United States: Careful With That Arbitration Clause!

Earlier this month, a Florida appellate court issued a decision which illustrates the potential perils of drafting arbitration provisions in contracts. Arbitration provisions can be drafted to apply broadly, or narrowly, and use of an inartfully drafted provision can have unintended results. Parties could find themselves forced to arbitrate matters that they never intended to arbitrate, or precluded from arbitrating matters that they did.

In Sunsplash Events, Inc. v. Robles, 2014 WL 5834388 (Fla. 4^th DCA), issued November 12, 2014, Florida's Fourth District Court of Appeal addressed the trial court's denial of Sunsplash's motion to dismiss the civil action and compel it to be arbitrated.

Mr. Robles had been a competitor of Sunsplash Events. Sunsplash purchased Mr. Robles' business, and hired Mr. Robles as an employee. To effectuate the deal two separate agreements were contemporaneously executed; a Bill of Sale and an Employment Agreement. The Bill of Sale transferred ownership of the business, while the Employment Agreement established Mr. Robles as an employee of Sunsplash. The Employment Agreement contained an arbitration provision. The Bill of Sale did not.

Mr. Robles eventually filed a lawsuit against Sunsplash alleging various claims in connection with the Bill of Sale. The allegations included that Sunsplash had failed to pay Robles under either the Bill of Sale or the Employment Agreement, and that Sunsplash's president had made various misrepresentations in order to induce Mr. Robles into entering into the Bill of Sale and Employment Agreement. Sunsplash filed a motion with the trial court seeking to have Mr. Robles' complaint dismissed and the claims relating to the Bill of Sale arbitrated pursuant to the arbitration clause contained in the Employment Agreement.

Mr. Robles argued that the claims relating to the Bill of Sale were not subject to the arbitration provision in the Employment Agreement because the Bill of Sale did not contain an arbitration provision, and that the claims relating to the Bill of Sale did not relate to matters specifically contemplated by the Employment Agreement. The trial court agreed with Mr. Robles and denied Sunsplash's motion to compel arbitration. Sunsplash appealed.

The arbitration agreement contained in the Employment Agreement had been drafted broadly, and the appellate court determined that the it was broad enough, and the connection between the two agreements close enough, to bring Mr. Robles' claims relating to the Bill of Sale within its ambit. The appellate court therefore reversed the ruling of the trial court, and sent the case back to the trial court for entry of an order of dismissal and referral of the case to arbitration.

As the Sunsplash case illustrates, if the parties to a transaction want to subject potential future disputes to arbitration, it is important to carefully consider how wide an arbitration net should be cast. Mr. Robles may or may not at the time that he signed the two agreements have anticipated that the arbitration agreement in one of them would also apply to the other. He may not have considered the question at all until it was too late. And it can cut both ways. An overly narrow arbitration provision can leave a party to litigate in court when it was intended all along that disputes should be arbitrated.

Should any dispute in any way related to the transaction be subject to arbitration? Or should the arbitration provision be limited only to disputes over rights and obligations arising directly from a particular agreement? If there are multiple agreements involved in a transaction, should any of them be specifically excluded from the terms of an arbitration provision? Questions such as these should be considered before consummating any transaction involving an arbitration agreement. There are myriad reasons to want a particular dispute to be arbitrated or not to be, including considerations of time, cost, and the availability of tools for discovering critical evidence. Competent legal advice is a must.

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