In a recent Commercial Division case, Justice Elizabeth H. Emerson was asked to determine whether certain parties were bound by an arbitration clause and whether that arbitration clause applied to a particular controversy—two questions typically determined by the court. Then why did Justice Emerson defer these questions to the arbitrator? The answer requires a close look at the language of the arbitration clause.
In Bromberg & Liebowitz v O’Brien, the plaintiff Bromberg & Liebowitz, CPA’s (“B&L”) entered into an agreement with defendant Patricia O’Brien (“Pat O’Brien”) to purchase Pat O’Brien’s local accounting practice (“Practice Purchase Agreement”). Pursuant to the Practice Purchase Agreement, Pat O’Brien agreed to provide consulting services to the practice throughout a certain transition period and defendant Jennifer O’Brien was to work for the practice for at least one year. Pat O’Brien signed the Practice Purchase Agreement but, despite a signature line for her to do so, Jennifer O’Brien did not.
On August 24, 2020, B&L commenced an action against Pat O’Brien, Jennifer O’Brien, and 328 Main LLC (“328 Main”) (an entity which received payments on behalf of Pat O’Brien), alleging that between September 2016 and June 2020 defendants diverted client fees from the practice to themselves.
Pat O’Brien and 328 Main moved, and Jennifer O’Brien cross-moved, to dismiss, or in the alternative, stay the action and compel B&L to proceed to arbitration based on an arbitration provision contained in the Practice Purchase Agreement. In pertinent part, the Practice Purchase Agreement provides:
Any controversy or claim arising out of or relative to this AGREEMENT, or the breach thereof, shall be submitted to arbitration before a single arbitrator, subject to the commercial arbitration rules of the American Arbitration Association . . . .
B&L opposed, arguing that (1) the arbitration clause did not include the misconduct alleged in the complaint and (2) that it cannot be compelled to arbitrate its claims against Jennifer O’Brien and 328 Main because they did not sign the Practice Purchase Agreement.
First, the court addressed the matter’s arbitrability. The court instructed that “questions of arbitrability,” as a term of art, covers disputes about whether parties are bound by an arbitration clause and whether an arbitration clause applies to a particular controversy.
While the court recognized that questions of arbitrability are typically for the court to decide, where, as here, the parties’ agreement specifically incorporates by reference the rules of the American Arbitration Association (“AAA”) and employs language referring “all disputes” to arbitration, courts will leave the question of arbitrability to the arbitrators. Indeed, the Commercial Arbitration Rules state, in pertinent part, “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” And so, the court held that the issue of whether the arbitration clause applied to B&L’s claims was to be resolved by the arbitrator, not the court.
The court further held that it was for the arbitrator to decide whether the non-signatory defendants, Jennifer O’Brien and 328 Main, may compel arbitration. The court reasoned that B&L, a signatory, cannot “disown its agreed-to obligation” to arbitrate “any controversy arising out of or relative to” the Practice Purchase Agreement. A signatory to an arbitration agreement, like B&L, is estopped from avoiding arbitration with a non-signatory when (i) there is a close relationship between the parties and controversies involved and (ii) the signatory’s claims against the non-signatory are intimately founded in and intertwined with the underlying agreement containing the arbitration clause. The court found both conditions to be met and instructed the parties to proceed to arbitration.
Questions of arbitrability are typically for the court to decide. However, where an arbitration clause specifically incorporates AAA rules by reference and employs language referring “all disputes” to arbitration, courts will leave the question of arbitrability to the arbitrators. In certain circumstances, this may include disputes over whether non-signatories can compel arbitration.