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O’Connell v. Konner

A-0968-03T1 (N.J. Super. App. Div. 2004) (Unpublished)

ARBITRATION — Where an arbitration provision in an agreement is written in a way that is closely integrated with resolution of only a narrow set of issues, it is not to be interpreted to cover any and all disagreements under the agreement.

A contractor and an investor formed a company to purchase a residential lot, divide it into two parcels, construct a home on each parcel, and then sell the homes. The profit was to be divided between them. The sales proceeds were first to be used to satisfy the outstanding mortgage, then to reimburse the investor for her initial contribution to the company, and then to pay the construction company for building the homes. Then, the profits were to be distributed after the homes were built and sold. The parties had a dispute over the distribution of profits and payment of building costs. The contractor sued the investor, claiming that she failed to pay him his portion of the profits as agreed in the company’s Operating Agreement and Memorandum of Agreement. He also alleged that the investor failed to pay the construction company the remaining portion of its builder’s fees. The investor counter-sued, alleging that the contractor had overcharged the company for the construction company’s services or billed the company for building materials never used on the project. She also claimed that the materials were used on unrelated projects, including the contractor’s own home. The investor also claimed that the contractor induced her into investing in the development scheme so he could skim funds and materials from the project for his own use and profit.

The contractor argued, pursuant to the company’s operating agreement, the issue had to be submitted to arbitration. That agreement required disputes involving costs and other issues of construction to be submitted to an arbitrator. In response, the investor argued that the obligation to arbitrate applied only to disputes arising from what should have been a contract between their company and the construction company, but there never was such a contract. Furthermore, she argued that nothing in the agreement made arbitration the sole and exclusive remedy. She also contended that some of her counterclaims, such as for fraud, were not subject to arbitration because they did not involve construction costs or management. Instead, she argued that her counterclaims were related to the contractor’s conduct as a member of the company. Further, she alleged that the conduct took place before there was a construction contract, if any. The lower court disagreed, holding that the issues were subject to arbitration.

The Appellate Division pointed out that the operating agreement’s arbitration provision was within a single sentence found at the end of a paragraph discussing how the company would enter into a contract with the construction company for the purpose of constructing the homes. That paragraph provided for a contract with the construction company on a commonly used form. The next sentence provided for arbitration. As a result, the Court held that the placement of the sentence strongly suggested that arbitration was to apply only to construction disputes between the company and the construction company. Furthermore, the project’s architect was to serve as the arbitrator. To the Court, it would not have made sense for the architect to resolve other than construction disputes. The investor’s claim fell far outside those contemplated by a contractual relationship to build two homes.

Thus, because at least some of the claims fell outside the agreement’s arbitration provision, and because courts do not like to bifurcate disputes between judicial resolution and arbitration, the Appellate Division held that all of the claims should be resolved in court.

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