Recently the Court of Appeal for the Second District of California ruled on the interpretation of an arbitration clause that stated, “any dispute arising out of this agreement.” After a quick glance, one might consider this language broad enough to include tort claims related to the formation of the contract. However, the Court of Appeal held otherwise.
In Rice v. Downs, the plaintiff, the defendant (plaintiff’s counsel), and two other partners entered into an agreement to form an LLC to develop affordable housing properties. (See Rice v. Downs (2016) 2016 WL 3085995.) The arbitration agreement in dispute held, “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.” (Id. at *1.) Eventually, there were issues among the parties and the plaintiff sued for malpractice. The defendant argued that the arbitration agreement compelled the arbitration of claims, including the tortious malpractice claim, and the trial court agreed.
In reversing the trial court’s order the Court of Appeal focused on contract principles of interpretation: “‘[t]he court should attempt to give effect to the parties’ intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made.’” (Id. at *5 citing Bono v. David (2007) 147 Cal.App.4th 1055, 1063.) To apply these principles, the court went into a broad vs. narrow approach.
To be considered broad the language should state, “any claim arising from or related to this agreement . . . or “arising in connection with the [a]greement.”) (Rice v. Downs (2016) WL 3085995 at *5.) Such broad language will be interpreted to apply to both contractual claims and tort claims that “hav[e] a significant relationship to the contract” and all other disputes that “having their origin or genesis the contract.” (Id.)
On the other hand, a narrow clause requiring arbitration would read, “a claim, dispute, or controversy arising out of an agreement, i.e., an important difference from the broader language of “relating to this agreement” or “in connection with this agreement” (Id.) Because the disputed arbitration clause contained this narrower language instead of the broader language, the appellate court held that the plaintiff did not have to arbitrate the related tortious malpractice which had its roots prior to the formation of the contract.
Practice Pointer: To avoid this nuanced judicial gloss, make sure to draft your arbitration agreements using the broader language.
For assistance with you real property matter(s) involving arbitration agreements, contact us today for a free 30-minute consultation. Schorr Law, APC, 310-922-8557, firstname.lastname@example.org.