Ohio courts on the scope of arbitration agreements
Evaluations of party relationships
are being used to help determine
court decisions on arbitration
BY JIM DIXON
On October 1, 2009, in EFB Construction, Inc. v. Hannum Crossing Development Co, Ltd., the Eighth District Court of Appeals (which covers all of Cuyahoga County) used a “relationship test” to determine the scope of an arbitration agreement. This decision signals the prevailing use of that test in such cases in general, including cases that involve construction contracts.
Typically, a dispute over arbitrability arises after a party that has signed an arbitration agreement files a lawsuit. From a procedural perspective, the defendant can either move to stay the lawsuit so the parties can proceed with arbitration or file responsive pleadings and proceed with the litigation. The ability to stay the action and enforce the agreement to arbitrate is provided by Ohio Revised Code §2711.02(B):
If any action is brought upon any issue referable to arbitration under an agreement in writing for arbitration, the court in which the action is pending, upon being satisfied that the issue involved in the action is referable to arbitration, shall on application of one of the parties stay the trial of the action until the arbitration of the issue has been had.
Typically, a court will be “satisfied that the issue involved in the action is referable to arbitration” if a party to the action shows that there is a written arbitration agreement and the scope of that agreement covers at least one of the issues involved in the litigation. The case law is relatively uniform in stating that the court can issue a stay even when the lawsuit involves other parties and other claims.
The dispute
With one novel twist, the facts of EFB Construction fit within the typical context for such a motion. EFB, a site work contractor, entered into eight written agreements with Hannum for eight phases of a residential development. Each of those eight agreements was in the form of a standard AIA document that included a broad arbitration provision. That provision called for the arbitration of all claims, and defined claims as “other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract.”
Though the scope of the authorization was in dispute, the parties agreed that Hannum verbally authorized EFB to proceed with some work on Phases 9 and 10 before written agreements were in place. EFB felt that the authorization was for the entirety of the work on Phase 9 and filed a lawsuit after Hannum did not award it all of that work. In its Complaint (here is the twist), EFB stated claims for sums due and for lost profits on Phase 9 and hinted that sums were due on other phases. To enforce its right to arbitrate, Hannum filed a Motion to Stay Pending Arbitration. In support of the motion, it filed an affidavit that included evidence that EFB submitted invoices for amounts due on Phase 8 and that Hannum had claims against EFB on Phases 4, 7, 8, 9 and 10. Thus, the pleadings and affidavits identified claims or counterclaims on three project phases where the parties had executed a broad form arbitration agreement. Even so, the trial court denied Hannum’s Motion to Stay.
The decision on appeal
On appeal, Hannum argued that the lawsuit involved some claims that were subject to written arbitration agreements and therefore the trial court should have stayed the entire action.
After Hannum and EFB submitted their briefs, but before the hearing with the three-judge appellate panel, the Ohio Supreme Court issued a decision Alexander v. Wells Fargo Financial (2009), 122 Ohio St. 3d 341. In that case, one plaintiff entered into a mortgage agreement with a bank, while another plaintiff entered into a loan agreement with another bank. Both written agreements contained arbitration provisions with broad language defining covered claims. Both plaintiffs filed lawsuits alleging that the banks violated statutory provisions governing the time period within which the banks were to file a mortgage satisfaction and financing statement termination. The trial court and the Eighth District both agreed that the issues were not referable to arbitration. The Ohio Supreme Court disagreed, ruling that the disputes arose out of and related to the underlying written agreements. It also stated that a standard it utilized in another case in 2006 “must be used” to determine the issue. That case, Academy of Medicine of Cinn. v. Aetna Health, Inc., incorporated a standard used by the Federal Sixth Circuit Court of Appeal in Fazio v. Lehman Bros., Inc. There, the court indicated that even non-contractual negligence claims can be referred to arbitration if the matters touch on those covered by an arbitration agreement. According to that court, the “proper method of analysis here is to ask if an action could be maintained without reference to the contract or relationship at issue. If it could, it is likely outside the scope of the arbitration agreement.” After reviewing the standards set forth in Alexander, Aetna and Fazio, the Eighth District Court in EFB stated: Based upon the inclusive holding of Alexander, it cannot be fairly said that the allegations underlying the claims appellee raised against appellant in this case were ones outside the scope of the existing agreements between the parties. Thus, the claims fell under the existing arbitration clauses. As indicated, “the claims [EFB] raised against [Hannum] in this case” included claims on Phase 9. Thus, those claims, under the relationship test of Alexander, are also subject to arbitration even though the parties had not executed a written arbitration agreement for Phase 9.
The meaning for contracting parties
EFB demonstrates that courts will use the relationship test to determine the scope of arbitration agreements. Under EFB, this includes
Ohio courts on the scope of arbitration agreements
Evaluations of party relationships
are being used to help determine
court decisions on arbitration
BY JIM DIXON
On October 1, 2009, in EFB Construction, Inc. v. Hannum Crossing Development Co, Ltd., the Eighth District Court of Appeals (which covers all of Cuyahoga County) used a “relationship test” to determine the scope of an arbitration agreement. This decision signals the prevailing use of that test in such cases in general, including cases that involve construction contracts.
Typically, a dispute over arbitrability arises after a party that has signed an arbitration agreement files a lawsuit. From a procedural perspective, the defendant can either move to stay the lawsuit so the parties can proceed with arbitration or file responsive pleadings and proceed with the litigation. The ability to stay the action and enforce the agreement to arbitrate is provided by Ohio Revised Code §2711.02(B):
If any action is brought upon any issue referable to arbitration under an agreement in writing for arbitration, the court in which the action is pending, upon being satisfied that the issue involved in the action is referable to arbitration, shall on application of one of the parties stay the trial of the action until the arbitration of the issue has been had.
Typically, a court will be “satisfied that the issue involved in the action is referable to arbitration” if a party to the action shows that there is a written arbitration agreement and the scope of that agreement covers at least one of the issues involved in the litigation. The case law is relatively uniform in stating that the court can issue a stay even when the lawsuit involves other parties and other claims.
The dispute
With one novel twist, the facts of EFB Construction fit within the typical context for such a motion. EFB, a site work contractor, entered into eight written agreements with Hannum for eight phases of a residential development. Each of those eight agreements was in the form of a standard AIA document that included a broad arbitration provision. That provision called for the arbitration of all claims, and defined claims as “other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract.”
Though the scope of the authorization was in dispute, the parties agreed that Hannum verbally authorized EFB to proceed with some work on Phases 9 and 10 before written agreements were in place. EFB felt that the authorization was for the entirety of the work on Phase 9 and filed a lawsuit after Hannum did not award it all of that work. In its Complaint (here is the twist), EFB stated claims for sums due and for lost profits on Phase 9 and hinted that sums were due on other phases. To enforce its right to arbitrate, Hannum filed a Motion to Stay Pending Arbitration. In support of the motion, it filed an affidavit that included evidence that EFB submitted invoices for amounts due on Phase 8 and that Hannum had claims against EFB on Phases 4, 7, 8, 9 and 10. Thus, the pleadings and affidavits identified claims or counterclaims on three project phases where the parties had executed a broad form arbitration agreement. Even so, the trial court denied Hannum’s Motion to Stay.
The decision on appeal
On appeal, Hannum argued that the lawsuit involved some claims that were subject to written arbitration agreements and therefore the trial court should have stayed the entire action.
After Hannum and EFB submitted their briefs, but before the hearing with the three-judge appellate panel, the Ohio Supreme Court issued a decision Alexander v. Wells Fargo Financial (2009), 122 Ohio St. 3d 341. In that case, one plaintiff entered into a mortgage agreement with a bank, while another plaintiff entered into a loan agreement with another bank. Both written agreements contained arbitration provisions with broad language defining covered claims. Both plaintiffs filed lawsuits alleging that the banks violated statutory provisions governing the time period within which the banks were to file a mortgage satisfaction and financing statement termination. The trial court and the Eighth District both agreed that the issues were not referable to arbitration. The Ohio Supreme Court disagreed, ruling that the disputes arose out of and related to the underlying written agreements. It also stated that a standard it utilized in another case in 2006 “must be used” to determine the issue. That case, Academy of Medicine of Cinn. v. Aetna Health, Inc., incorporated a standard used by the Federal Sixth Circuit Court of Appeal in Fazio v. Lehman Bros., Inc. There, the court indicated that even non-contractual negligence claims can be referred to arbitration if the matters touch on those covered by an arbitration agreement. According to that court, the “proper method of analysis here is to ask if an action could be maintained without reference to the contract or relationship at issue. If it could, it is likely outside the scope of the arbitration agreement.” After reviewing the standards set forth in Alexander, Aetna and Fazio, the Eighth District Court in EFB stated: Based upon the inclusive holding of Alexander, it cannot be fairly said that the allegations underlying the claims appellee raised against appellant in this case were ones outside the scope of the existing agreements between the parties. Thus, the claims fell under the existing arbitration clauses. As indicated, “the claims [EFB] raised against [Hannum] in this case” included claims on Phase 9. Thus, those claims, under the relationship test of Alexander, are also subject to arbitration even though the parties had not executed a written arbitration agreement for Phase 9.
The meaning for contracting parties
EFB demonstrates that courts will use the relationship test to determine the scope of arbitration agreements. Under EFB, this includes a claim on an oral agreement where earlier written agreements included arbitration agreements. Future judicial decisions will determine how far the courts are willing to go to with this analysis. Until then, parties can expect that the scope of their arbitration agreements will be interpreted broadly. BXM
For further information regarding the law and practical compliance tips, please contact James Dixon, Frantz Ward LLP, 2500 Key Center, 127 Public Square, Cleveland, OH 44114, 216-515-1660.
a claim on an oral agreement where earlier written agreements included arbitration agreements. Future judicial decisions will determine how far the courts are willing to go to with this analysis. Until then, parties can expect that the scope of their arbitration agreements will be interpreted broadly.
BXM
For further information regarding the law and practical compliance tips, please contact James Dixon, Frantz Ward LLP, 2500 Key Center, 127 Public Square, Cleveland, OH 44114, 216-515-1660.
