The Partnership That Wasn’t and The Motion to Compel Arbitration

• Posted on: Feb 3 2021

We have noted previously that the “policy of [the State of New York is] to encourage arbitration.” See Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39 (1997). For this reason, “[a]ny doubts as to whether an issue is arbitrable will be resolved in favor of arbitration.” State of New York v. Philip Morris Inc., 30 A.D.3d 26, 31 (1st Dept. 2006), aff’d, 8 N.Y.3d 574 (2007)). This is especially so where the agreement to arbitrate incorporates rules that explicitly authorize the arbitrator to resolve all disputes, including those concerning “the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought.” See Offshore Expl. & Prod., LLC v. Morgan Stanley Private Bank, N.A., 626 F. App’x 303, 305 (2d Cir. 2015).

In Steamer v. Rinde, 2021 N.Y. Slip Op. 30214(U) (Sup. Ct. N.Y. County Jan. 19, 2021) (here), the Court granted defendants’ motion to compel arbitration because the parties’ agreement to arbitrate was broad in scope, requiring them to arbitrate “[a]ny claim or dispute arising out of th[eir] Agreement or the alleged breach thereof”. 

Steamer involved a proposed partnership that never came to be. In August 2018, the individual plaintiffs (the “Plaintiffs”), partners in Steamer Hart LLP, agreed to join defendants as partners in CKR Law. At the time, they signed “Joinder” documents that set forth the terms of their agreement (e.g., equity draws, year-end distributions, performance bonuses, and other incidents of a new partnership) (the “Joinder Documents”). Although they signed the Joinder Documents and agreed to the terms of a partnership agreement (the “Partnership Agreement”), plaintiffs claimed that defendants “surreptitiously and fraudulently attached the parties’ signature pages to an earlier draft of the Joinder [Documents] … to which [they] never agreed and in fact flatly rejected.” They maintained that the earlier draft “made no provision for [their] compensation and did not . . . reference the … Addendum.” 

The Partnership Agreement expressly required binding arbitration before JAMS for “[a]ny claim or dispute arising out of th[e] Agreement or the alleged breach thereof.” “[T]he cost of any arbitration [was to] be borne exclusively by the Partner asserting the claim,” thereby obligating that party “to advance such costs and expenses before commencing any proceedings.” The Joinder documents recognized the foregoing provisions. 

Plaintiffs commenced a mediation before JAMS in October 2018. Mediation was a prerequisite to arbitrating the parties’ dispute under the Partnership Agreement. However, Plaintiffs denied mediating under the terms of the Partnership Agreement, stating that their decision to mediate was an “expedient” means of trying to resolve their dispute. 

On October 25, 2018, plaintiffs’ counsel served a “Demand for Arbitration” on defendants in connection with their dispute. Nevertheless, Plaintiffs commenced the action by service of a summons with notice, seeking a declaration that they were “not and never were law partners with the defendants” and monetary relief representing the fees paid to CKR Law by plaintiffs’ clients; costs involved in plaintiffs’ move into (and, later, out of) the offices of CKR Law; and sums expended by plaintiffs for which defendant Michael James Rinde promised to reimburse them.

Defendants filed a motion to stay the action and compel arbitration, arguing that the arbitration provisions in the Partnership Agreement and in the Joinder documents were broad, clear, and unambiguous. The Court granted the motion.

The Court held that in light of the state policy encouraging the arbitration of disputes, the broad arbitration provisions in the Partnership Agreement and Joinder Documents, and “plaintiffs’ counsel’s express Arbitration Demand,” arbitration of the dispute was appropriate. Slip Op. at *4. The Court also held that because the arbitration provisions in the governing documents were broad, the arbitrator was the appropriate person to decide “[a]ll the issues and claims summarized in plaintiffs’ summons with notice filed in this action.…” Id.

The Court further held that pursuant to the terms of the arbitration agreement, the parties were to mediate their dispute: “Because the Partnership Agreement requires that mediation be given a chance prior to any arbitration, this court’s grant of defendants’ motion necessarily requires that the parties first proceed to mediation which, if unsuccessful, will be followed by binding arbitration.” Id. In so ruling, the Court held that the costs of mediation would be shared by the parties, as opposed to plaintiffs, as defendants urged. Id.

Plaintiffs argued that the Partnership Agreement was silent as to who would bear the costs of mediation, as opposed to arbitration. The Court agreed, finding “Plaintiffs’ point [to be] well taken.” Id. at *5. “[N]othing is said about the cost burden underlying the mediation, which must precede any arbitration,” observed the Court. 

The Court held that “[i]n view of the contractual silence on th[e] point,” it was applying “an objective standard” that “recognize[d] the mutual benefit to both sides inherent in mediation as a means of negotiation toward the goal of consensual resolution and settlement of their dispute.” Id. See Chapman, Spira & Carson, LLC v. Helix BioPharma Corp., 115 A.D.3d 526, 527 (1st Dept. 2014). “Viewed thusly, and objectively,” concluded the Court, the Court would supply “the missing term by adopting a construction requiring both sides to share equally in the cost of mediation.” Id.

Takeaway

The threshold question in assessing whether to compel arbitration is whether there is a valid and binding agreement to arbitrate. Matter of Belzberg v. Verus Invs. Holdings Inc., 21 N.Y.3d 626, 630 (2013). If the court finds that a valid arbitration agreement exists, the next question to consider is whether the dispute comes within the scope of that agreement. Zachariou v. Manios, 68 A.D.3d 539, 539 (1st Dept. 2009) (“Whether a dispute is arbitrable is generally an issue for the court to decide unless the parties clearly and unmistakably provide otherwise.”).

Where the parties “clearly and unmistakably” reserve the question of arbitrability for decision by the arbitrator, the dispute will be sent to arbitration. This is especially so when the parties incorporate the rules of the arbitral forum into their agreement. Zachariou, 68 A.D.3d at 539 (“[w]here there is a broad arbitration clause and the parties’ agreement specifically incorporates by reference the AAA rules providing that the arbitration panel shall have the power to rule on its own jurisdiction, courts will ‘leave the question of arbitrability to the arbitrators’”) (citations omitted)).

In Steamer, the parties’ agreements contained broad arbitration provisions that provided for the arbitration of “[a]ny claim or dispute arising out of th[e] Agreement or the alleged breach thereof” and incorporated by reference the JAMS rules. As such, consistent with the law in New York, and plaintiffs’ counsel’s demand for arbitration, the Court found that there was clear and unmistakable evidence that the parties intended to have an arbitrator decide their dispute.