Posted In: Litigation
By P. Wesley Lambert on March 15, 2016
In transactional matters, it is not uncommon for parties to negotiate the method and forum for the resolution of disputes. Inevitably, the parties will place their agreed-upon dispute resolution process into their written transactional documents and then prepare to close the deal. But what happens when the transaction involves multiple written agreements which are inconsistent, or at best, inconclusive as to the parties’ intent on the appropriate dispute resolution process? In such instances, Ohio courts are likely to resolve the issue by employing the “umbrella agreement” test adopted by the Sixth Circuit Court of Appeals in Nestle Waters North America, Inc. v. Bollman, 505 F.3d 498, 504 (6th Cir.2007). In Nestle Waters, the Sixth Circuit held that where there are multiple contracts between the parties, a dispute is arbitrable pursuant to an arbitration clause in one of the contracts if the arbitration clause forms “part of the umbrella agreement governing the parties’ overall relationship . . . .” Id. at 506. Thus, parties finding themselves in such a situation must determine which agreement, of several, is the “umbrella agreement” that will control the dispute resolution question.
State and Federal Public Policy Favor Arbitration
Both Ohio and Federal Courts have adopted a strong policy favoring the arbitration of disputes. Brennan v. Brennan, 164 Ohio St. 29, 128 N.E.2d 89 (1955); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983). However, this policy is not without its limitations, and it remains a basic principle that “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” Henderson v. Lawyers Title Ins. Corp., 108 Ohio St. 3d 265, 271 (2006), quoting United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, (1960). Thus, while courts are encouraged to read agreements containing arbitration clauses with an eye towards ordering arbitration, they must still give effect to the terms utilized by the parties to the agreement. And, when evaluating whether to bring a lawsuit relating to an agreement containing an arbitration provision, it is imperative to predetermine the claims that will be asserted, the parties that will be involved, and the theories of liability – all with an eye towards evaluating whether the claims may be filed in a court of law or if they must be submitted to arbitration.
Applying the Nestle Waters “Umbrella Agreement” Test in Light of the Public Policy Favoring Arbitration
In Nestle Waters, the Sixth Circuit held that where there are multiple contracts between the parties, a dispute is arbitrable pursuant to an arbitration clause in one of the contracts if the arbitration clause is “part of the umbrella agreement governing the parties’ overall relationship . . . .” Id. at 506. The arbitration clause in Nestle Waters was embedded in a Purchase and Sale Agreement (“PSA”) for the sale of real property. Id. at 501. The PSA called for the execution of several additional documents, including a deed transferring real property that did not contain arbitration clauses. Id. After a dispute arose regarding the transaction, the plaintiff sought to compel arbitration based upon the PSA’s arbitration clause. The defendant sought a declaration that the dispute centered on the deed, which did not contain an arbitration clause. Id. at 501.
The Sixth Circuit noted that where multiple contracts are involved, case law “has adopted a more narrow test for ‘arbitrability,’ examining which agreement ‘determines the scope of’ the contested obligations.” Id. at 504. However, the Sixth Circuit distinguished the issue presented in Nestle Waters as a matter of first impression, concerning whether an arbitration clause in an earlier contract could be applied to a dispute arising out of a later agreement whose execution was required by the first contract. Id. at 504. The Sixth Circuit found that the matter was arbitrable because “[t]he form of each of the subsequent documents, including the Deed, was attached to and made part of the PSA.” Therefore, proper interpretation of the deed could not be determined without reference to the PSA and the ongoing relationship between the parties. Id. at 505. The Sixth Circuit deemed the PSA to be the “umbrella agreement” governing the parties’ transaction and compelled arbitration.
The Nestle Waters decision was later distinguished by the Sixth Circuit in Dental Associates, P.C. v. American Dental Partners of Michigan, LLC, 520 F. App’x 349 (6th Cir. 2013), cert denied, 134 S. Ct. 425 (2013). In Dental Associates, the parties executed a series of agreements, some of which contained broad arbitration clauses whereas others did not. In determining whether the parties’ dispute was required to be arbitrated, the Sixth Circuit examined whether an asset purchase agreement was the “umbrella agreement” requiring the application of its arbitration clause to disputes arising out of subsequent agreements. The Sixth Circuit held that it was not, noting that the “APA did not create the relationship between the parties; rather, the APA only governs the one-time purchase and transfer of assets, and the Service Agreement defines the ongoing business relationship between the parties.” Id. at 352. Additionally, the Sixth Circuit examined the individual contracts to determine the parties’ intent, noting that if the parties had intended for disputes arising under each agreement to be arbitrated, they could have carried the APA’s arbitration clause forward into each one. Id. At least one Ohio court has reached a similar result. See Carew v. Seeley, 1st Dist. Hamilton No. C-050073, 2005-Ohio-5721,¶ 13 (“The fact that an arbitration clause was present in only six of the fifteen exhibits demonstrated an intent to restrict the clause's application.”).
Practical Considerations When Contemplating Complex Deals or Litigating Cases Arising from Documents Containing Arbitration Provisions
Guidance from the Nestle decision demonstrates the importance of keeping transactional documents consistent so that courts will not need to grapple with the question of which document controls in situations where disputes arise from multi-contract transactions. Similar situations can arise when contracts are amended, supplemented or renewed at a later date and the parties’ intent is inconsistent with their earlier intent as manifested in the original transaction document(s). It is also important to be clear as to what disputes are covered by the dispute resolution clause. Are all disputes arising from the agreement pulled into the arbitration provision, or are only certain types of disputes (i.e., breach of contract actions) subject to the arbitration clause, while reserving other claims for ordinary court proceedings.
In situations where a dispute arises from a transaction that contains multiple inconsistent documents, it will be important to determine which of the documents governs the dispute at issue, and which, if any, of the documents is the “umbrella agreement” governing the totality of the parties’ relationship. Important factors to consider include which document contains the parties’ obligations at issue in the dispute, whether any of the documents calls for the execution of subsequent documents, which documents contain integration clauses, the timeline for execution of the documents at issue, and whether all documents must be read together or may be severed.
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