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.
5 thoughts on “Relying Unduly on “Arising Out Of” in Arbitration Provisions”
Ken, this is a very interesting and timely question in arbitration law. The UK House of Lords decided a case raising precisely this issue just a few years ago, Premium Nafta Products Ltd v Fili Shipping Company Ltd
 UKHL 40, http://www.bailii.org/uk/cases/UKHL/2007/40.html. The judgment referred to the long line of English cases which had tried to parse the wording of arbitration clauses, finding differences between disputes "arising under", "arising out of", "in relation to", or "in connection with" the contract, and concluded that such efforts were futile: "the distinctions which they make reflect no credit upon English commercial law," and "the time has come to draw a line under the authorities to date and make a fresh start."
In their Lordships' view, a court construing an arbitration clause "should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction."
Alex: Thanks for reminding me of that case; it's gratifyingly sensible. I wrote about it in the following blog post: https://www.adamsdrafting.com/2007/10/24/arising-o…. Ken
Would be great to get a SC opinion on the scope of arising out of but I doubt that will happen. And Ken, I doubt either party contemplates every aspect they would want covered by arbitration, or even every category (for large scale deals, this type of distinction is more relevant). However, for the millions of everyday arbitration provisions, people just want arbitration to be the dispute resolution forum for their contract.
I do like the house of lords decision, especially the part where it uses "arising out of" to define what arising out of means.
Jason: I don't know what you would expect the Supreme Court to say regarding the meaning of "arising out of." As used in standard English, "arising out of" is inherently vague, and attempting to attribute to it a more precise meaning for purposes of contracts is to indulge in futile and counterproductive magic-wordery. Anyone who can't control their contract language and looks to the courts to rescue them deserves whatever messes they get into. Ken
The additional difficulty posed in the particular context of construing an arbitration clause is that the role of the court—at least under Canadian law, which I am familiar with—is limited only to undertaking a “prima facie” examination of the scope of the clause. Where the dispute appears to fall within the scope of the clause, the dispute should be referred to arbitration: see Dell Computer v. Union des Consommateurs,  2 S.C.R. 801, http://www.canlii.org/en/ca/scc/doc/2007/2007scc3…. The role of the arbitrator, by contrast, is to come to a definite determination, on the basis of all the evidence, whether the dispute is properly within the arbitrator’s jurisdiction: see e.g. François Knoepfler, “Les décisions rendues par l’arbitre à la suite d’un examen ‘Prima Facie’”, (2002) 20:4 ASA Bulletin 587.
Not being a U.S. lawyer, I do not pretend to know what the position may be on this question under U.S. law. However, I put the suggestion forward that it may simply not be the role of a court to come to any definite landing on what “arising out of” or similar wording means.