Corporate & Securities Law

Relying Unduly on ?Arising Out Of? in Arbitration Provisions

By Ken Adams

That one-man legal-news phenom Steven Sholk pointed me to this story on Law360.com. (Subscription required, or free trial.) It describes how in a petition filed on September 25, American Home Assurance Co. asked the U.S. Supreme Court to define the scope of the phrase arising out of in arbitration clauses. This represents another installment in American Home’s long-running contract dispute with Vivendi SA subsidiary UMG Records.

According to Law360.com,

American Home’s appeal centered on a controversy over UMG’s “deductible reimbursement obligation” set out in the parties’ payment agreements. The Ninth Circuit rejected that appeal in May, affirming that the agreements’ mandatory arbitration provision did not extent to claims UMG had levelled against American Home since the dispute did not “arise out of” the agreements.

The Law.360.com story quotes Eric Brunstad of Dechert, who represents American Home, as saying, “The articular phrase ‘arising out of’ is commonly found in millions of arbitration agreements. It’s really important that parties understand what this phrase means, because they need to know what they are getting into.”

I have a different take on this. Here’s what I would have said: It’s really important that parties understand that if they want to be able to arbitrate anything other than contract claims arising directly out of the contract containing the arbitration provision, they should make that clear in the arbitration provision. Relying arising out of to be elastic in scope is reckless. And no, tacking and relating to onto arising out of is nowhere near adequate!

You can find the definitive treatment of this issue in, ahem, my article “The AAA Standard Arbitration Clause: Room for Improvement.” Go here for a PDF copy.

Of course, this recommendation comes too late for American Home. That’s why I’m a drafter not a litigator?I prefer avoiding messes rather than having to clean them up.

Full post as published by AdamsDrafting on October 05, 2010 (boomark / email).