Survival of Arbitration Clauses After Termination of Contract
By Kenneth J. Ashman & Neal D. Kitterlin
Your client, a large widget manufacturer, comes to you with a commercial dispute
with one of its main suppliers of raw materials. Upon review of the governing
contract, you notice that it contains a procedure compelling arbitration for
any dispute that arises under its terms. You also notice, however, that the
contract expired four years ago. When you ask the client about this fact, he
confirms that the contract technically expired then, but says that the two
companies “just kept doing business together like we always had under
the contract.” Because the parties continued to behave as if the contract
were still in effect, must your client initiate arbitration in order to resolve
its dispute? According to a recent federal court decision, the answer is no.
In Vantage Technologies Knowledge Assessment, LLC v. College Entrance Examination
Board, 2008 WL 5264908 (E.D.Pa. Dec. 18, 2008), the court ruled that parties
are not bound to submit to arbitration absent a written agreement compelling
arbitration. In Vantage, the parties entered into a written contract
in May 1998, under which Vantage agreed to oversee the online administration
of the College Board’s proprietary writing assessment tool, “WritePlacer.” The
terms of the contract included an agreement that all disputes arising out
of or relating to the contract would be subject to arbitration. The contract
expired in 1999, but was retroactively renewed by a further written agreement
in 2001, which also contained an arbitration clause. In 2002, this agreement
expired, and a draft agreement which included the same arbitration clause
as that found in the parties’ previous agreements was circulated,
but never agreed to. Despite the parties’ inability to agree on the
terms of a new agreement, Vantage and the College Board continued to do
business with one another without a written contract. In July 2008, the
parties entered into a new contract that did not contain an arbitration
provision.
In August 2008, the College Board initiated arbitration seeking a declaratory
judgment with respect to unpaid amounts claimed by Vantage. In September
2008, Vantage filed an action in Pennsylvania state court (later removed
by College Board to the Eastern District of Pennsylvania) alleging unjust
enrichment, breach of contract, fraud in the inducement, negligent misrepresentation,
and false prosecution of an arbitration claim. In deciding the College Board’s
motion to stay the proceedings before the federal court, as allowed by the
Federal Arbitration Act, the court analyzed whether the parties had agreed
to submit the dispute to arbitration, characterizing the issue as “whether
the parties continued to be bound by the arbitration clause of an expired
commercial contract when the parties have continued to do business after
that contract’s expiration.”
In answering the issue in the negative—the arbitration provision
did not survive the contract’s termination— the court distinguished
the case of Luden’s Inc. v. Local Union No. 6 of Bakery, Confectionery
and Tobacco Workers’ International Union of America, 28 F.3d 347
(3rd Cir. 1994), relied upon by the College Board, holding that the determination
there that the arbitration clause survived applied only in the labor context.
The Vantage court noted that labor contracts include arbitration
clauses for the express benefit of labor, in exchange for a promise not
to strike. The Vantage court found no such exchange to be present
where “two sophisticated commercial entities mutually decide to continue
their relationship on a day-to-day basis in the absence of an agreement
signed by both.” It also relied on a New Jersey district court case,
Bogen Communications, Inc. v. Tri-Signal Integration, Inc., 2006 WL 469963
(Feb. 27, 2006), which reached the same conclusion under a set of similar
facts.
Finally, the Vantage court noted that, while federal law favors
arbitration and requires any doubt about the scope of coverage to be resolved
in favor of arbitration, a court may not invoke federal policy to “create
an arbitration provision in a contractual relationship where no such provision
exists.” Thus, under the Vantage ruling, a court will not
imply the continued existence of an arbitration clause based on the conduct
of the parties, but will require that such a clause be part of an express
agreement in order to be enforced.
As a notable caveat, not all courts may follow this approach, and it may
instead turn on the intent of the parties. For example, the authors litigated
a similar case last year, and, in an unreported Illinois lower court decision,
the court ruled that an expired contractual provision providing for the
shifting of attorneys’ fees to a prevailing party in a dispute was
nonetheless enforceable after the contract’s expiration because the
parties continued to behave as though the contract was still in force, under
a contract implied-in-fact theory. It would be no tremendous leap of logic
to apply the same analysis if the contractual provision at issue were an
arbitration provision rather than a fee-shift provision, so although the Vantage decision
provides support for one side of the dispute, it does not resolve the question
definitively.
Kenneth J. Ashman is a principal of Ashman Law Offices, LLC, a business law and litigation boutique, with offices in Chicago and Lincolnshire, Illinois; and New York. Mr. Ashman holds leadership positions in the American Bar Association and Illinois State Bar Association, and is active in the Chicago Bar Association, Lake County Bar Association, and the Decalogue Society of Lawyers. Neal D. Kitterlin is a litigation associate at the firm.
Note
“Survival of Arbitration Clauses After Termination of Contract”, by Kenneth J. Ashman and Neal D. Kitterlin, 2009, General Practice Solo, and Small Firm Division Business Opportunities and Commercial Law Committee. © 2009 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
© Copyright 2009, American
Bar Association.
