Watch Your Words: How to Preserve Your Right to Arbitrate

Today we bring you a cautionary tale on the importance of carefully drafting arbitration clauses in contracts. Parties whose goal is to preserve the right to compel arbitration should be mindful to include a broad arbitration clause in each written agreement when engaging in complex, multi-agreement transactions. Otherwise, like in this case, they may find that the dispute they want to arbitrate is not subject to arbitration.

In Ahern v. Asset Management Consultants, the parties entered into a business relationship that involved two agreements between plaintiffs (the “Ahern parties”) and defendants (the “BH parties”): a Purchase Agreement and a Cotenancy Agreement. The Purchase Agreement gave the Ahern parties a tenant in common interest in an office building in Anaheim. The Cotenancy Agreement governed the management and operations of that office building. However, only the Cotenancy Agreement included an arbitration clause, and a narrow one at that. You can see where this is going …

As always, trouble ensued. It culminated with a foreclosure on the office building, eliminating the Ahern parties’ interests. The Ahern parties sued the BH parties, alleging misrepresentation and material omissions in the marketing and sale of the office building. The trial court compelled arbitration pursuant to the arbitration clause in the Cotenancy Agreement. The BH parties prevailed at arbitration and the trial court confirmed the arbitration award. However, the Second District Court of Appeal vacated the award. It held that the trial court erred in compelling arbitration.

This case hinged on the narrow language of arbitration clause in the Cotenancy Agreement. That clause states: “any dispute arising in connection with the interpretation or enforcement of the provisions of this Agreement, or the application or validity thereof, shall be submitted to arbitration.” The court noted that although the Purchase Agreement and the Cotenancy Agreement “were related to each other, the acquisition of the tenant in common interests was accomplished entirely through the [Purchase Agreement].” Further, the Ahern parties’ claims related to the acquisition of the tenant in common interests, not their management and operation.

If the Cotenancy Agreement had contained a broad arbitration clause that required arbitration of “any claim arising from or related to” the agreement, then the BH parties would have likely prevailed.

The Court also considered and dismissed two other related arguments. First, the court held that the “rooted in” concept (i.e., that tort claims arising from contractual relationships are subject to arbitration clauses in those contracts because they have their roots in them) only applies to broad arbitration clauses, not narrow ones like here. Second, the court held that Civil Code section 1642 directs courts to construe agreements relating to one transaction in light of one another. But it does not direct courts to merge the agreements into a single contract. In other words, Section 1642 is an interpretive tool; it may not be used to rewrite contracts contrary to the parties’ intent.

The bottom line is that courts will start with the actual language of a contract when considering whether or not to compel arbitration. Before you sign or draft a contract with an arbitration clause, it is best to get legal advice to make sure your language isn’t too narrow or too broad.

If you have questions or concerns about these or similar issues, please reach out to the authors or anyone at Boutin Jones.