clients range from Fortune...