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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: January 25, 2018

Court Requires Parties to Arbitrate Some Claims and Have Others Decided by the Court

On January 11, 2018, Justice Knipel of the Kings County Commercial Division issued a decision in Levy v. Donel Corp., 2018 NY Slip Op. 30070(U), requiring parties to arbitrate some claims while litigating others, explaining:

Pursuant to CPLR 7503 (a), where there is no substantial question whether a valid agreement was made or complied with the court shall direct the parties to arbitrate. Arbitration is a favored method of dispute resolution in New York. The threshold issue of whether there is a valid agreement to arbitrate is for the courts. Once it is determined that the parties have agreed to arbitrate the subject matter in dispute, the court’s role has ended and it may not address the merits of the particular claims. However, it is settled that a party will not be compelled to arbitrate and, thereby, to surrender the right to resort to the courts, absent evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes. The agreement must be clear, explicit and unequivocal and must not depend upon implication or subtlety. The movant has the burden to show a clear and unequivocal agreement to arbitrate the claim.

Here there is a clear, unequivocal agreement to arbitrate contained in the Shareholders’ Agreement. However, a similar clause is not contained in the Stock Option Agreement, and defendants have not established that the parties intended the Stock Option Agreement and the Shareholders’ Agreement to form a single unified contract. The Stock Option Agreement expressly states that the parties intended same to “supplement” the Shareholders’ Agreement. While it is the general rule that written contracts executed simultaneously and for the same purpose must be read and interpreted together, this rule

does not require that the two separate instruments must be deemed consolidated and one for all purposes or that a separate and independent provision of one, such as a jurisdictional paragraph, which has no bearing on the construction to be placed on the two instruments is to be incorporated in the other (Kent v Universal Film Mfg. Co., 200 App Div 539, 550 [1st Dept 1922]).

[T]he Shareholders Agreement restricts the sale, transfer, assignment, hypothecation or encumbering of shares except as provided in this Agreement and in the Stock Option Agreement. The parties thus plainly recognized a distinction between “this Agreement” (the Shareholders’ Agreement) and the Stock Option Agreement. The plain language of section 16 of the Shareholders’ Agreement requires rabbinical arbitration of any dispute relating to “this Agreement.” Insofar as no mention of the Stock Option Agreement appears in section 16 of the Shareholders’ Agreement, that section cannot be interpreted, absent any additional terms in either agreement, to apply to disputes related to the Stock Option Agreement. The Stock Option Agreement, executed separately, relates to Menachem’s right to purchase a set amount of shares and provides the mechanism for setting the purchase price. A conflict regarding Menachem’s right to purchase a specified amount of shares and the valuation of the shares is not a conflict arising from the terms of the Shareholders’ Agreement which governs, inter alia, general restrictions on the alienation or encumbering of shares, general offers to purchase and/or sell shares between shareholders and transfer of shares resulting from the death of a shareholder.

When an agreement between parties is clear and unambiguous on its face, it will be enforced according to its terms and without resort to extrinsic evidence. Accordingly, a court should not, under the guise of contract interpretation, imply a term which the parties themselves failed to insert or otherwise rewrite the contract. Given the absence of an arbitration clause in the Stock Option Agreement or any unequivocal language incorporating the Stock Option Agreement into the arbitration clause of the Shareholders’ Agreement, the court cannot compel Menachem to submit his claims relating to the Stock Option Agreement to arbitration. Defendants do not contend that Menachem’s remaining causes of action (fifth through tenth) are subject to arbitration.

(Internal quotations and citations omitted) (emphasis added).

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. 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 including, as discussed above, whether the dispute must be arbitrated.

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