Broad, Narrow, Whatever! Do You Write Right?

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Although today’s thoughts were inspired by a very recent California Appellate Court’s decision concerning the wording of an arbitration clause in a non-real property agreement, they could well have come out of a dispute of an indemnity clause in a real property contract or, for that matter, out of many other kinds of contract provisions. What made the June 1, 2016 decision most striking was that the court found an arbitration provision to be inapplicable to the dispute at hand despite the extremely strong public policy in favor of arbitration. This is quite surprising because one should never bet against a court finding an arbitration provision enforceable even if supported by only the slimmest of reeds.

For those who do not comprehend how strong courts feel about arbitration, think about the following from a 2000 California case:

California has a strong public policy in favor of arbitration and any doubts regarding the arbitrability of a dispute are resolved in favor of arbitration. . . . This strong policy has resulted in the general rule that arbitration should be upheld ‘unless it can be said with assurance that an arbitration clause is not susceptible to an interpretation covering the asserted dispute.’ … The party opposing arbitration has the burden of demonstrating that an arbitration clause cannot be interpreted to require arbitration of the dispute.

Now, faithful Ruminations readers know that we look for every opportunity to wheel out the following principles. They are recited over and over by judges and, for variety, we like to quote the formulations that show up in various court decisions to prove that they really are bedrock principles, and ones that all see ignored by document writers. In this recent dispute over whether a particular claim had to be arbitrated or not, the court pointed out that even the strong public policy in favor of arbitration “does not override ordinary principles of contract interpretation.” That statement gives us permission to trot out some of those principles, this time using yet another court’s words:

The court should attempt to give effect to the parties’ intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made.

The ordinary rules of contract interpretation apply to arbitration agreements.

The court should attempt to give effect to the parties’ intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made.

The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.

A court must view the language in light of the instrument as a whole and not use a “disjointed, single-paragraph, strict construction approach.

An interpretation that leaves part of a contract as surplusage is to be avoided.

Agreements to arbitrate, as well as other agreements, can be “broad” or “narrow.” In the context of an arbitration clause (or, in a very similar way, in the context of an indemnification clause), the following, very similar, phrases, are considered to be “broad”:

… any claim arising from or related to this agreement

… any claim arising in connection with this agreement

… any controversy arising out of or relating to this agreement

… any problem or dispute arising under or concerning the terms of this agreement

In contrast, these are not; they are “narrow”:

… any claim arising out of this agreement

… any claim arising from this agreement

… any dispute arising under this agreement

We don’t think it is necessary to point out why the first set of phrases is “broad,” but the second set is “narrow.”

Basically, those of us familiar with the case law have learned that the phrase “arising in connection with” (using the words of a federal Court of Appeals, “reaches every dispute between the parties having a significant relationship to the contract and all disputes having their origin or genesis in the contract.” And, importantly, that includes torts as well as contract claims, if either, in any way, arises out of the contractual relationship.

Now, we’re sure that many readers are asking, “So, what’s new? Doesn’t everyone know this already?” Unfortunately (or fortunately, depending on whether one needs a sword or a shield), no – not everyone knows this. In fact, in the California case, the law firm responsible for failing to write an operating agreement’s arbitration provision “broadly,” didn’t. The result was that claims that the firm and one of its partners had committed malpractice and breached their fiduciary duties, as well as a demand for rescission, were held to be outside the arbitration provision because those claims sound in tort, and were not breaches of the agreement itself. The law firm involved has over 650 attorneys.

One could legitimately wonder if the draftsperson had been aiming for streamlined language and readability, resulting in an inadvertent result. Forget it. When it came to writing the agreement’s “jurisdiction” provision, he wrote that a particular state’s court would have jurisdiction over “any action on a claim arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement.” We might say, – ‘nuf said – but that wouldn’t be true. Here’s another contract interpretation guideline. When faced with two similar, but not identical phrases, a main conclusion is that they don’t mean the same thing – there “must” be a reason why they seemed the same, but weren’t. Basically, a court can (and will) conclude that, “had the parties intended to be inclusive as to the arbitration provision, they would have used the same, ‘broad,’ language they used in the jurisdiction provision.”

Though we’ve focused on how to write an arbitration provision, the lessons apply to entire agreements. We can’t just write agreements as if they were social letters. Words matter. Ruminations is certain that readers now understand (if they hadn’t before today) why one set of phrases is “narrow” and the other is “broad.” In fact, we’re thinking that many didn’t need to read the “broad” ones to know that the other set was “narrow” and might not be all-inclusive. Yet, that isn’t enough.

We have to read our agreements. We need to have someone who didn’t write a “non-standard” provision read it critically, analytically, with an open mind. Sure, that’s time consuming and raises costs, but what’s the cost of screwing up? In the case at hand, the arbitration provision should have been “standard issue.” It should have been “in stock” ready to be pulled into any agreement that calls for an arbitration provision. And, it should have been part of a set of similar, “boilerplate-like” provisions, each one of which was coordinated with all of the others. Had that been done here, the arbitration provision would have matched, been parallel to, the jurisdiction provision.

Writing agreements can be boring work and, if that is the case, how much more boring is it to write (or use) boilerplate-like provisions? Yet, that’s what the deal-making principals expect and deserve.

For those who want to see the California court’s words, click HERE.

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