ARBITRATION CLAUSE IN PARTNERSHIP AGREEMENT

Nowadays, arbitration clauses are standard in nearly all types of agreements ranging from attorney-client retainer agreements to licensing and partnership agreements. These clauses allow parties to an agreement to settle their disputes outside of a courtroom while obtaining legally enforceable decisions at the same time (usually). Judges tend to favor arbitration clauses in contracts, as they help lighten the load on the judicial system. In fact, California has a strong public policy in favor of arbitration, resulting 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.”[1] However, as mentioned below, including or omitting a few seemingly unimportant words from these clauses can crucially impact enforceability. Earlier this month, a California Court of Appeal ruled that an arbitration clause in an agreement among business partners requiring the parties to arbitrate "any controversy between the parties arising out of this Agreement," did not extend to malpractice actions against one of the parties who acted both as a partner in the business and as its legal counsel based on his alleged acts or omissions while acting as counsel. The trial court granted a motion to compel arbitration of all claims (including claims for legal malpractice, breach of contract, and breach of fiduciary duty) after concluding that the arbitration clause was “broad enough to encompass tort causes of action” and “because the gravamen of these claims involves the Operating Agreements, these causes of action ‘arise out of’ the Operating Agreement.”[2]

However, the Court of Appeal reversed the trial court’s decision, finding that, “clauses requiring arbitration of a claim, dispute, or controversy ‘arising from’ or ‘arising out of’ an agreement, i.e., excluding language such as ‘relating to this agreement’ or ‘in connection with this agreement,’ are ‘generally considered to be more limited in scope than would be, for example, a clause agreeing to arbitrate ‘any controversy . . . arising out of or relating to this agreement,’ which might thus cover misconduct arising out of the agreement as well as contractual issues.”[3] Therefore, “a tort claim based upon violation of an independent duty or right originating outside of the agreement does not arise from the agreement and falls outside the scope of the arbitration provision.”[4]

As you can see, although courts strongly favor the enforcement of arbitration clauses, the inclusion or omission of a few words can be crucial. If you or someone you know has a business dispute related to a contractual arbitration clause, or simply needs an arbitration clause drafted or interpreted, contact a competent business law attorney immediately to determine your rights or obtain your goal in relation to that contract.

--By Ara M. Baghdassarian, Esq.

Ara is an associate attorney with Barnes Law, licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] http://sos.metnews.com/sos.cgi?0616//B261860, pp. 9.

[2] Id. at pp. 7.

[3] Id. at pp. 10-11.

[4] Id. at pp. 16.