August 09, 2019

Judicial proceeding may be stayed pending completion of an arbitration where the determination of issues alleged in the demand for arbitration may also dispose of the nonarbitrable matters


Paragraph 4(b) of the consulting agreement [Agreement] between the Plaintiff and the Defendant addresses Defendant's right to terminate the agreement "for cause" and concludes as follows: "Any dispute between the parties shall be resolved first by submitting same for mediation to AAA, and absent a resolution, then by a 3 member panel Arbitration through AAA."

Following the termination of the Agreement, allegedly "for cause," Plaintiff commenced an action for "breach of contract" after Defendant failed to pay Plaintiff the consulting fee and performance bonus Plaintiff contended were due Plaintiff under the terms of the Agreement.

Defendant, citing the arbitration clause set out above, moved pursuant to CPLR §7503(a) to compel arbitration and to stay Plaintiff's "breach of contract" action pending completion of the arbitration.

Plaintiff opposed Defendant's  motion on the grounds that the clause Defendant was relying upon applied only to disputes relating to termination and not to actions alleging breach of contract. In rebuttal, and without conceding that the scope of the arbitration clause was limited to the resolution of disputes involving termination, Defendant argued it had not paid Plaintiff as the Agreement was "terminated for cause." Supreme Court denied Defendant's motion, and Defendant appealed.

The Appellate Division vacated the lower court's ruling, opining:

1. Defendant's contentions with respect to Plaintiff's termination for cause in response to allegations first made by Plaintiff in opposition to Defendant's motion to compel arbitration were properly raised;

2. It was undisputed that Paragraph 4(b) of the consulting agreement applies, "at minimum, to any dispute regarding the Plaintiff's claims, including objections with respect to the existence, scope or validity of the arbitration agreement";

3. In the event arbitrable and nonarbitrable claims are inextricably interwoven, the proper course is to stay judicial proceedings pending completion of the arbitration, particularly where the determination of issues in arbitration may well dispose of nonarbitrable matters" and

4.  Even assuming, without deciding, that the only arbitrable dispute is whether the Agreement was properly terminated for cause, judicial proceedings should be stayed until that issue is resolved, since that determination may also dispose of Plaintiff's breach of contract cause of action.

Accordingly, the Appellate Division ruled that Supreme Court should have granted Defendant's motion to compel arbitration of the matter.

The decision is posted on the Internet at:

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