When Drafting An Arbitration Clause, Check Case Law First

Neil Bardack
June 16, 2016

In the recent decision of the California Court of Appeal in Rice v. Downs, Second Appellate District, Div. One, B261860 (Filed 6/1/16), the Court held the drafters of an arbitration clause (the parties and their lawyers alike) were experienced and would not have chosen language that they would have expected to be interpreted differently than the judicial interpretations in then-existing California and Ninth Circuit case law where their chosen language was reviewed. That is, the drafting parties were presumed to know the law.

This decision provides a good review of how arbitration language is typically used and litigated. What is important is that most drafters borrow language from other contracts without much thought of what a court would do when a dispute arises over the scope and meaning or what claims are included or not. Having been presumed to know the law, it is important for drafters to read it.

In Rice, the Court parsed through a number of litigated arbitration clause permutations to decide whether certain claims for malpractice, breach of fiduciary duty, and rescission claims that plaintiff Rice brought against his attorney Downs arose out of limited liability operating agreements drafted by the defendant attorney and were properly arbitrated with other disputes between the parties. These claims were not found to have arisen from the agreement under the following language: “any controversy between the parties arising out of this agreement” as they were not contractual claims (and even tort claims) that arose from the agreement itself. In so holding, the appellate court reversed the trial court’s decision ordering Rice’s claims for malpractice to arbitration.

The Court affirmed that arbitration clauses are to be interpreted like any other contract to give effect to the parties’ intentions in light of the usual and ordinary meaning of the contractual language and circumstances under which the contract was made. The focus on whether a particular dispute is intended by the parties to be arbitrated turns on whether the clause is broad (“any claim arising from or related to this agreement or arising in connection with the agreement’). In that case, even tort claims that have their roots in the relationship of the parties to the contract could be ordered to arbitration, as the factual allegations need only “touch matters covered by the contract between the parties.”

Having said this, the Court found that any determination of whether the parties intended to arbitrate a specific dispute had to be resolved by determining whether the claims are controversies “arising out of” the agreements, that is, whether the disputes “have their roots in the relationship between the parties which was created by the contract in dispute that has the arbitration clause.”

Upon holding that the drafters were experienced and presumed to know the law, the Court held the parties to examine how courts had interpreted the scope of the language being used to determine if a particular claim arose out of or from the agreement.