February 06, 2014 Articles

Determining Arbitrability when the Relationship Between Parties Is Governed by Multiple Agreements

By Michael J. Miles, Esq.

"Arbitration is strictly a matter of consent and thus is a way to resolve those disputes—but only those disputes—that the parties have agreed to submit to arbitration." Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. 287, 130 S.Ct. 2847, 2857 (2010) (internal quotes and cites omitted).

The question of whether parties have agreed to submit their disputes to arbitration can become a difficult one when multiple agreements exist between them. Some of the agreements may contain arbitration provisions; others may not. Moreover, disparities may exist between the arbitration provisions contained in the different agreements. Determining whether disputes must be arbitrated, and the terms of any arbitration, can itself lead to new disputes among the parties.

The difficulty of these problems is illustrated by three cases decided earlier this year: Robinson Brog Leinwand Greene Genovese & Gluck, P.C. v. John M. O'Quinn & Assocs., 523 Fed. App'x 761 (2d Cir. 2013), Dental Associates, P.C. v. American Dental Partners of Mich., 520 Fed. App'x 349 (6th Cir. 2013), and Gaffin v. Schumacher Homes of Cincinnati, Inc., No. CA2012-09-066, 2013 WL 1094986 (Ohio Ct. App. Mar. 18, 2013). So is a potential framework for addressing them.

Robinson Brog Leinwand Greene Genovese & Gluck, P.C. v. John M. O'Quinn & Assocs.
In Robinson Brog, three different law firms agreed to jointly represent a group of shareholders in a potential stock fraud case on a contingency fee basis. The relationship between the law firms was defined by three separate documents: (1) the Client Agreement, which detailed the attorney-client relationship, set forth the contingency fee rate, and memorialized the clients' promise to pay the fees; (2) the Referral Fee Letter Agreement, which provided that the three law firms would jointly prosecute the litigation and specified how the attorney fees would be shared; and (3) the Consent to Refer Document, which informed the clients that one of the law firms, Robinson Brog, would join in the representation and set out the fee sharing among the firms. Only the Client Agreement contained an arbitration provision.

A dispute subsequently arose between the law firms regarding apportionment of the fees and, additionally, whether that dispute must be arbitrated. Robinson Brog argued, inter alia, that it should not be required to submit the dispute to arbitration because the apportionment of legal fees was governed by a Referral Fee Letter Agreement, which did not include an arbitration provision. Further, Robinson Brog argued, the claims were not within the scope of the arbitration provision contained in the Client Agreement, which applied to "[a]ny and all disputes, controversies, claims or demands arising out of or relating to (1) this Agreement or (2) any provision hereof or (3) the providing of services by Attorneys to Client or (4) the relationship between Attorneys and Client."

The court rejected these arguments, finding that "only by virtue of the [three agreements] functioning together is there even a basis for generating a potential recovery, and only from such recovery may Robinson Brog be paid its attorneys' fees and expenses." As such, the Client Agreement was the "foundation" of the three interdependent agreements and that "[w]ithout a client to represent, there could be no net settlement or recovery and thus no basis for distributing attorneys' fees." The court reasoned, "Robinson Brog may not seek to benefit from the portion of the Client Agreement that creates the pool funds for payment of attorneys' fees without also subjecting itself to the arbitration clause contained in that same agreement." The court thus held that Robinson Brog was estopped from denying its obligation to arbitrate the dispute over attorney fees.

Dental Associates, P.C. v. American Dental Partners of Mich.
In Dental Associates, a dental practice entered into two agreements with ADPI, an administrative services provider: (1) an Asset Purchase Agreement (APA), through which ADPI purchased a large portion of the assets used in the operation of the dental practice; and (2) a Service Agreement under which ADPI's subsidiary, ADPM, provided administrative and other nonclinical services to the dental practice. Further, as required by the Service Agreement, the dental practice entered into Employment Agreements with its dentists, which identified ADPI and ADPM as third-party beneficiaries. The APA and Employment Agreement both contained arbitration provisions requiring that "[a]ll disagreements and controversies with respect to this Agreement . . . be settled by binding arbitration." The Employment Agreements also included integration clauses providing that "[t]his agreement contains the entire agreement between the parties and supersedes all other agreements and understandings between the parties with respect to the subject matter of the Agreement."

The dental practice subsequently brought an action for breach of fiduciary duty, breach of contract, tortious interference, and unjust enrichment, in response to which both ADPI and ADPM moved to dismiss and compel arbitration. They argued that the APA was an "umbrella agreement" governing the parties' relationship and, accordingly, the dispute was arbitrable under its terms. The court disagreed.

Generally, the court noted, "[A] dispute falls outside the scope of an agreement if the action could be maintained without reference to the contract or relationship at issue." Where there are multiple contracts between the parties, however, a narrower test of arbitrability must be used. The court must examine which agreement determines the scope of the contested obligations. It is not enough that a dispute merely "touches on matters covered by the arbitration clause." For example, as the court explained, a dispute will be "arbitrable pursuant to the arbitration clause in a related contract if the arbitration clause is part of the umbrella agreement governing the parties' overall relationship."

Applying this standard, the court determined that the dental practice's claims arose under the Service Agreement and were thus not arbitrable under the APA or Employment Agreements. The APA was not an "umbrella agreement" because it did not create the relationship between the parties. It only governed a one-time purchase and transfer of assets. It was the Service Agreement that defined the ongoing relationship between the parties. Moreover, the dispute could be maintained without reference to the APA. The court thus held that the parties' dispute was not subject to arbitration.

Gaffin v. Schumacher Homes of Cincinnati, Inc.
In Gaffin, a subcontractor brought an action against a homebuilder for its failure to pay for work done on various projects, alleging breach of contract and unjust enrichment. The relationship between the parties was governed by a Trade Partner Agreement, whereby the subcontractor agreed to provide drywall and painting services in homes built by the builder, and a series of Scope of Work Agreements, which set forth the specific details of the work to be completed on individual projects. Only the Trade Partner Agreement contained an arbitration clause. While the trial court held that the claims were not subject to arbitration, because the Scope of Work Agreements formed their basis, the Court of Appeals disagreed. The Court of Appeals found that "[i]t is clear that the [Trade Partner] Agreement controls the business relationship between the parties, while the Scope[] of Work [Agreements] relate only to the methodology regarding completion of services." The Court of Appeals thus compelled arbitration of the subcontractor's claims.

The lesson to be drawn from these cases is that when faced with multiple agreements between parties, courts will look carefully to the nature of the dispute and determine which of the agreements encompasses the obligations disputed by the parties while forming the basis of the true relationship between the parties. Parties must therefore be mindful of how their disputes relate to the various agreements between them and how those agreements relate to each other.

Keywords: ADR, litigation, arbitration, Contracts, disputes, multiple