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Posted: December 2, 2014

Arbitration Provision in One Agreement Found to Apply to Second, Related Agreement

On November 25, 2014, Justice Ritholtz of the Queens County Commercial Division issued a decision in Astoria Equities 200 LLC v. Halletts A Dev. Co., LLC, 2014 NY Slip Op. 24364, broadly interpreting an arbitration clause.

In Astoria Equities 200 LLC, the parties’ dispute related to the development of commercial real estate. The parties agreed that two of the plaintiff’s causes of action should be arbitrated, but disagreed about the application of the arbitration clause in one of the agreements governing their relationship to two other causes of action. The court ruled that those causes of action should be arbitrated as well, explaining that the two agreements should be read as one, with the arbitration provision applying to issues arising out of either agreement:

[T]he court is of the view that the letter agreement and the operating agreement may be treated as one instrument. The letter agreement containing the arbitration clause and the operating agreement are both dated August 15, 2008. Both documents govern, inter alia, the business relationship between the parties, and the letter agreement notes that “contemporaneously herewith Astoria Equities has become a member of Halletts A pursuant to that certain Operating Agreement dated of even date herewith ***.” Generally, the rule is that separate contracts relating to the same subject matter and executed simultaneously by the same parties may be construed as one agreement. In the absence of anything to indicate a contrary intention, instruments executed at the same time, by the same parties, for the same purpose, and in the course of the same transaction will be read and interpreted together, it being said that they are, in the eye of the law, one instrument. The issue whether separate documents executed simultaneously should be treated as a single contract is governed by the intent of the parties manifested at the time of contracting and viewed in the light of all the surrounding circumstances. If, as the plaintiff contends, the operating agreement sets out part of the consideration to be paid for the sale of its property, then the sale agreement and the operating agreement certainly relate to the same subject matter, and the court finds an intent that the two documents should be treated as a single contract.

The plaintiff’s attorney asserts: “Astoria Equities agreed to sell the Astoria Equities Property to the Company for two components of consideration: (1) $7.5 million in cash, and (2) as set forth under the Operating Agreement, an equity interest valued at $7.5 million, now worth approximately 8.4% of the Company in the entity that would acquire the Properties for future development.” (Memorandum of Law, p. 5 [emphasis added].) After taking the position that part of the consideration for the sale of the property is specified in the operating agreement, the plaintiff cannot successfully deny that the letter agreement and operating agreement should be treated as one instrument.

The plaintiff faced a dilemma. In order to avoid arbitration, it must treat the letter agreement and the operating agreement as separable contracts. In order to rescind the letter agreement, the plaintiff must treat it and the operating agreement as mutually dependent contracts, the breach of one undoing the obligations under the other. The plaintiff did not escape this dilemma.

In the case at bar, the arbitration clause entered into by the parties is very broad.: “Any dispute arising out of or in connection with this Letter Agreement or the Agreement dated June 26, 2007 shall be settled through arbitration.” The dispute concerning the defendant company’s compliance with the operating agreement is certainly connected to the letter agreement, the two contracts being treatable as one instrument or as mutually dependent contracts, the breach of one undoing the obligations under the other.

Any grounds based in the operating agreement which plaintiff Astoria purportedly has for refusing to comply with the Letter Agreement are certainly linked or related to the Letter Agreement.

A dispute over the consideration to be received by the plaintiff for the sale of its property, although the consideration be partly expressed in the operating agreement, goes to the heart of the sale agreement itself, and, thus, the court finds that there was a clear intent to arbitrate as expressed in the broad arbitration clause and as required by the law of this state.

(Internal quotations and citations omitted).

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