Case Law Summaries

Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen v. Rosen

• Opinion Date: November 28, 2001
• Business Law
• E-Mail

ARBITRATION—It is the factual allegations underlying a dispute, not the name given to the cause of action, that must be examined and compared to the terms of an arbitration agreement.

A law firm, organized as a corporation, had a shareholders agreement which included a provision for private, alternative dispute resolution. A time came when a number of individuals, and eventually an entire department of the law firm, left and joined another firm. Shortly after that, the original law firm ceased doing business. The original law firm asserted that the departing shareholders failed to give a required sixty days’ notice of their departure and that such an action was deemed a “withdrawal” under the shareholders agreement. If it were such a withdrawal, the individual departing shareholders would be required to turn over their shares without compensation. One of the departing shareholders requested mediation pursuant to the shareholders agreement, but the mediation proved unsuccessful. He then requested arbitration pursuant to the shareholders agreement. About a month later, the defunct law firm filed a complaint against the individual shareholders and their new law firm alleging causes of action “all framed in tort, including counts for breach of fiduciary duty, unfair competition, interference with economic and contractual relations, conversion, defamation, fraud and misrepresentation, and unjust enrichment.” The individual defendants moved to dismiss or stay the law suit pending arbitration, “arguing that the allegations of the Complaint raised issues that arose out of the Agreement and were therefore arbitrable.” The defunct law firm opposed the motion, arguing that the arbitration provision of the Agreement did not apply to its conspiracy and tort claims and were intended to cover “a run of the mill withdrawal of a ... partner by ... death, by retirement, and by going to another law firm,” but did not cover a “wholesale withdrawal under a conspiracy to destroy [the firm].” The lower court would not dismiss the action or stay the law suit pending arbitration because it was not “satisfied that the arbitration clause [was] sufficiently clear. It is not all inclusive. The [defunct law firm] should be permitted to pursue the causes of action alleged in the complaint. I find no merit to the argument that the arbitration clause covers these kinds of allegations.” The Appellate Division saw the essence of the individual shareholder’s argument to be that although its former law firm’s complaint was “framed in tort, its allegations actually allege breaches of the express and implied terms of the Shareholder’s Agreement, and because they [arose] out of that Agreement, they [were] subject to” arbitration. The Court believed that courts should honor the parties’ intent regarding the scope of their agreement to arbitrate disputes and, “[g]enerally, we consider the contractual terms, the surrounding circumstances, and the purpose of the contract.” As the Court saw the relevant provision of the Shareholder’s Agreement, it read “If there is a controversy or dispute involving this agreement ... such controversy or dispute shall be resolved first by the parties attempting mediation ... if the parties to unable to mediate the controversy or dispute arising out of the negotiation making or implementation of this Agreement, then the parties shall” resort exclusively to arbitration. The defunct law firm contended that the arbitration agreement was “limited” and not “broadly” worded. The Appellate Division, however, did not think the issue was how “broad” or how “narrow” the agreement was in a theoretical sense, but whether it encompassed the claims asserted by the defunct law firm. At the outset, the Court could not explain why the first sentence of the applicable provision in the shareholders agreement described “a controversy or dispute involving this Agreement,” whereas the second sentence referred to “the controversy or dispute arising out of the ... implementation of this Agreement.” Nonetheless, by the agreement’s plain terms, both sentences “describe a broader class of controversy or dispute than merely breaches of the express terms of the Agreement.” Consequently, the Court considered whether the defunct law firm’s allegations fell within the scope of a “controversy or dispute involving this Agreement or arising out of the ... implementation of this Agreement.” To the Court, the agreement governed “the members’ mutual duties to the firm and to each other during membership as well as upon withdrawal, termination or the dissolution of the firm.” The allegations involved events both while the individual defendants were members of the defunct law firm and after their departure. All involved the relationship between members of the firm, largely governed by the agreement. The Court looked at the dictionary to discover that “implement” meant “to carry out, accomplish, fulfill; to give practical effect to and ensure of actual fulfillment.” Consequently, the Court was satisfied that it was the factual allegations underlying the dispute, and not the name given to the cause of action that must be examined and compared to the arbitration agreement. In that light, the Court felt that the defunct law firm’s claims that the former shareholders breached their fiduciary duties were virtually indistinguishable from contract claims. This meant that the defunct law firm’s Complaint arose out of the covenant of good faith and good dealing that is implied in every contract. That covenant is a contractual obligation, not an obligation in tort. Consequently, the Court ruled that the claim against the individual shareholders were subject to arbitration and that its ruling was “supported by New Jersey’s strong policy favoring contractual arbitration of disputes.” As such, “although ‘the scope of the arbitration ... is governed by the agreement of the parties,’ ... ambiguities in the language of an arbitration clause ordinarily should be construed in favor of arbitration.” Consequently, the Court resolved any doubts about applicability of the arbitration agreement in favor of arbitration and ruled that all of the claims arising out of the agreement, including conspiracy claims against individual former shareholders, should be conducted before any litigation goes forward. This meant that it rejected the defunct law firm’s argument that because its conspiracy claims against the individual shareholders also involved the new law firm, which was not a party to the arbitration agreement, litigation of the conspiracy claims should have been permitted to proceed any arbitration.

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