One function of this blog is to give me a forum for screwing up without embarrassing myself too much. In this blog post from last month, I took a second crack at analyzing arising out of or relating to. Further reflection revealed that effort to be, well, lame, and I’ll be deleting it in the next few days. Below is another attempt. And I’ve made a conforming change to this blog post about the AAA standard arbitration clause. It’s what got me exploring the subject further in the first place.
The phrase arising out of or relating to is a fixture of contracts. It’s primarily associated with governing-law provisions and arbitration provisions. Contracts routinely state—the wording varies—that the governing law of the contract covers all matters “arising out of or relating to” that contract. And it’s standard for arbitration provisions to say that all disputes “arising out of or relating to” the contract fall within the scope of the provision. For example, the American Arbitration Association’s standard arbitration clause refers to “Any controversy or claim arising out of or relating to this contract.”
Here’s one concern that use of the phrase is intended to address: If the parties to a transaction get into a dispute, any claims they bring against each other might be based on the contract between them. For example, Acme might bring against Widgetco a claim for breach of a contract obligation, or breach of warranty.
Alternatively, the parties might bring other kinds of claims. For example, Acme might bring a tort claim, such as a claim for misrepresentation. Or it might bring a claim challenging a patent, a claim authorized by statute, or any of various other possible claims.
Contracts offer predictability in business transactions. It follows that drafters would likely be inclined to arrange matters so that a contract’s provisions cover all possible disputes, not just those grounded in contract. (Whether that’s in fact a good idea would depend on the context.) And it’s not surprising that drafters should avail themselves of arising out of or relating to, as arising out of would seem to express a narrower meaning that does relating to. As I noted in MSCD 12.10, “Think in terms of how one arises out of one’s parents but is related to a broader group of people.”
But is arising out of or relating to the best way to articulate this intended meaning? In a passage relating to drafting arbitration provisions, Commercial Contracts: Strategies for Drafting and Negotiating § 5.04[D] (citations omitted) deftly summarizes the conventional wisdom regarding arising out of or relating to:
It is essential that an arbitration clause cover precisely the subject matter that the parties intend to be submitted to arbitration. In most contracts that provide for arbitration, the parties intend that all disputes arising out of or relating to the contract be subject to arbitration, and in the United States the phrase “arising out or relating to” has become the model for broad arbitration clauses. Also effective is the phrase “in connection with.” By using a more limited description—e.g., one which covers only disputes “arising out of” the contract, and not those “relating to” the contract—the parties create the risk that a court will conclude that the parties did not intend the clause to be broad and, in particular, intended to exclude tort claims, which may be considered to “relate to” the contract but not to “arise out of” the contract.
But consider the drastic disconnect between first sentence of the quoted paragraph and what follows. It would indeed be a good idea to state precisely what kind of claims are to be submitted to arbitration, but instead of precision, arising out of or relating to merely offers two degrees of vagueness.
In this regard, it’s no accident that in the quoted paragraph Commercial Contracts uses the phrase “subject matter.” If you want to bring all claims within the scope of a governing-law provision and an arbitration provision, it would make sense to focus not on the contract but instead on the activities that the parties will be engaging in as part of the transaction contemplated by the contract. That would allow you to dispense with or relating to, as you wouldn’t need to make the leap from contract claims to other claims—any claim, whatever its nature, would necessarily have to arise out of the activities that the parties would be engaging in under the contract.
You could articulate this meaning with arising out of the subject matter of this agreement, but you’d be trading one kind of vagueness for another—there’s plenty of litigation as to what the subject matter of this agreement means for purposes of a given contract (more about this in a future post). You’d be better off instead saying what the subject matter of the contract is. For example, if you’re dealing with a confidentiality agreement, for purposes of any arbitration provision you could say “any disputes arising out of this agreement or the Recipient’s handling, disclosure, or use of any Confidential Information.”
This approach allows you to articulate clearly the intended meaning rather than relying on what is in effect code. Instead of establishing an unduly narrow set—the contract—and relying on a vague standard to reach beyond it, you establish the relevant set—activities under the contract.
But plenty of courts have had occasion to assess the meaning of arising out of or relating to in the context of arbitration provisions. Doesn’t that make arising out of or relating to “tested” contract language? Perhaps it does, but the notion of tested contract language is a canard. (Click here for my blog post on the subject.)
If arising out of or relating to has been tested, that’s because it’s opaque. You can count on its continuing to blindside contract parties and their lawyers.
If you elect to stick with arising out of or relating to rather than articulating clearly your intended meaning, you’re opting for deficient contract language. You’re relying on courts to breathe meaning into your contract language rather than electing to establish that meaning yourself.
By the way, another possible reason for using arising out of or relating to is that you want to capture not just the subject matter of the contract but also other activities. But if you can’t articulate just what those other activities might be, then you probably shouldn’t be worrying about them. They might well be sufficiently unrelated to the subject matter of the contract that a court would be unwilling to hold that they fall within the governing-law provision or arbitration provision, whether or not you use or relating to. See this September 2008 blog post.