Arbitration Clauses for Ongoing Relationships

By SHAWN BATES and DAVID HRICIK

Introduction

Binding arbitration is becoming increasingly commonplace. Contracts routinely contain clauses requiring the parties to waive their right to litigate in favor of arbitration. While no longer new, the phenomenon continues to gain strength at an amazing pace.
Because parties can be compelled to arbitrate disputes only if there is an agreement to do so, it is critical to draft the clause to ensure it achieves the scope intended by the parties.1 There has been scant attention paid to temporal considerations in drafting arbitration provisions, even though that issue is critical when, as often happens, a contract with an arbitration clause is executed during an ongoing relationship, in which earlier contracts do not contemplate arbitration.
This article discusses the relevant temporal issues to be considered in negotiating and drafting arbitration clauses during ongoing commercial relationships.

Does your client want retroactive application?
The answer to this question will determine the wording of the arbitration clause. A broad arbitration clause will govern all disputes “arising out of or related to” the contract.2 This can include some claims arising out of conduct that predates the formation of the contract, such as a claim that the contract was fraudulently induced.3
However, the question of retroactively applying an arbitration clause is a much less clear and, as of now, less frequently litigated issue in arbitration jurisprudence. The few courts that have faced this issue have held that, except under specific circumstances, even a broad arbitration clause will not reach back in time to embrace disputes arising under an earlier contract that did not contain such a clause, even if (as is often the case) the dispute also “relates to” the later contract with the arbitration clause.4
This rule of interpretation is often critical and yet counterintuitive. In many industries, the parties often develop long-term relationships governed by a series of contracts. Even in shorter-term relationships, parties frequently enter into one contract to establish the parameters of a particular project, and then enter into another contract by which the project will actually proceed. Frequently, business relationships have existed for decades and may involve a mix of older contracts predating the widespread popularity of commercial arbitration and more recent “follow-on” contracts containing, for the first time in the relationship, an arbitration provision.
When a contract with an arbitration provision is introduced to an ongoing relationship, the question to consider is whether the new arbitration clause governs only disputes arising under the contract containing the clause, or whether the clause governs disputes arising from an earlier portion of a project or relationship, under a predecessor contract that has no arbitration clause.

A standard clause is insufficient to arbitrate
disputes under an earlier contract
Courts recognize two different forms of arbitration clauses: narrow and broad.5 The prototypical narrow arbitration clause encompasses only those disputes “arising under” the contract.6 A broad arbitration clause captures disputes “arising under or relating to” the contract.7 More importantly, for an arbitration clause to require arbitration of disputes arising under or relating to contracts that pre-date the clause, the agreement must expressly and unequivocally contemplate such retroactivity.8
A recent engineering malpractice case highlights the practical effect of failing to address temporal issues in express language. A mining company had entered into a contract with a global engineering and construction firm. Under the contract, the engineering firm would produce a feasibility study to recommend whether the mining company should proceed with a specific project. The contract did not have an arbitration clause. Ultimately, the feasibility study recommended proceeding with the project, so the mining company engaged the engineering firm to construct the project under a separate follow-on contract. The follow-on contract contained the prototypical “broad” clause mandating arbitration of all disputes “arising under or relating to” the follow-on contract.
Sometime later, the mining company sued the engineering firm and alleged flaws in the feasibility study and misdiagnosis of the project’s viability. In response, the engineering firm tried to invoke the follow-on contract’s arbitration provision. The mining company opposed, contending that its claims arose under the earlier contract, which had no such provision. The trial court denied the engineer’s motion to compel arbitration. Following the majority of courts,9 the court held that an arbitration clause in a later contract does not cover disputes relating to earlier contracts unless the arbitration clause expressly and unequivocally mandates arbitration of disputes arising under the earlier contract.10 The Nevada Supreme Court affirmed this holding, despite that the parties could end up litigating some of the same complex fact issues that were subject to arbitration.11

Ways of achieving – or avoiding – retroactivity
Achieving an all-encompassing, retroactive effect requires careful attention to the language in an arbitration clause. On the other hand, parties who want to limit the scope of an arbitration clause will want to reject the provisions discussed below.

A. Expressly agreeing to retroactivity
The clearest and easiest way to ensure arbitrating all disputes that arise under all of the parties’ existing contracts is to include an arbitration provision that says so.12 For example, a clause specifying that all disputes arising under or relating to existing contracts between the parties constitutes an agreement to arbitrate.
However, as shown below, there are other, less direct ways to negotiate and obtain that result. Depending on the circumstances, negotiating these less direct clauses may be more appropriate.

Entire relationship clauses
By tailoring an arbitration clause to expressly cover the “entire relationship” between the parties, retroactivity can be achieved. Courts have permitted retroactively applying arbitration clauses to disputes that arose while performing under an agreement that preceded the contract containing the clause, but only when the clause expressly covers the parties’ entire relationship, not just the contract that calls for arbitration.13 But absent expression of the parties’ intent to cover their entire relationship, courts have refused to apply even a broad arbitration clause to claims involving the parties’ ongoing relationship where the dispute arose from facts or acts predating the contract with the arbitration clause.14

Specific incorporation clauses
Arbitration clauses have also been allowed to reach back in time when the clause expressly refers to and incorporates the earlier agreement not containing an arbitration provision.15 For example, one court addressed a 1995 licensing and distributorship agreement containing an arbitration clause that expressly referred to and subsumed the parties’ previous agreements. More specifically, the contract’s merger clause stated that the 1995 agreement “constitutes the entire understanding and agreement. Any other previous negotiations, discussions, and/or written or oral agreements between the parties on the subject matter of this Agreement are superseded hereby.”16 The court held that claims under the earlier contracts were subject to the 1995 contract’s arbitration clause because the prior contracts were expressly subsumed by this broad and explicit merger clause.17
While most garden-variety merger clauses do not go as far as that in the case above, modifying a contract’s generic merger clause is one way to achieve retroactive application of the arbitration agreement.

Superseding contract clauses
Retroactive application of an arbitration clause also has been permitted where an earlier short-form or preliminary agreement was superseded or encompassed within a later definitive agreement that contained an arbitration clause and covered the same subject matter. For example, in Pennzoil Exploration & Production Co. v. Ramco Energy Limited, the parties had entered into a series of agreements allocating the potential development rights in Azerbaijani oil fields.18 Because the Azerbaijan government was unstable, the development rights were modified repeatedly to take into account the government takeover of various oil fields and the introduction of new partners into the government-driven allocation scheme.19 Early letter agreements between Ramco and Pennzoil, without arbitration clauses, expressly specified that definitive agreements would follow. Detailed, definitive agreements did follow, and they contained arbitration clauses. After signing three of the definitive contracts with arbitration clauses, Ramco attempted to sue Pennzoil on one of the earlier letter agreements.20
Affirming the district court’s decision, the Fifth Circuit compelled arbitration of the claims brought under an earlier agreement that did not contain an arbitration clause. In so doing, the Court focused on three facts. First, each of the agreements between the parties simply modified the terms of the original agreement, in light of the changed political landscape. In fact, the later agreement “regulated the relation of the parties in the exercise of their rights and obligations under” the earlier contract.21 Second, the earlier agreements expressly stated that subsequent definitive agreements would follow.22 Finally, the Court noted that the later agreements expressly referenced the earlier ones.23
To achieve the broadest possible application of an arbitration clause in situations where business is based on one or more “interim” agreements that will eventually be supplanted by a more definitive agreement, practitioners should consider designing the interim agreements to expressly recognize the forthcoming definitive agreement.

The key is express and unequivocal retroactivity
The case law indicates several paths to retroactively applying an arbitration clause. To ensure the best chance that an arbitration clause will be retroactively applied to disputes arising under an earlier contract without an arbitration provision, the parties should expressly and unequivocally indicate their intent. Whether the merger clause is modified, the arbitration clause is broadened to cover the parties’ “entire relationship,” earlier agreements are specifically incorporated into later ones, or language is added elsewhere in the contract to indicate retroactivity, the key is to make clear that the arbitration clause is intended to reach back in time.

Conclusion
As sophisticated clients and counsel become more adept at defining the scope of an arbitration clause to be as broad as possible, it would serve them well to consider the seemingly overlooked issue of retroactivity. There are a number of approaches to increase the likelihood that an arbitration clause will be applied retroactively, even to require arbitration of disputes arising under prior contracts without arbitration clauses. Knowing that the law will not, absent such language in the parties’ contract, require arbitration of such disputes will allow counsel to negotiate and draft agreements that express and carry out their clients’ intent.

Endnotes
1. EEOC v. Waffle House, Inc., 534 U.S. 279, 289, 293 (2002) (“[I]t is the language of the contract that defines the scope of disputes subject to arbitration. * * * The FAA . . . does not require the parties to arbitrate when they have not agreed to do so.”); see also AT & T Tech. Inv. v. Communications Workers of Am., 475 U.S. 643, 648 (1986) (stating that a “party cannot be required to submit to arbitration any dispute which he has not agreed to submit”). 2. Collins & Aikman Prods. Co. v. Bldg. Sys., Inc., 58 F.3d 16, 20 (2d Cir. 1995) (“The clause in this case, submitting to arbitration ‘[a]ny claim or controversy arising out of or relating to th[e] agreement,’ is the paradigm of a broad clause”); Ferrari N. Am., Inc. v. Ogner Motor Cars, Inc., No. 02-Civ.-7720SAS, 2003 WL 102839, at * 3 (S.D.N.Y. 2003) (“the prototypical broad arbitration provision” is one that makes arbitrable “[a]ny dispute, controversy or claim arising under or in connection with [an agreement]”); Brown v. Coleman Co., Inc., 220 F.3d 1180, 1184 (10th Cir. 2000) (explaining that arbitration clause covering “all disputes or controversies arising under or in connection with this Agreement” is broad form). 3. See, e.g., Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 398 (1967); Large v. Conseco Fin. Serv. Corp., 292 F.3d 49, 53 (1st Cir. 2002) (“As we have explained, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud”); Garten v. Kurth, 265 F.3d 136, 143 (2d Cir. 2001). 4. Hendrick v. Brown & Root, Inc., 50 F.Supp.2d 527, 533-34 (E.D. Va. 1999) (refusing retroactive application of arbitration clause because “the contractual language [arising under or relating to] does not evince an agreement to arbitrate pre-existing disputes”; rather, such language “speaks in the present tense or connotes the future”); Sec. Watch, Inc. v. Sentinel Sys., Inc., 176 F.3d 369, 372 (6th Cir. 1999) (refusing to apply arbitration clause in shipping agreement to dispute based on conduct occurring under prior shipping agreements, absent some temporal language indicating the parties intended retroactive application); Choice Sec. Sys., Inc. v. AT&T Corp., No. 97-1774, 1998 WL 153254, at *1 (1st Cir. Feb. 25, 1998) (noting that no provision of the later agreement even “remotely intimate[d] that the parties ever contemplated so radical a retroactive renegotiation of their earlier agreements,” in holding that an arbitration provision did not apply to disputes relating to earlier products). 5. See New River Mgmt. Co., L.L.C. v. Henry Schein, Inc., No. 00-1946, 2001 WL 565244 (4th Cir. May 25, 2001) (comparing broad and narrow form arbitration clauses); McDonnell Douglas Fin. Corp. v. Pa. Power & Light Co., 858 F.2d 825, 832 (2d Cir. 1988) (distinguishing “between ‘broad’ clauses that purport to refer all disputes arising out of a contract to arbitration, ‘narrow’ clauses that limit arbitration to specific types of disputes”); Sedco v. Petroleos Mexicanos, 767 F.2d 1140, 1145 n.10 (5th Cir. 1985) (comparing broad and narrow arbitration clauses). 6. See, e.g., Am. Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 92-93 (4th Cir. 1996) (collecting cases and noting that courts label “narrow” arbitration clauses limiting arbitration to disputes “arising under” or “arising hereunder” the contract); Pennzoil Exploration and Prod. Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1067 (5th Cir. 1998) (clauses that “only require arbitration of disputes ‘arising out of’ the contract are narrow); Tracer Research Corp. v. Nat’l Envtl. Servs. Co., 42 F.3d 1292, 1295 (9th Cir. 1994) (“arising out of” language means arbitration clause is narrow form). 7. See note 2 supra. 8. See note 4 supra. 9. See note 4 supra; see also Peerless Importers, Inc. v. Wine, Liquor & Distillery Workers Union Local One, 903 F.2d 924, 928 (2d Cir. 1990) (holding that arbitration clause did not reach back to cover employment dispute that was based on conduct occurring prior to signing arbitration agreement; arbitration agreement “may not be used to reach back to cover disputes arising before the agreement was executed, unless such preexisting disputes are brought within the scope of the clause”); Nordin v. Nurti/System, Inc., 897 F.2d 339, 344 (8th Cir. 1990) (finding that broad-form arbitration clause in settlement agreement with employee did not retroactively cover disputes arising from non-compete agreement); In re Hops Antitrust Litig., 655 F. Supp. 169, 172-73 (E.D. Mo.), (denying arbitration of disputes predating arbitration clause; “[t]he record reflects no agreement by the parties to amend earlier contracts to provide for arbitration of disputes”) app. dism., 832 F.2d 470 (8th Cir. 1987); George Washington Univ. v. Scott, 711 A.2d 1257, 1260-61 (D.C. 1998) (concluding that conduct that occurred before arbitration clause took effect was not arbitrable); Kenworth v. Bruner, 745 So.2d 271, 276 (Ala. 1999) (holding that arbitration clause in invoice for buyer’s purchase of reflectors for truck did not relate back to buyer’s claims arising from original purchase of truck; “retroactive agreements to arbitrate require closer scrutiny than agreements calling for arbitration of disputes relating to future activities. * * * [I]f the arbitration clause contains retroactive time-specific language, e.g., a phrase reading ‘this agreement applies to all transactions occurring before or after this agreement,’ then we may apply the arbitration provision to disputes relating to past events”). 10. Order on Motion to Compel Arbitration, Equatorial Tonopah Inc. v. Kvaerner U.S. Inc., No. CV-16392 (5th Jud. Dist. of Nye County, Nev., Mar. 27, 2002). 11. Order of Affirmance, Kvaerner U.S. Inc. v. Equatorial Tonopah Inc., No. 39571 (Nev. Oct. 21, 2003). 12. Hendrick, 50 F.Supp.2d at 533-34 (refusing retroactive application of arbitration clause because “the contractual language does not evince an agreement to arbitrate pre-existing disputes”); Security Watch, 176 F.3d at 372 (temporal language indicating arbitration clause applies to prior existing contracts necessary); Choice Sec. Sys., 1998 WL 153254, at *1 (arbitration clause did not apply to prior existing contract because provision did not say it would). 13. Zink v. Merrill Lynch Pierce Fenner & Smith, Inc., 13 F.3d 330, 331-33 (10th Cir. 1993) (enforcing arbitration agreement as to dispute arising out of contested transaction that predated execution of the arbitration clause, because the clause provided for arbitration of any controversy arising out of “your business or this agreement”) (emphasis added); Belke v. Merrill Lynch Pierce Fenner & Smith, Inc., 693 F.2d 1023, 1028 (11th Cir. 1982) (allowing arbitration of pre-agreement dispute under a clause that covered not only disputes arising out of the agreement, but also any controversy between the parties “arising out of [their] business”). 14. Church v. Gruntal, 698 F.Supp. 465, 469 (S.D.N.Y. 1988) (holding that arbitration clause did not apply retroactively to claims arising prior to the date of the contract, because the clause only covered matters arising out of or related to the contract and did not explicitly cover all matters relating to the relationship between the parties); Necchi S.p.A. v. Necchi Sewing Mach. Sales Corp., 348 F.2d 693, 698 (2d Cir. 1965) (concluding that arbitration clause did not reach back to cover earlier disputes relating to the parties’ relationship; the clause covered only matters concerning the contract containing the arbitration clause, rather than the working relationship between the parties). 15. See, e.g., Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 722-23 (9th Cir. 1999). 16. Id. at 723. 17. Id. 18. 139 F.3d 1061 (5th Cir. 1998). 19. Id. at 1062-64. 20. Id. 21. Id. at 1064. 22. Id. 23. Id.

Shawn Bates is an associate with the Houston law firm of Yetter & Warden, L.L.P., where he specializes in business and technology litigation. He is a 2000 graduate of Georgetown University Law Center, where he was an editor of the Georgetown Law Journal and a Legal Research and Writing Fellow.

David Hricik is an assistant professor at Mercer School of Law in Macon, Georgia. Prof. Hricik also consults for Yetter & Warden, L.L.P. He is a 1988 graduate of Northwestern Law School.

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