But We Agreed to Arbitrate! – The Enforceability of an Arbitration Clause after the Termination or Expiration of the Written Agreement
By Filemon “Phil” Carrillo on June 29, 2017
Businesses include arbitration clauses in their contracts for many reasons, including to avoid the greater cost of litigation in the courts. However, many business relationships will continue after the termination of a contract. Given its value, how do businesses ensure that the arbitration provision survives the end of a contract?
Many contracts have a predetermined end date. These are known as term contracts. The term of the contract can be set in a number of ways. Examples include (i) the sale of a certain number of products; (ii) the delivery of a set amount of goods; (iii) the completion of a specific project or projects; or, (iv) a calendar date. As a practical matter, however, businesses will often continue to provide services or to perform according to the contract beyond the predetermined term. It could be because the business relationship was beneficial for all parties, a project was not finished by the end date, or a number of other factual scenarios. The question is, does the arbitration provision survive the end of the term of a contract or agreement where the parties continue to perform? The answer: It depends.
The case law shows a strong policy in favor of arbitration—all doubts as to whether an arbitration clause applies to a particular dispute are resolved in favor of sending the parties to arbitration. However, the specific facts of a case may be enough to override this strong policy. After all, “[t]he object of an arbitration clause is to implement a contract, not to transcend it.” Litton Fin. Printing Div., a Div. of Litton Bus. Sys., Inc. v. N.L.R.B., 501 U.S. 190, 205 (1991). The below analysis of two cases illustrates what distinguishes a case where the arbitration provision survives the expiration or termination of a contract from one where it does not.
The court in Bogen Commc’ns, Inc. v. Tri-Signal Integration, Inc. (“Bogen”), 227 Fed.Appx. 159, 2007 WL 1109237 (3d Cir. 2007), found that a post-expiration dispute was not subject to an arbitration clause. Bogen Communications, Inc. (“Bogen”) was a manufacturer and seller of sound systems and telephone peripherals. Bogen hired Tri-Signal Integration, Inc. (“Tri-Signal”) to distribute its products in California. Bogen and Tri-Signal’s contract included an arbitration clause and expressly stated that it would terminate on December 31, 2000. After the contract expired the companies continued to do business together, but on materially different terms. Then, on May 7, 2003, more than two years after the expiration of the initial contract, Bogen terminated its business relationship with Tri-Signal. Tri-Signal sued, and Bogen moved to compel arbitration.
The Bogen court noted: “Despite well-established policy considerations favoring the enforcement of arbitration agreements under the [FAA], a party can only be required to arbitrate if ‘that party has entered into a written agreement to arbitrate that covers the dispute.’” Id, 227 Fed.Appx. at 161 (quoting Bel-Ray Co., Inc. v. Chemrite Ltd., 181 F.3d 435, 440 (3d Cir. 1999)). In deciding to deny Bogen’s motion to compel arbitration, the court pointed to the fact that the parties did not enter into a new written agreement after the termination of the original contract, and that the dispute did not arise until over two years after the termination. The court found that the lawsuit did not arise under the original contract and that there was no evidence of a clear intention to arbitrate disputes that arise under the new arrangement.
In contrast, where the dispute does relate to the original contract, the arbitration clause is enforceable. In Destinations by Design, LLC v. T-Mobile USA, Inc., No. 2:09-CV-1099, 2010 WL 1687752 (S.D. Ohio Apr. 26, 2010), the court found that an arbitration provision was enforceable because the dispute centered on a project that was started prior to the expiration of the contract.
Destinations by Design, LLC (“DBD”), an event management and planning company, entered into a Services Agreement with T-Mobile. The Services Agreement, by its own terms, expired on December 1, 2008 and included an arbitration provision. DBD and T-Mobile began planning T-Mobile’s event seven months before the agreement expired. Then, in May 2009—after the contractual termination date—T-Mobile sent DBD a letter instructing it to cease work on all T-Mobile projects. Id., 2010 WL 1687752, at *1-2. DBD filed suit in October 2009, and T-Mobile moved to compel arbitration.
DBD argued that its complaint was based on an oral agreement after the expiration of the Services Agreement. Id., 2010 WL 1687752, at *3. T-Mobile’s position was that DBD’s claims were subject to the arbitration provision in the original contract. The court agreed with T-Mobile and found that the dispute was subject to the arbitration provision. The court stated: “This fact—that the disputed project work began under the terms of the Services Agreement, but ended after the agreement expired—establishes that the current dispute relates back to the Services Agreement. Id., 2010 WL 1687752, at *5.
The court in Destinations by Design, LLC distinguished that case from the dispute in Bogen. It noted that in Bogen, the dispute involved work that was begun and completed after the expiration of the written agreement. Because DBD began the project subject of the lawsuit during the term of the Services Agreement, the court found that the parties had agreed to arbitrate the dispute. Id.
Two lessons result from analyzing Destinations by Design, LLC and Bogen. First, firms cannot rely on a termination or expiration of a contract to escape the contractual obligation to arbitrate disputes. If the case involves a project that was begun during the term of the contract, or if the case involves facts and obligations that arise out of the original contract, the arbitration clause will be enforceable post-termination. Second, if firms want to protect their agreement to arbitrate, they should enter into new written agreements with an enforceable arbitration clause at the onset of any contemplated continued business relationship. An agreement to arbitrate is a creature of contract, and is limited in scope to only that contract. Firms often enter into a contract for specific services, distribution, or production, then conduct business that goes beyond the scope of the original term contract. A new written agreement with an arbitration provision is key to protect a businesses’ interest in arbitrating disputes.
This article was prepared by Douglas R. Luther (firstname.lastname@example.org), of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of antitrust, trademark, copyright, trade secret, unfair competition, franchise, and distribution laws.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.