Published On: August 23rd, 2016 / Categories: arbitration /

arbitrationCommercial & residential real estate contracts

From commercial/residential real estate contracts, to corporate buy-sell agreements, to employment contracts, to financial services agreements, even consumer shrinkwrap/clickwrap contracts—if you’ve ever entered into a contract, you’ve likely encountered an arbitration clause. These provisions require the parties to a contract to resolve their disputes through a neutral third-party arbitrator rather than through litigation. The impetus behind including these stipulations in written agreements is the notion that the alternative dispute resolution process may be less costly and time-consuming for the participants than filing a lawsuit.

Substantial amount of litigation

Despite their genesis in offering a streamlined alternative to the courts, however, arbitration clauses have been the subject of a substantial amount of litigation over the years.  Still, these contractual provisions are a routine reality for those who work with written agreements. The following paragraph, from a California Association of Realtors form, is a typical example of the type of arbitration provision commonly found in many contracts today:

“The Parties agree that any dispute or claim in Law or equity arising between them out of this Agreement or any resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration.”

Broad enough to encompass any conflict?

In view of these circumstances, one might think that these provisos would be fungible, and that any of them would be broad enough to encompass any conflict that might arise between the parties with respect to the contract in question, requiring the parties to that contract to have their disagreement addressed through the use of this more “efficient” process.   As a recent case decided by California’s Second District Court of Appeal demonstrates, however, careful attention must be paid to the drafting of arbitration clauses in order to ensure that they serve their intended purpose of requiring matters to be arbitrated.

In that case, an attorney whose law firm represented two individuals and their respective companies in the affordable housing industry went into business with those two individuals to develop affordable housing. In furtherance of this enterprise, the attorney formed an LLC for himself and those two individuals to engage in affordable housing development, and prepared an operating agreement for that LLC. The operating agreement for the LLC included an arbitration clause that provided as follows: “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.”

Legal malpractice

Subsequently, the attorney was sued for legal malpractice in connection with the formation and operation of the LLC. The trial court ordered the parties to arbitrate their disputes pursuant to the operating agreement’s arbitration provision. After arbitration, the parties filed various appeals, including the plaintiffs’ assertion that their legal malpractice claim was not covered by the operating agreement’s arbitration clause. The court of appeal agreed with the plaintiffs, ruling that the language of the arbitration provision limited its scope to only those matters that arose out of the operation of the LLC under the operating agreement. As such, those matters arising in connection with the formation of the LLC, including the plaintiffs’ legal malpractice claims, were not included in that scope, thus allowing the plaintiffs to pursue those claims in the courts.

The benefits of arbitration

In view of the outcome of this case, if your intention is to avail yourself of the benefits of arbitration for all disputes between the parties to your contract, make sure to consult with legal counsel about crafting your contractual arbitration provision to encompass all of the types of disputes you wish to arbitrate. In this way, you can help make sure that your arbitration language is broadly enough worded to cover disputes beyond only those “arising from” the agreement.

The case is Rice v. Downs, Case Nos. B211850 and B264964, Second District Court of Appeal, 2016 Cal. App. LEXIS 446 (June 1, 2016).

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