Nonarbitrable Issues Can be Decided in an Arbitration When They Are Inextricably Intertwined With an Arbitrable Issue

On April 8, 2021, the First Department issued a decision in Protostorm, Inc. v. Foley & Lardner LLP, 2021 NY Slip Op. 02227, holding that nonarbitrable issues can be decided in an arbitration when they are inextricably intertwined with an arbitrable issue, explaining:

Where there is no substantial question whether a valid agreement to arbitrate was made or complied with, the court shall direct the parties to arbitrate and its order shall operate to stay a pending action. Once a valid arbitration agreement is identified, an arbitration should only be stayed when the sole matter sought to be submitted to arbitration is clearly beyond the arbitrator's power. Further, where arbitrable and nonarbitrable claims are inextricably interwoven, 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.

There is no dispute that there is a valid agreement between the parties to arbitrate any dispute regarding unpaid fees. Thus, the court must compel arbitration of defendants' claim for unpaid fees and stay this action pending completion of the arbitration. Moreover, because plaintiff's nonarbitrable malpractice claim is inextricably intertwined with the arbitrable claim for unpaid fees, the proper course is to stay the action pending completion of the arbitration.

To the extent plaintiff argues that it cannot be forced to arbitrate its malpractice claim because it did not explicitly agree to do so, both the First and Second Departments have clearly found that a nonarbitrable issue can be decided in an arbitration when it is inextricably intertwined with an arbitrable issue, particularly where, as here, the determination of the arbitrable unpaid fees claim may dispose of the nonarbitrable malpractice claim.

Although plaintiff relies on Primavera Laboratories Inc. v Avon Products Inc., (297 AD2d 505 [1st Dept 2002]), that case is inapposite. In Primavera, this 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. Additionally, in Primavera, this court stayed the arbitration because numerous preliminary issues needed to be resolved in the action before the arbitration procedure could be invoked. Here, unlike in Primavera, the parties' retainer agreement does not specifically provide for any disputes to be decided in New York courts. Moreover, there are no issues that must be resolved prior to defendants invoking their right to arbitration of the issue of unpaid fees.

(Internal quotations and citations omitted) (emphasis added).

Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.