Those who still treat dispute resolution clauses as “3am clauses”, to be hurriedly agreed at the last minute just before the deal is to be signed, should heed the lesson handed down by the US Court of Appeals for the Tenth Circuit in Ragab v Howard et al, No. 15-1444 (10th Cir. 2016).
In 2013, Mr Ragab entered into a business relationship with the Defendants which involved six separate agreements. Each agreement contained an arbitration provision, but there were differences between them in relation to the governing arbitration rules, the selection of the arbitrators, the notice required to arbitrate and entitlements to costs and fees. The business relationship broke down and Mr Ragab brought a claim in the court against his former business partners, the claim falling within the scope of all six agreements. The defendants filed a motion to compel arbitration. The question for the court was whether it was appropriate to compel the parties to enter into arbitration and, if so, under which of the six arbitration clauses.
US courts have long recognised and enforced policies that favour arbitration. Arbitration agreements are regularly given effect on motions to compel, unless it would be contrary to public policy or unconscionable to do so. However, the court in this case found that there had not been “a meeting of minds” with respect to arbitration between the parties. This was reflected in the different agreements that had been included in each of the six agreements, even though the agreements were interrelated. The court concluded that the dispute should be determined by the court rather than being referred to arbitration.
The court in Ragab noted that previous US cases had concluded that “irreconcilable” differences across arbitration provisions could make them unenforceable, justifying refusal to compel arbitration. This, together with a lack of language in the agreements that suggested one contract should take precedence over the others, left the court with little doubt that it would be appropriate to dismiss the motion to compel arbitration. The court felt it could not “arbitrarily pick one [arbitration provision] to enforce because doing so could violate the other five.”
The court indicated that basic arbitration provisions in the agreements, such as one that simply stated that claims “shall be submitted to binding arbitration”, would have been enforceable. But the enforceability of any agreement was effectively cancelled out by the other arbitration agreements. The important aspect of this case was that there was no meeting of minds in respect of the form that any arbitration should take, as evidenced by the conflicting details in the multiple provisions.
A dissenting judge saw the parties as commercial entities who clearly demonstrated their intention to arbitrate their disputes. This judge argued that the plaintiff was “free to initiate arbitration under the terms of whichever of the six agreements he prefers.” He considered that giving effect to the intent of the parties to submit their disputes to arbitration would be a better approach, rather than ignoring all six of the arbitration agreements.
This case contains an important lesson for anyone involved with drafting contracts. Keep it simple, and keep it consistent, especially in circumstances where multiple agreements cover different aspects of a single commercial relationship.
For further information on jurisdiction, choice of law and methods of dispute resolution – please see our coffee break video series on 3am dispute resolution clauses here.