Exactly Who is Covered by an Arbitration Clause… and for What?

Alternative dispute resolution, including arbitration, has likely never been more popular. 

Agreements to arbitrate disputes simply are contracts between the parties that make them. The language that can be used to form an arbitration agreement can be as varied as any other form of contract. When questions arise about just what the parties have agreed to arbitrate, and what disputes can otherwise be resolved in court, the scope of an arbitration agreement, or of an arbitration clause contained in some other form of contract, often is first construed by the courts.

A brief, but fairly typical, arbitration clause pertaining to a company and its owners or agents might simply say the signors agree that:

Any dispute, controversy or claim any kind or nature whatsoever between
the company and any current or former principal or principals of the company,
shall be conclusively resolved by binding arbitration.

There are other terms that often will be included to ensure that the award is actually binding, but this is really the gist of it. 

Using this language as an example, one could comfortably conclude that it covers (1) any dispute between a principal and the company, (2) any dispute between a former principal and the company, and/or (3) any dispute between former and current principals. 

So what about a claim by a former principal against current principals where the plaintiff tries to sue the current principals in their individual capacities as opposed to their capacities as principals of the company?  Would those claims need to be arbitrated under the language used in the above example? 

Applying these hypothetical facts, a court would need to identify the parties intended to be covered by the arbitration clause. The court would then need to determine whether the subject of the dispute fell within the scope of the agreement. A case with similar facts recently was decided by the Michigan Supreme Court in Altobelli v Hartmann, ___ Mich ____; Case No. 150656 (June 13, 2016). The result was not nearly as complex as one might think.

As noted, arbitration is a matter of contract.  As such, when considering the scope of the arbitration agreement at issue in Altobelli the Supreme Court reminded us that when interpreting an arbitration agreement the goal is to identify and enforce the parties’ intent. To do this the courts must look to the express language of the arbitration agreement and, if it is clear and unambiguous, enforce that language using its plain and ordinary meaning and without regard to the merits of the underlying case.  While a party can’t be required to arbitrate an issue that is not the subject of an enforceable agreement, because Michigan favors arbitration the burden will be on the party seeking to avoid a facially enforceable agreement.             

In Altobelli, as noted, the Supreme Court first needed to decide who was included as part of the “firm” as issue in that case and expressly referenced in the arbitration clause.  In particular, the Supreme Court needed to decide whether the “firm” also included individuals working for the firm. 

To answer that question, the Supreme Court turned to agency law to find that corporate entities can only act through its officers and agents. As such, the Supreme Court recognized, as it previously had in other cases, that the acts of corporate officers and agents, when performed within one’s scope of employment, will be deemed the acts of the corporation.

Thus, the Supreme Court concluded that by having all of the principals of the firm sign the firm’s operating agreement, the same agreement containing the arbitration clause, the plaintiff, as a signor, knew that certain individuals would be operating as agents on the firm’s behalf. The named defendants in that case were five of the firm’s managing directors, the firm’s CEO, and the head of one of the firm’s operating groups. Because the firm could not legally act but through the efforts of these agents and because the defendants were given the authority they exercised by and through the operating agreement, the Supreme Court ruled that they each were intended to be included within the scope of the arbitration clause.

When considering whether the plaintiff’s substantive disputes came within the scope of the agreement the Supreme Court returned to the plain language of the arbitration clause while examining the entirety of the claims pled. The arbitration clause covered “any dispute” between the firm and any former principal, a fairly broad scope but fairly typical as in the example above.

In that case, the Supreme Court observed that all of the alleged wrongful actions, specifically intentional torts against the named individuals, claims that seemingly were intentionally crafted and pled so as to avoid arbitration, nonetheless pertained to decisions and actions the individuals made while performing their duties to the firm. It did not matter that the plaintiff insisted that he was suing the defendants in their individual capacities; the law is clear that a plaintiff’s labels are not controlling. 

To the contrary, using agency principles the Supreme Court instead looked behind the plaintiff’s labels and concluded that he actually was challenging the defendants’ actions while exercising their duties to the firm under the operating agreement. As such, the Supreme Court ruled that the plaintiff’s claims involved disputes between the firm and plaintiff, and therefore covered by the arbitration clause.

So in the end, the Supreme Court merely reaffirmed the longstanding rules that (1) arbitration contracts are construed using the rules of contract construction and (2) the actions of a corporation’s officers and agents are construed using established agency principles. Applying these established pathways, identifying and enforcing the intentions of the parties to an arbitration agreement at issue in Altobelli wasn’t nearly as troublesome as it might first have seemed.

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