Sun Valley Ranch v. Robson (CA1 11/20/12)

Here’s one about an arbitration clause that all drafters of contracts will need to remember.

A limited partnership was formed to build and operate a HUD apartment project. The partnership agreement had an arbitration clause. The partnership entered into a contract with HUD to build the project, with one of the partners as the builder. When the project was later sold the partners disagreed about how to split up the money; this lawsuit resulted. Defendants argued that the arbitration clause applied. Plaintiff argued that most of its claims arose out of the construction contract and that some of them weren’t arbitrable in any event.

The Court of Appeals holds that all claims are subject to arbitration.

The first issue is whether an arbitration clause in one contract can apply to another than doesn’t have such a clause.

The court follows a federal district court case from Kansas, the "analytic framework” of which is “consistent with Arizona law.” What that means or why its true the court does not explain. The Kansas case says that when the language of an arbitration clause in one contract is broad enough to apply to claims from another then whether it actually does apply depends on our old friends, Factors.

Here, the clause covered “any” dispute “arising out of or relating to” the partnership agreement. That, says the court, is broad enough. (Have you ever seen an arbitration clause that wouldn’t be?)

So the court then turns to the factors. The first is “whether the agreements incorporate or reference each other.” The partnership agreement incorporated the construction agreement; the construction agreement did not incorporate the partnership agreement. The court concludes that “standing alone, this factor is neutral, though it demonstrates the related nature of the two agreements.” What?? That one contract doesn’t incorporate the other is “neutral?” So let’s get this straight: both incorporate each other, that’s “positive”; neither does, that’s “negative”; one does and the other doesn’t, that’s “neutral.” That sort of thinking is fine in electrical engineering but this is supposed to be law. Except that under the court’s analysis there isn’t really any “neutral” because even purported neutrality “demonstrates” support of its conclusion.

The next factor is whether the agreements are dependent on each other or relate to the same subject matter. Here the plaintiff did itself no good; the allegations of its Complaint essentially alleged that the construction contract was part and parcel of the partnership agreement.

Factor three is whether the arbitration clause specifically excludes certain claims. How is that different from the threshold breadth-of-language analysis? Apparently the court doesn’t know, either, since it doesn’t analyze this factor.

The last factor is whether the agreements were executed closely in time by the same parties. Here, they were.

So the court concludes that the arbitration agreement in the partnership contract applies to claims under the construction contract.

What does the court not analyze? What does it not use to interpret the contracts? The intent of the parties. The word “intent” does not appear in the opinion. So much for all those silly cases that tried to tell you it was important. Using Factors courts can engineer any conclusion they deem best.

The next issue was whether certain claims could be heard by an arbitrator.

The plaintiff tried to argue that its unjust-enrichment claim had nothing to do with the partnership agreement. After a dozen pages talking about how interrelated they are, though, the court wasn’t going to let that fly.

More serious was how an arbitrator could appoint a receiver and dissolve the partnership. The Revised Uniform Arbitration Act (12-3001 et seq.) allows an arbitrator to order “interim” remedies, which the court thinks a receiver is. As to dissolution, the court finds a thirty-year-old Michigan case that allowed an arbitrator to dissolve a partnership. The statute (29-345)says that the Superior Court can dissolve a partnership but that doesn’t “suggest,” you see, that the power is exclusive. (In fairness, one might argue that the non-judicial dissolution statute – 29-344 – signals that the legislature would agree; but the court doesn’t – it doesn’t mention it.)

(There was also an issue about whether parties not technically signatories to the contracts could insist on arbitration but the court’s holding on this isn’t particularly novel or surprising.)

(link to opinion)