Opinion ID: 1702725
Heading Depth: 1
Heading Rank: 5

Heading: The Scope of the Arbitration Clause in the Credit Agreement: Identifying the Controversy and the Transactions.

Text: Pursuant to the express language of Section 2 of the FAA, only a controversy that arises out of the transaction in question can be forced to arbitration. The Deeses state in their brief that it is nonsensical to contend that [their] present claims arise out of, are in connection with, or relate to the Equity Line, i.e., the credit agreement and the transaction it evidenced. The Deeses argue that the Equity Line was just the vehicle used by AmSouth to wrongfully change the terms of the Dees/AmSouth First Mortgage. They cite Koullas v. Ramsey, 683 So.2d 415, 417 (Ala.1996), for the proposition that this Court will not stretch the language of a contract to apply to matters that were not contemplated by the parties when they entered the contract. They then assert that they could not have contemplated in their wildest dreams the March 2001 manner in which AmSouth would use the Equity Line by increasing the Equity Line principal by $51,210.74 to purchase the [Deeses'] First mortgage from Countrywide. In Koullas the arbitration clause extended only to disputes between the parties arising under this Agreement, 683 So.2d at 417 (emphasis omitted); this court explained the effect of that limitation as follows: Where, as here, an arbitration clause refers to disputes or controversies `arising under' an agreement, the clause will apply only to those claims arising under the terms of the agreement, and it will not extend to matters or claims independent of, or merely collateral to, the agreement. Old Republic Ins. Co. v. Lanier, 644 So.2d 1258 (Ala.1994). We agree that, in order for a dispute to be characterized as arising out of or relating to the subject matter of the contract, and thus subject to arbitration, it must at the very least raise some issue that cannot be resolved without a reference to or construction of the contract itself. Dusold v. Porta-John Corp., 167 Ariz. 358, 807 P.2d 526 (Ct.App.1990); Terminix Int'l Co., L.P. v. Michaels, 668 So.2d 1013 (Fla.Dist.Ct.App.1996); Greenwood v. Shefrield, 895 S.W.2d 169 (Mo.App. 1995). If there is no such connection between the claim and the contract, then the claim could not reasonably have been intended to be subject to arbitration within the meaning of a clause that required arbitration only for claims `arising out of or related to' the contract. Dusold.  683 So.2d at 417-18. Because in Koullas this Court was called upon to construe only the phrase arising under this [a]greement, observations made in that opinion concerning the construction to be accorded to the different phrase arising out of or relating to an agreement were technically dictum. Certainly our caselaw on point as to that latter phrase has distinguished it from the former and has assigned to Koullas its proper role as commenting on only the former. For example, in Ex parte Cupps, 782 So.2d 772 (Ala.2000), this Court stated in a footnote: After making this statement [the statement being the passage from Koullas set out above except for its last sentence], the Court in Koullas continued: `If there is no such connection between the claim and the contract, then the claim could not reasonably have been intended to be subject to arbitration within the meaning of a clause that required arbitration only for claims arising out of or related to the contract.' 683 So.2d at 418. This particular statement, however, is dictum in that the arbitration clause in that case did not include the language `arising out of or related to.' Thus, while it would appear from this sentence that the term `arising out of or related to' receives the same construction as `arising from' and `arising under,' our cases clearly treat these two classes of terms differently. See Reynolds & Reynolds Co. [v. King Autos., Inc . ], 689 So.2d [1] at 2-3 [(Ala. 1996)]. 782 So.2d at 776-77 n. 1. See also Birmingham News Co. v. Lynch, 797 So.2d 440, 444-45 (Ala.2001), summarizing the holding in Koullas as being that an arbitration clause referring to disputes or controversies `arising under' an agreement applies only to those claims arising under the terms of the agreement, and does not extend to matters or claims independent of, or merely collateral to, the agreement. Subsequent to Koullas this Court has also pointed out that it is often observed that the words `relating to' in the arbitration context are given a board construction. See Beaver Constr. Co. v. Lakehouse, L.L.C., 742 So.2d 159, 165 (Ala.1999); Reynolds & Reynolds Co. v. King Autos., Inc., 689 So.2d 1 (Ala.1996); Old Republic Ins. Co. v. Lanier, 644 So.2d 1258 (Ala. 1994). Karl Storz Endoscopy-America, Inc. v. Integrated Med. Sys., Inc., 808 So.2d 999, 1013 (Ala.2001). This Court has held ... that the phrase `any controversy or claim arising out of or relating to' in arbitration agreements covers a broad range of disputes. Vann v. First Community Credit Corp., 834 So.2d 751, 754 (Ala.2002). See also Beaver Constr. Co. v. Lakehouse, L.L.C., 742 So.2d 159, 165 (Ala.1999) (`relatingto' language has been held to constitute a relatively broad arbitration provision). Likewise, in Bama's Best Housing, Inc. v. Hodges, 847 So.2d 300, 303 (Ala. 2002), we observed: [W]e have held that where a contract signed by the parties contains a valid arbitration clause that applies to claims `arising out of or relating to' the contract, that clause has a broader application than an arbitration clause that refers only to claims `rising from' the agreement. See Reynolds & Reynolds Co. v. King Autos., Inc., 689 So.2d 1, 2 (Ala.1996)(citing Old Republic Ins. Co. v. Lanier, 644 So.2d 1258 (Ala.1994)). (Emphasis omitted.) The `arising out of language was not intended to cover matters or claims independent of, or collateral to, the contract. American Bankers Life Assurance Co. v. Rice Acceptance Co., 709 So.2d 1188, 1191 (Ala.1998)(a three-Justice opinion, with two Justices concurring specially in such a way as to endorse this proposition). See also Ex parte Discount Foods, Inc., 789 So.2d 842, 845 (Ala.2001), and Ex parte Crisona, 743 So.2d 452, 456 (Ala.1999). In Ex parte Messer, 797 So.2d 1079, 1082-83 (Ala.2001), we made the following observations about the proper interplay between state-law principles of contract interpretation and federal substantive arbitration law: `When deciding whether the parties agreed to arbitrate a certain matter ..., courts generally ... should apply ordinary state-law principles that govern the formation of contracts.' First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). In applying general Alabama rules of contract interpretation to the language of an arbitration agreement subject to the FAA, this Court must, in accordance with the federal substantive law on arbitration, resolve any ambiguities as to the scope of the arbitration agreement in favor of arbitration. See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (Section 2 of the FAA `create[s] a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act' and `establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration'). The FAA `simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms,' and `parties are generally free to structure their arbitration agreements as they see fit.' Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478-79, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989). Accordingly, `as with any other contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability.' 797 So.2d at 1082. Where the parties have entered into a single written contact and a dispute thereafter develops between them directly arising out of that contract, the requirement in § 2 of the FAA that there be a controversy thereafter arising out of such contract is easily determined to have been satisfied. Likewise, the analysis is fairly straightforward as to the alternative provided by § 2 of a controversy thereafter arising out of such ... transaction when the contours of the transaction evidenced by the contract are distinct and the dispute that develops can confidently be said to arise out of it. Where, however, the parties have entered into a succession of contractual dealings, extending over the course of several years and involving various subtransactions, identifying the controversy (or, to use the phrase in the arbitration clause at issue, the controversy, claim, dispute, or disagreement) and determining which, if any, of the contracts it arises out of (or, to use the phrase in the arbitration clause at issue, arises out of, in connection with, or relates to), can become problematic. Analyzing the connection and relationship between the subsequently arising controversy and the various earlier contracts and transactions requires first a determination of the nature of the controversy. (Hereinafter we may alternatively substitute dispute or claim for the FAA's term controversy, given that the parties here use those first two terms in phrasing their arguments.) Identification of the transaction, against the backdrop of a series of contracts and dealings, becomes a function of identification of the dispute. Until one knows what the dispute is, one does not have a frame of reference for analyzing the relationship, if any, between it and the parties' prior transactions and dealings. Where, as here, the dispute has been articulated in a complaint filed to initiate a lawsuit, that statement by the plaintiffs of their claim or claims is essentially determinative, absent an amendment of the complaint or other types of formal submissions altering the statement of the claim or claims. Thus, in the litigation context, the plaintiffs have the opportunity, in the first instance, to define the dispute. They may pursue or forgo available claims as they see fit and select the factual underpinnings they deem pertinent to aver. In this case, the Deeses elected to include within the introductory factual averments of their complaint the following: 6. On April 16, 1996, the [Deeses] took out a home equity line of credit with AmSouth. [The Deeses] borrowed money on this line of credit.... 7. After repurchasing the [Deeses'] mortgage from Countrywide on March 13, 2001, AmSouth rolled the mortgage into the [Deeses'] equity line of credit. Interest was charged at the higher interest rates and [the Deeses] were charged additional fees and expenses for this transaction. . . . . 10. Thereafter, on or about June 1, 2001 [the Deeses] received a billing statement on his equity line of credit with AmSouth reflecting two payments of $51,210.74 leaving his account with a credit of $29,125.76.... The Deeses then proceeded to state their claims arising out of those facts in the following counts, which included the following numbered paragraph averments: II. Unlawful Conduct Alleged 11. As a result of the unlawful conduct of [AmSouth and Countrywide] alleged hereinabove, [the Deeses] have been billed fees, expenses and interest they should not have to pay. The [Deeses'] credit is also being affected by [AmSouth and Countrywide's] wrongful conduct.