Arbitration Pitfalls – Broad or Narrow Scope

Arbitration Series – Part 3 of 3:  When drafting an arbitration provision, careful attention should be given to the language describing the scope of disputes to be arbitrated. Unless the parties intend to arbitrate all disputes that may touch on or collaterally relate to the contract, the arbitration clause should contain express language specifically identifying and narrowly describing the scope of disputes to be arbitrated. In determining whether a given dispute falls within the scope of a contractual arbitration provision, courts first determine whether the arbitration clause is broad or narrow. Chelsea Family Pharmacy, PLLC v. Medco Heath Solutions, Inc., 567 F.3d 1191, 1196 (10th Cir. 2009). “Under a narrow arbitration clause, a dispute is subject to arbitration only if it relates to an issue that is on its face within the purview of the clause, and collateral matters will generally be beyond its purview. “ Id., at 1262. In contrast, where an arbitration clause is broad, “there arises a presumption of arbitrability and arbitration of even a collateral matter . . .if the claim alleged implicates issues of contract construction or the parties’ rights and obligations under it.” Id. The precise wording of an arbitration clause does matter and should be carefully considered.

“Arising Out Of” “Relating To” or “Connected With:” The arbitration clauses recommended by the American Arbitration Association (“AAA”) call for arbitration of “any controversy or claim arising out of or relating to this contract, or the breach thereof.” Such language has universally been construed to be a broad arbitration clause. C & L Enters., Inc. v. Citizen Band Potawatomi Indian Tribe of Okla., 532 U.S. 411, 415 (2001); Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1071 (9th Cir. 2013); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 876 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1369 (Fed. Cir. 2006); Terminix Int’l Co. v. Palmer Ranch Ltd. P’ship, 432 F.3d 1327, 1329 (11th Cir. 2005); Getzelman v. Trustwave Holdings, Inc., No. 13-cv-02987-CMA, 2014 WL 3809736 *3 (D.Colo. Aug. 1, 2013). The use of such terms as “related to” or “connected with” extends the scope of the arbitration provision beyond claims under the contract. Julian v. Julian, No. 4137-VGP, 2009 WL 2937121 at *5 (Del. April 23, 2009) (“related to” language “explicitly extends the scope of the arbitration provision ‘beyond the four corners of’” the agreement); Brown v. Coleman Co., Inc., 220 F.3d 1180, 1184 (10th Cir. 2000) (arbitration clause encompassing “all disputes or controversies arising under or in connection with this Agreement” constituted “a broad arbitration clause as it covers not only those issues arising under the employment contract, but even those issues with any connection to the contract.”). Similarly, contracts that call for arbitration of “any dispute between the parties” without limiting language have also been construed to be broad arbitration clauses. Qwest Corp. v. New Access Communications, LLC, No. 03-N-1278, 2004 U.S. Dist. LEXIS 28523, * 3 (D. Colo. Mar. 31, 2004) (arbitration clause covering “any claim, controversy or dispute between the parties” with no restriction found to be broad)

Disputes “Under” or “Arising Under” the Agreement: Courts have split over the interpretation of arbitration clauses limiting arbitration to disputes “under” or “arising under” an agreement. Some courts construe such clauses to be relatively narrow. See Cape Flattery Ltd. v. Titan Mar., LLC, 647 F.3d 914, 924 (9th Cir. 2011) (“arising under” language signals a narrow arbitration clause); Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir.1983) (phrase “arising under” deemed relatively narrow); Carro Rivera v. Parade of Toys, Inc., 950 F. Supp. 449, 453 (D.P.R. 1996) (because tort claims did not relate to contract interpretation and performance, they did not “arise under” the agreement); B.C. Rogers Poultry, Inc. v. Wedgeworth, 911 So.2d 483, 488 (Miss. 2005) (arbitration of disputes “arising under this agreement” is narrow and focused only on those disputes actually “under” the agreement). Many other courts, however, have found clauses requiring arbitration of any dispute “arising under” the agreement to constitute a broad arbitration clause. Cook v. PenSa, Inc., No. 13-CV-03282-RM-KMT, 2014 WL 3809409 *13-14 (D. Colo. Aug. 1, 2014) (determining that “the Tenth Circuit would follow the majority of federal circuits and give the phrase ‘arising under’ a broad construction based on strong federal policy in favor of arbitration.”); Viaero Wireless v. Nokia Solutions Network U.S. LLC, No. 13-CV-00866-RM-CBS, 2013 WL 5366402, at *5 (D. Colo. Sept. 25, 2013) (unpublished) (noting that “arbitration provision extends to ‘any dispute under this Agreement . . . ,’ and therefore, the presumption in favor of arbitration extends to peripheral matters relating to the parties’ obligations”); Dialysis Access Center, LLC v. RMS Lifeline, Inc.,638 F.3d 367, 382 (1st Cir. 2011) (giving broad construction to provision requiring arbitration of “any dispute that may arise under this [Master Service] Agreement”); Consol. Brokers Ins. Servs., Inc. v. Pan-Am. Assur. Co., Inc., 427 F. Supp. 2d 1074, 1083 (D. Kan. 2006) (finding arbitration clause, which encompassed “[a]ny dispute arising between the parties under this Contract,” to be “a broad provision”).

Drafting Narrow Arbitration Clauses: Given the strong presumption in favor of arbitration, unless the parties intend to arbitrate all disputes related to their contract, including collateral and peripheral matters that may merely implicate issues of contract construction or the parties’ rights and obligations under it, extreme care should be taken to limit the arbitration clause to specific, narrowly defined types of disputes. The parties should include express language identifying with specificity the type of disputes they agree to arbitrate. The parties also may want to recite their intention that the arbitration clause is intended to be narrow, that the agreement to arbitrate only covers those categories of disputes specifically listed, and the parties do not intend to arbitrate statutory, tort or other claims that merely touch on or collaterally relate to the agreement.

In addition, where the parties intend to arbitrate only a limited category of disputes but want those disputes, but only those disputes, to be resolved under an arbitration organization’s arbitration rules, those rules should be carefully reviewed, specifically identified in the contract, and express language should be included in the arbitration clause excluding the application and operation of any arbitration rule that would otherwise extend the scope of arbitrable disputes beyond what the parties intend. Arbitration rules adopted by an arbitration association such as the AAA, for example, typically provide that: (1) the parties shall be deemed to have made such rules a part of their arbitration agreement whenever they have provided for arbitration under such rules; (2) the arbitrator shall have the power to determine disputes over the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim; and (3) the arbitrator shall have the power to determine the validity of a contract of which an arbitration clause forms a part, and that such arbitration clause shall be treated as an agreement independent of the other terms of a contract. See, e.g., AAA Commercial Arbitration Rules R-1 and R-7. While courts recognize that arbitration is purely a matter of contract, any ambiguities will be construed in favor of arbitration. Parties should draft their arbitration clauses accordingly.