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Think Your Arbitration Clause is Sending Your Dispute to Arbitration? It May Not

Posted by Eric Parzianello on March 4, 2015

Depending on the nature of the dispute and which side you’re on, arbitration can be a good mechanism to provide a resolution.  Parties often insert some type of arbitration clause in their agreements believing that all disputes under that agreement must be arbitrated.  If, however, the arbitration clause is not sufficiently broad to cover any type of dispute and a complaint is drafted with the intent of avoiding arbitration, court litigation will proceed as one Florida appeals court recently held.

In Sherwood v. Slazinski, Dr. Leonard Slazinski and other members of a limited liability company (LLC) filed an action against two other members of the LLC, the Sherwoods, seeking declaratory and injunctive relief.  Like most Operating Agreements, the one at issue addressed company formation, capital contributions, profits/losses, distributions, management, compensation, bookkeeping and transfers.  The Operating Agreement also contained the following clause:

    • “[i]n the event of any impasse in decision-making, not otherwise capable of being decided according to the terms of the Operating Agreement, the matter shall first be referred to voluntary nonbinding mediation. In the event there is no satisfactory resolution after such mediation, it shall be referred to arbitration….”

The Sherwoods filed a motion to compel arbitration on the basis of this clause.  The Court of Appeals found that “to compel arbitration, the Sherwoods had to demonstrate: (1) that a valid written agreement to arbitrate existed, (2) that an arbitrable issue existed, and (3) that the right to arbitrate had not been waived.”In a February 20, 2015, decision, the Florida Court of Appeals concluded that the dispute as framed by Dr. Slazinski in his complaint did not fall within the scope of the arbitration clause since the clause related only to member duties and decision-making impasses. Because the arbitration clause was narrowly drafted, it didn’t extend “to any and all claims that may arise or relate to the agreements governing the business.” The Court therefore denied the requested arbitration.

If you desire arbitration for any type of dispute, make sure your clause says that.  If you’re trying to avoid arbitration, make sure your complaint is drafted to ensure that result.

Eric Parzianello

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