Non-arbitrable Matters Inextricably Interwoven with Arbitrable One Sent to Arbitration by First Department

• Posted on: Apr 12 2021

Generally, matters that are not covered by an agreement to arbitrate do not have to be arbitrated. After all, arbitration is a creature of contract. And, because an agreement to arbitrate is governed by the rules of contract interpretation, the courts must “give effect to the contractual rights and expectations of the parties.” Volt Info. Scis., Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989). In other words, “as with any other contract, the parties’ intentions control.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985). 

Where there is a valid agreement to arbitrate, all matters that fall within the scope of that agreement are to be arbitrated. See Silverman v. Benmor Coats, 61 N.Y.2d 299, 309 (1984) (courts will not stay arbitration unless the “sole matter sought to be submitted to arbitration is clearly beyond the arbitrator’s power”). Matters that do not fall within the scope of the agreement will not be arbitrated, unless they are “inextricably interwoven” with the arbitrable ones, in which case “the proper course is to stay judicial proceedings pending completion of the arbitration, particularly where … the determination of issues in arbitration may well dispose of nonarbitrable matters.” Cohen v. Ark Asset Holdings, 268 A.D.2d 285, 286 (1st Dept. 2000); see also Lake Harbor Advisors, LLC v. Settlement Servs. Arbitration and Mediation, Inc., 175 A.D.3d 479 (2d Dept. 2019); Monotube Pile Corp. v Pile Foundation Constr. Corp., 269 A.D.2d 531 (2d Dept. 2000).

The foregoing principles were recently applied by the Appellate Division, First Department in Protostorm, Inc. v. Foley & Lardner LLP, 2021 N.Y. Slip Op. 02227 (Apr. 8, 2021) (here), a legal malpractice action, in which the motion court stayed the action in favor of the arbitration of the law firm’s unpaid legal fees. As discussed, the Court reversed the stay of an arbitration on the grounds that the non-arbitrable matters were inextricably interwoven with the arbitrable ones.

In Protostorm, plaintiff retained defendant to maintain a malpractice action against plaintiff’s prior counsel. Thereafter, plaintiff commenced a malpractice action against defendants and other attorneys in the United States District Court for the Eastern District of New York. 

Defendants moved to dismiss the federal action based on the lack of subject matter jurisdiction. They also commenced an arbitration proceeding against plaintiff for unpaid legal fees based on the parties’ retainer agreement, which provided that “[a]ny dispute over fees and/or costs … [would] be submitted to and settled exclusively by binding arbitration.” 

The federal action was ultimately dismissed for lack of subject matter jurisdiction. As a result, the court did not rule on whether the arbitration should be stayed. 

Plaintiff then commenced an action in New York Supreme Court, alleging the same claim of legal malpractice and moved to stay the arbitration pending resolution of the action. Defendants cross moved to stay the action and compel arbitration.

The motion court granted plaintiff’s motion for a stay of arbitration and denied defendants’ cross motion to stay the action in favor of arbitration. The First Department unanimously reversed.

The Court held that since there was a valid agreement between the parties to arbitrate any dispute regarding unpaid fees, it had to “compel arbitration of defendants’ claim for unpaid fees ….” Slip Op. at *1 (citing CPLR 7503(a)). And “because plaintiff’s nonarbitrable malpractice claim [was] inextricably intertwined with the arbitrable claim for unpaid fees,” the Court held that “the proper course [was] to stay the action pending completion of the arbitration.” Id. (citations omitted). Such a result, observed the Court, was consistent with decisional authority in the First and Second Departments, where the courts have held that “a nonarbitrable issue can be decided in an arbitration when it is inextricably intertwined with an arbitrable issue, particularly where … the determination of the arbitrable … claim may dispose of the nonarbitrable … claim.” Id. (citations omitted).

In holding that the arbitrable and non-arbitrable matters should be arbitrated, the Court distinguished the facts in Protostorm with those in Laboratories Inc. v. Avon Prods. Inc., 297 A.D.2d 505 (1st Dept. 2002), a case upon which plaintiff relied. There, the court stayed the arbitration pending resolution of the action because the parties’ agreements expressly provided that all disputes regarding the enforcement of the parties’ obligations would be decided in New York courts with the exception of one narrow category of disputes regarding royalties payable, which would be arbitrated. Id. (citing 297 A.D.2d at 506). Additionally, in Primavera, the court stayed the arbitration because numerous preliminary issues needed to be resolved in the action before the arbitration procedure could be invoked. Id. (citing id.).

Takeaway

A court will not order a party to submit to arbitration absent evidence of that party’s unequivocal intent to arbitrate the dispute, and unless the dispute falls clearly within the class of claims the parties agreed to arbitrate. Since arbitration is a creature of contract, arbitration clauses must be enforced according to their terms, even if the result is bifurcated litigation.

Notwithstanding, where arbitrable and non-arbitrable claims are inextricably interwoven, courts will stay the judicial proceeding pending completion of the arbitration, especially where the determination of issues in arbitration could dispose of non-arbitrable matters. That was the case in Protostorm, where the Court found that “the determination of the arbitrable unpaid fees claim [could] dispose of the nonarbitrable malpractice claim.” Slip Op. at *2.  Thus, by arbitrating both the fee issue and the malpractice issue, the interests of judicial economy could be served and the risk of inconsistent results avoided.