Motion to Compel Arbitration Denied Despite Reference to Arbitration in Forum Selection Clause

On March 28, 2023, Justice Joel M. Cohen of the New York County Commercial Division issued a decision in FFS Data Corp. v. the OLB Group, Inc., 2023 N.Y. Misc. LEXIS 1377. The Court denied the defendant’s motion to compel arbitration based on a dispute resolution provision contained in an asset purchase agreement between the parties. The Court noted that the provision in question “is a marvel of linguistic misdirection”, but ultimately determined that the defendant “has not carried its burden of establishing that the parties had a clear, explicit and unequivocal agreement mandating that they arbitrate disputes arising out of the APA.” The Court explained:

Dissection of the relevant language of Section 6.9 of the APA is not for the squeamish. First, it provides that "[i]n the event of any legal or equitable action arising under this Agreement, the parties hereto hereby agree that jurisdiction and venue for such action shall lie exclusively within either [sic] the state courts of New York located in New York County, New York." Putting aside that the word "either" is not joined by its typical companion "or," the sentence certainly suggests an intention that "any" action arising under the agreement would be litigated in court. Although it is possible in some cases to read such exclusive jurisdictional language as narrowly applying only to ancillary proceedings in aid of arbitration, to avoid conflicting with an otherwise clear arbitration provision (Isaacs v Westchester Wood Works, Inc., 278 AD2d 184, 185, 718 N.Y.S.2d 338 [1st Dept 2000]), that is made more difficult here by three succeeding sentences in Section 6.9. Those sentences provide that a "final judgment in any such [state court] action shall be conclusive," that the parties "agree to enter into mediation prior to trial in any suit, action, or proceeding arising out of or relating to this agreement," and that the parties waive the right to a jury trial "in connection with any litigation or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby." The most natural reading of those sentences is that they envision a proceeding on the merits of the dispute, rather than simply an ancillary proceeding in aid of arbitration.

It is at this point, however, that Section 6.9 seems to make a U-turn. First, it states the option that "[a]ny and all disputes may be resolved by means of mediation between the parties" (emphasis added). That is followed by the curious sentence upon which OLB's hopes for arbitration turn: "Foregoing [sic] this or in the absence of reaching an agreement through mediation, the parties shall agree to binding arbitration with the prevailing party entitled to recovery of all cost including but not limited to attorney fees." OLB's efforts to read this sentence (which does not make clear which "this" the parties might be "foregoing/forgoing" or whether "shall agree to binding arbitration" is an agreement or an agreement to agree), in isolation, as an unequivocal selection of arbitration as the exclusive and mandatory dispute resolution mechanism is unavailing.

Sound "principles of contract construction require that 'all terms of an agreement to be read together and harmonized whenever reasonably possible' (WSC Riverside Dr. Owners, LLC v McCabe, 2011 WL 11166419 [Sup Ct, NY County 2011], quoting HGCD Retail Services, LLC v 44-45 Broadway Realty Co., 37 AD3d 43, 49-50, 826 N.Y.S.2d 190 [1st Dept 2006]). Here, in addition to the dispute resolution language contained elsewhere in Section 6.9, which points directly to a court proceeding on the merits, there is this clear statement all capital letters in Section 6:15: "EACH OF THE PARTIES HERETO AGREES THAT [ANY CLAIMS OF ANY KIND ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY] SHALL BE TRIED BEFORE A JUDGE OF A COURT HAVING JURISDICTION WITHOUT A JURY." Although this language is not contained in a "dispute resolution" paragraph per se, it would be difficult to square its express terms with a reading of Section 6.9 that would prohibit bringing an action to a bench trial in New York State court.

Pulling together the various provisions cited above, and seeking to avoid negating any unequivocal contractual language, the Court finds that the most natural and harmonious reading is that the arbitration sentence at the end of Section 6.9 is triggered if, and only if, the parties first elected the option of pursuing mediation in lieu of a court proceeding. Such a procedure would be similar to that set forth in the contractual provision at issue in Bd. of Managers of 825 W. End Condominium v Grunstein (192 AD3d 500, 500, 140 N.Y.S.3d 694 [1st Dept 2021]), in which the court found there was no binding agreement to arbitrate absent an election by the board of managers to mediate the dispute.

As the Court noted, agreements to be arbitrate must be clear, explicit and unambiguous for New York courts to compel arbitration.

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning an agreement to arbitrate or moving to compel or stay arbitration.