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Gruff v. Caddy Corporation of America

A-5134-99T3 (N.J. Super. App. Div. 2001) (Unpublished)

ARBITRATION—Where one agreement between parties mandates arbitration for disputes arising out of certain activities or relationships, arbitration is mandated even for separate agreements without such an arbitration provision if the subject matter of the dispute related to the separate agreement arises out of such activities or relationships.

A shareholder’s agreement provided that “[a]ll claims, demands, disputes, controversies, differences or misunderstandings between or among the parties hereto, or any persons bound hereby, except for specific enforcement by injunctive relief of the Restrictive Covenant, arising out of or by virtue of the Agreement, shall be submitted to and determined by arbitration.” The Shareholder’s Agreement also provided that all claims other than those required to be submitted to arbitration, were to be subject to exclusive jurisdiction and venue of the Superior Court for the county and in the U.S. District Court of New Jersey. A vice-president and shareholder became dissatisfied with his employment and negotiated a termination agreement. He claimed that an unsigned memorandum, referred to by him as the “consulting agreement,” requested the company’s accountant and the company’s attorney to coordinate their efforts to produce an agreement including the negotiated understanding of the parties. That memorandum did not indicate how disputes arising out of it were to be resolved. After remaining with the company on a part-time basis to assist in training his replacement, the employee was terminated by a letter from the company which also demanded that the employee sell his shares back to the company pursuant to the Shareholder’s Agreement. The employee refused to transfer his shares and the company demanded arbitration of the Shareholder’s Agreement seeking to enforce the purchase of the purchase of the employee’s stock. In response, the employee filed a court action asserting his employer’s alleged breach and fraudulent and negligent misrepresentations regarding the memorandum. He also filed an answer to the arbitration demand, but stated that he did not intend to arbitrate the dispute over the memorandum because it was beyond the scope of the Shareholder’s Agreement. The lower court ordered the employee to submit to arbitration and the arbitrator held against the employee. On appeal, the employee argued that the dispute involved in the memorandum was not subject to the arbitration provision of the Shareholder’s Agreement. New Jersey favors settlement of disputes by arbitration. Submission to arbitration is essentially a contract, and the parties are bound to the extent of that contract. On the other hand, courts may not “rewrite a contract to broaden the scope of arbitration ... [because] parties may agree to shape and limit the scope of arbitration in their contract.” Further, any questions as to whether a party is obligated to submit to arbitration are generally decided by arbitrators rather than by a court, provided that the particular dispute is within the scope of the arbitration provision. In this case, the employee argued that his claim of breach of the alleged agreement contained in the memorandum was unrelated to his position as a shareholder and, therefore, was beyond the scope of the Shareholder’s Agreement and not subject to arbitration. He supported this claim by pointing out that the memorandum was created more than a year after the Shareholder’s Agreement was executed and did not mention either the Agreement or the arbitration provision. The Court rejected those contentions. It pointed out that the Shareholder’s Agreement required submission to arbitration of “[a]ll claims, demands, disputes, controversies, differences or misunderstandings between or among the parties [to the Agreement] ... arising out of or by virtue of the Agreement ... .” According to the Court, the term “any controversy” is ordinarily broadly construed to include “any dispute between the parties relating to the contract.” In this case, the arbitration clause applied to, among other things, “all ... controversies.” The memorandum contained a stock repurchase provision as well as an agreement under which the employee was to serve as a consultant to the company. “Both issues clearly relate to and arise out of or by virtue of the Shareholder’s Agreement.” The Shareholder’s Agreement had a share purchase section. Further, it provided that the company could enter into a written employment contract with the shareholders and “[i]n the event of any conflict between this [Shareholder’s] Agreement and any Employment Contract, the provisions of this Agreement shall take precedence.” The Court found that this made clear that separate employment agreements, (and the employee contended the memorandum constituted one) were subject to the arbitration provisions of the Shareholder’s Agreement. Consequently, the contention that it mattered that the memorandum came later than the Shareholder’s Agreement was without merit.

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