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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: October 17, 2019

Broad Arbitration Clause Covers Claims Arising in Contract, Quasi-Contract and Tort

On October 4, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Broumand v. Abbot, 2019 NY Slip Op. 32938(U), holding that a broad arbitration clause covered claims arising in contract, quasi-contract and tort, explaining:

The Federal Arbitration Act (FAA) applies because Broumand’s claims involve interstate commerce. Matters concerning companies’ operation of nationwide marijuana businesses affect interstate commerce. Thus, gatekeeping statute of limitations rulings may not be made by the court.

Here, neither the operating agreements of Holdings or Columbia Care are governed by New York law, nor do the parties contend they contain the requisite language reserving statute of limitations issues for the court notwithstanding applicability of the FAA. In fact, the arbitration provision itself states that AAA rules will govern; thus, arbitrability and the statute of limitations are issues reserved for the arbitrator. So long; as any claim plausibly “relates” to the Holdings and Columbia Care Agreements, questions as to arbitrability of any claim are for the arbitrator, and not the court, to decide.

All of Broumand’s claims relate either to the Holdings or Columbia Care Agreements. The bulk of his claims are brought either derivatively on behalf of AVF or double derivatively on behalf of Holdings and concern Abbot and Vita taking virtually all of Holdings’ business and moving it under the auspices of Columbia Care. This, allegedly, amounts to a breach of their duty of loyalty as Holdings’ managers and breach of their non-compete obligations under the Holdings Agreement. These claims “relate” to the Holdings Agreement. LLCs are creatures of contract and their operating agreements govern their internal affairs. Thus, claims based on breach of fiduciary duty inherently relate to the operating agreement. And of course, a claim that the ¬∑operating agreement was breached arises thereunder. Simply put, the Holdings Agreement’s broad arbitration clause covers all of these claims, whether grounded in contract, quasi contract, or tort.

The same is true of Broumand’s direct claims concerning his investment in A VF and the promises made to him concerning Columbia Care. AVF is the vehicle through which Broumand acquired his interest in Holdings. His personal claims concerning that investment relates to Holdings, especially since the alleged fraud was failure to disclose how Holdings would operate in relation to Columbia Care. Likewise, promises concerning Broumand’s relationship with Columbia Care relate to its operating agreement. To be sure, if the arbitration provisions were limited to claims arising under those agreements, these claims would not be subject to arbitration. But given the breadth of the arbitration provisions, it is clear that the parties have an unmistakable agreement to arbitrate and that the subject matter of the claims is fairly interpreted as falling within their scope. Thus, at most, Broumand’s contentions that his direct claims are not arbitrable may be raised with the arbitrator but are not grounds for precluding arbitration.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. As this decision shows, even though the agreement to arbitrate in contractual, the types of disputes covered by an agreement to arbitrate can be much broader that breach of contract claims. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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