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Court of Appeal takes a look at arbitration clauses

California's 2nd District Court of Appeal has overruled a lower court's decision in a case involving a contract dispute and a mandatory arbitration clause. The court's decision shows that arbitration clauses contained in contracts may not be as broad as the parties intended if they are not carefully worded.

In the case, several parties agreed to form an LLC in order to develop affordable housing. The contract contained an ostensibly broad arbitration clause that said that any dispute that arose out of the agreement would be submitted to arbitration. Later, a dispute did arise, and the plaintiff sued the defendant. Before forming the LLC, the defendant had worked as the plaintiff's attorney.

The plaintiff sued on multiple grounds, including rescission of contract, legal malpractice and breach of fiduciary duty. The defendant moved to compel arbitration of the case, which the trial court granted. At arbitration, the defendant was successful on most, but not all, of the claims. Both appealed. The Court of Appeal found that the language contained in the contract specifically only pertained to disputes arising from the contract itself. Since some of the claims were based on the defendant's conduct as a lawyer before the contract was entered into, the court found that those claims were not covered by the arbitration clause and should have remained in court rather than gone to arbitration.

Many companies include arbitration clauses in their business contracts in order to avoid potentially expensive and lengthy litigation. As this case shows, it is very important to pay attention to the language of the arbitration clause in order to make certain that all disputes are covered.

Source: National Law Review, "California court parses wording of arbitration agreement very carefully," Joshua M. Heinlein, June 23, 2016

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