Arbitration Clause Back from the Dead

Apr 25, 2019

Back from the Dead: When an Arbitration Clause May Survive an Agreement to Terminate the Agreement Containing the Arbitration Clause
By Gregory M. Smith, The Maloney Firm, APC
 
On April 23, 2019, in the matter of Oxford Preparatory Academy v. Edlighten Learning Solutions, the California Court of Appeal, Fourth Appellate District, held that parties can still be bound to an arbitration provision in a written agreement, even after they mutually agree to terminate the agreement containing the arbitration clause.
 
In December 2015, Oxford Preparatory Academy (“Oxford”) and Edlighten Learning Solutions (Edlighten”) entered into: (1) an Affiliation Agreement); (2) a Personnel Services Agreement); and (3) a Management Services Agreement (collectively “the Agreements”). The Management Services Agreement contained an arbitration provision, which was incorporated by reference into the other Agreements, which stated: “Any controversy or claim arising out of this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction.”
 
Only a few months later, the parties entered into an agreement to “terminate the Affiliation Agreement, the Management Services Agreement, and the Personnel Services Agreement … by mutual consent upon the terms set forth herein.” The Termination Agreement stated that effective June 17, 2016, “all rights and obligations of [the parties] under the [Agreements] shall cease” but that the obligations of each party to pay for the services rendered prior to the termination date survived the termination of the Agreements. The Termination Agreement also included an integration clause which stated: “There are no agreements, understandings, commitments, representations or warranties with respect to the subject matter hereof except as expressly set forth in this Agreement. This Agreement supersedes all prior oral or written negotiations, understandings and agreements with respect to the subject matter hereof.”
 
Thereafter, Oxford sued Edlighten for failure to timely pay as required by the survival clause, and Edlighten moved to compel arbitration pursuant to the clause in the Management Services Agreement. The trial court denied the petition because: “(1) the parties explicitly agreed in writing to terminate all three agreements and to extinguish ‘all rights and obligations’ under them, with only two specified exceptions; and (2) the parties’ right and obligation to resolve their dispute through arbitration is not among the rights and obligations” surviving termination of the agreements.
 
The Court of Appeal disagreed with Oxford and the trial judge. The Court ruled “The Termination Agreement does not demonstrate any intent that it would supersede the Arbitration Clause, or, for that matter, any other right or obligation which arose under the parties’ agreements before the termination date.” The Court reasoned that the use of the phrase “shall cease” in the Termination Agreement indicated that the parties had no intent to terminate any rights that were already vested to the parties (including arbitration), instead the Termination Agreement “merely divided the rights and obligations of the parties on a temporal basis.” Further, the Court ruled that because the Termination Agreement was silent as to any repudiation of the arbitration clause, it fell outside of the “subject matter” of performance specified in the integration clause.
 
The lesson to be learned from the case is that clarity is always paramount when drafting a document creating, amending, or terminating an agreement. Leaving a term silent and hoping that a court might see it your way may lead to unintended consequences. Instead, parties and their counsel should seek to maximize the clarity of the bargains they strike. This is even more important in the context of arbitration because, as Oxford Preparatory Academy v. Edlighten Learning Solutions demonstrates, there is a judicial presumption in favor of arbitration, even after the parties terminate the underlying agreement.


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