Arbitration Clause – Narrow or Broad

Posted by David Adelstein on December 22, 2018
Trial Perspectives, Uncategorized

Arbitration, as a method of dispute resolution, is a creature of contract.  If you prefer to arbitrate disputes as opposed to litigating disputes in court, then you want a properly drafted arbitration provision in your contract.  If you want all disputes arising out of or relating to your contract to be arbitrated, then you want this specified in your contractual arbitration provision.  Conversely, if you want certain disputes not to be arbitrated or carved-out from arbitration, you want to clarify this in the arbitration provision.  The more clarity, the better, as it will avoid an issue down the road as to whether the dispute at-issue is subject to the arbitration provision.

Arbitration being a creature of contract was discussed in Vancore Construction, Inc. v. Osborn,43 Fla.L.Weekly D2769b (Fla. 5thDCA 2018) (internal citations omitted), which dealt with a contract between a purchaser and a homebuilder. This case, in particular, discussed the difference between a narrow arbitration provision and a broad arbitration provision. It is good practice to understand the difference, specifically if you negotiate or enter into contracts that contain an arbitration provision. As stated by the Vancore Construction Court:

Because arbitration provisions are contractual in nature, they are subject to the rules of contract interpretation.  The determination whether a dispute must be arbitrated “turns on the parties’ intent,” which is manifested in the plain language of the contract itself.  In general, courts favor arbitration provisions and “will try to resolve an ambiguity in an arbitration provision in favor of arbitration.”  Thus, if the language of the arbitration provision is sufficiently broad, courts will apply a liberal construction and require arbitration. 

Two types of arbitration provisions have emerged — those that are narrow in scope and those that are broad in scope.  Narrow arbitration provisions generally require arbitration for claims or controversies “arising out of” the subject contract, whereas arbitration provisions that are broad in scope usually require arbitration for claims or controversies “arising out of or relating to” the subject contract. When a contract contains a narrow arbitration provision, arbitration is only required when a litigant’s claims have a direct relationshipwith the terms and provisions contained in the contract.  In contrast, when a contract contains a broad arbitration provision, the court will compel arbitration when the party’s claims have a “significant relationship” to the contract.  The test to determine whether a “significant relationship” exists has been described as follows:

A “significant relationship” between a claim and an arbitration provision does not necessarily exist merely because the parties in the dispute have a contractual relationship. Rather, a significant relationship is described to exist between an arbitration provision and a claim if there is a “contractual nexus” between the claim and the contract. A contractual nexus exists between a claim and a contract if the claim presents circumstances in which the resolution of the disputed issue requires either reference to, or construction of, a portion of the contract. More specifically, a claim has a nexus to a contract and arises from the terms of the contract if it emanates from an inimitable duty created by the parties’ unique contractual relationship. In contrast, a claim does not have a nexus to a contract if it pertains to the breach of a duty otherwise imposed by law or in recognition of public policy, such as a duty under the general common law owed not only to the contracting parties but also to third parties and the public.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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