Earlier
this year, the Missouri Court of Appeals affirmed a trial court’s refusal to
enforce an arbitration provision within an operating agreement. Now we all know
that arbitration agreements are difficult to circumvent, so what happened in
this case?
The case is Disruption 8, LLC v. Vertical Enterprises, LLC. To keep it simple, the parties executed three
contracts, and only one of them contained an agreement to arbitrate. The
plaintiff alleged that the defendant breached one of the three contracts. But
the contract breached did not contain an arbitration provision.
The Court of Appeals set forth a lot
of great law for anyone litigating the enforceability of an arbitration
provision, stating in part:
“When faced with a motion to compel arbitration, the motion court must determine whether a valid arbitration agreement exists and, if so, whether the specific dispute falls within the scope of the arbitration agreement… Whether or not a dispute is covered by an arbitration agreement is a question of law for the courts… Arbitration agreements are tested through a lens of ordinary state-law principles that govern contracts[.]…[a] party cannot be compelled to arbitration unless the party has agreed to do so… Policies favoring arbitration are ‘not enough, standing alone, to extend an arbitration agreement beyond its intended scope because arbitration is a matter of contract’…Therefore, “any curtailment of the right to a jury trial, which is what arbitration agreements do, “should be scrutinized with utmost care.”… Thus, to be a valid waiver of a party’s right to a jury trial, an arbitration agreement must be “clear, unambiguous, and conspicuous.”…When the contract at issue contains no express arbitration clause, arbitration may be compelled only if the circumstances demonstrate a clear agreement to arbitrate… “[m]ere reference” to another contract “is insufficient to establish that [a party] bound itself to the arbitration provision of the [other] contract”… If the parties contemporaneously execute documents “relating to the same subject,” and one of the documents contains an arbitration clause, arbitration may be compelled in a dispute involving a related document “unless ‘the realities of the situation’ indicate that the parties did not so intend.”… Contracts do not relate to the same subject, however, when they cover “distinct aspects of the parties’ transaction.” … When the claim is “independent of the contract terms [in the contract requiring arbitration] and does not require reference to the underlying contract, arbitration is not required.”
[Citations
omitted]
Applying
these principles, the Court concluded that the lawsuit alleging a breach of a
loan agreement did not implicate the arbitration agreement in the parties’
operating agreement.
Cosgrove Simpson is frequently
confronted with motions to compel arbitration, particularly when dealing with
entities such as registered investment advisers. A party’s right to have their
matter heard by a jury is obviously critical, so be sure to carefully evaluate
if and how to challenge any effort to thwart that right.
