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Attention Clause Drafters: Proofread! (July 11)

Mediation or arbitration?  A federal court in Ohio analyzed a confusing contract clause and made its choice.

In Moro Aircraft Leasing Inc. v. Keith, the U.S. District Court for the Northern District of Ohio sent a matter to arbitration where the dispute resolution clause provided for the settlement of “the dispute by mediation administered by Arbitration under the Rules of the American Arbitration Association” (emphasis added). Moro Aircraft Leasing, Inc. v. Keith, No. 3:10 CV 2708, 2011 U.S. Dist. LEXIS 61869 at *18 (N.D. Ohio June 9, 2011).

Plaintiff Moro Aircraft didn't want to arbitrate. But the court made short shrift of claimant’s argument that the arbitration clause is ambiguous because the AAA’s rules do not include information on “mediation administered by Arbitration.”

Toledo, Ohio-based U.S. District Court Senior Judge David A. Katz ruled that the “arbitration clause clearly intends this language to refer to ‘Arbitration under the Rules of the American Arbitration Association,’ not some undefined ‘mediation’ process.” Id. at *22.

The court may be shortchanging the mediation process referenced in the contract. But it made a choice for arbitration.  Still, if mediation or a stepped clause was the parties' real intent, it could have been achieved by careful drafting and proofreading.

The court also reaffirmed the doctrine that a nonsignatory can estop a signatory from avoiding an arbitration clause. The court pointed to the Sixth Circuit’s approval in Javitch v. First Union Securities Inc., 315 F.3d 619 (6th Cir. 2003), of the decision in Thomson-CSF v. Am. Arbitration Ass’n, 64 F.3d 773 (2d Cir. 1995), which dictated that “the circuits have been willing to estop a signatory from avoiding arbitration with a non-signatory when the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.” Thomson-CSF, 64 F.3d at 779.

Thus, plaintiff Moro Aircraft was estopped from avoiding arbitration of its claims against Keith that related to the funding agreement simply because Keith was not a signatory to the agreement.

Moro Aircraft made two other arguments as to why the court should not compel the arbitration clause. One involved the proposition that the funding agreement's arbitration clause did not cover its tort claims against Keith. The court dismissed this contention, quoting a Sixth Circuit decision which held that “even real torts can be covered by arbitration clauses if the allegations underlying the claims touch matters covered by the agreement.” Fazio v. Lehman Bros. Inc., 340 F.3d 386, 395 (6th Cir. 2003). In this case, the tort claims directly related to the funding agreement.

In addition, Moro Aircraft contended that the arbitration clause was unenforceable because it was contained in an adhesion contract. The court disagreed. The opinion quotes a Northern District of Ohio decision which stated that “there must be some evidence that, in consequence of the imbalance, the party in the weaker position was defrauded or coerced into agreement to the arbitration clause.” Stachurski v. DirecTV Inc., 642 F.Supp.2d 758, 768 (N.D.Ohio 2009). There being a dearth of such evidence in this matter, the court dismissed this claim as well.

The dispute resolution clause was valid, the court held, and Keith was permitted to compel arbitration of the claims against him.

--Helena Tavares Erickson, CPR Senior Vice President, and CPR intern Peter Siemons