Opinion ID: 1860623
Heading Depth: 1
Heading Rank: 2

Heading: Construction and Scope

Text: In this connection, IMS contends that (1) the Agreement contemplates only permissive not mandatoryarbitration; and that (2) some of its claims are outside the scope of the provision.
IMS contends that the trial court's order ... should be upheld regardless of whether KSEA refused to mediate IMS's claims because the arbitration provision expressly provides that arbitration is optional to the aggrieved party, not mandatory. Brief of Appellee, at 30 (emphasis in original). This point is evident, IMS continues, from the language of the provision, which uses the mandatory verb `shall' in reference to mediation but uses the permissive verb `may' with regard to arbitration. Id. (emphasis in original). In this connection, § XII provides: A. Except as otherwise specifically provided for herein, any dispute relating to whether a material breach of this agreement has occurred by any party... shall initially be attempted to be resolved by the involved parties through non-binding mediation to be commenced within 30 days following expiration of the period for cure of a noticed breach.... B. If within 30 days after the commencement of mediation, a resolution of the dispute has not been achieved, the dispute may thereafter be submitted by any party to binding arbitration under the commercial rules of the American Arbitration Association then in effect.... (Emphasis added.) We disagree with IMS. Its construction of these provisions is contrary to logic and to the weight of authority, both California and federal. The California rule was thoroughly discussed in Erickson v. Aetna Health Plans of California, 71 Cal.App.4th 646, 84 Cal.Rptr.2d 76 (1999). In that case, Aetna Health Plans of California, Inc. (Aetna), appealed from an order denying its motion to compel arbitration of a dispute over its duty to provide cancer treatment.... under a [replacement Medicare] plan called Senior Choice. Id. at 649, 84 Cal.Rptr.2d at 78. The arbitration provision, which was included in the Senior Choice handbook, provided: `If you are not satisfied with the [grievance panel's] proposed resolution, you may request binding arbitration.' Id. (emphasis added). The insured argued that the word may rendered arbitration voluntary. Id. at 659 n. 6, 84 Cal.Rptr.2d at 83, n. 6. The California Court of Appeal for the Fourth District rejected that argument. In doing so, it first set forth the general framework in which California construes agreements to arbitrate, stating: `California law incorporates many of the basic policy objectives contained in the FAA, including a presumption in favor of arbitrability....' 71 Cal.App.4th at 655, 84 Cal.Rptr.2d at 82. Thus, even in non-FAA cases, courts `are guided by the rule that, contractual arbitration being a favored method of resolving disputes, every intendment will be indulged to give effect to such proceedings.' Id. (some internal quotation marks omitted). Next, the court discussed the legal effect of the word may in the arbitration context. It explained: The parties have not identified any authority construing the precise language at issue here, and we are aware of none. They do, however, cite three decisions which are instructive, as all concerned agreements which, like the present one, provided that disputes `may' be submitted to arbitration. In the first, Service Employees Internat[ional] Union, Local 18 v. American Building Maintenance Co., (1972) 29 Cal.App.3d 356 [105 Cal.Rptr. 564] ( Service Employees ), the agreement provided that `the issue in dispute may be submitted to an impartial arbitrator.' ( Id., at p. 358 [, 105 Cal.Rptr. 564], italics omitted.) The court held the clause provided for mandatory rather than consensual arbitration. Since the parties always could elect consensual arbitration without a contract provision, interpretation of the clause to require only consensual arbitration would make the provision of little purpose. ( Ibid ). The court concluded the word `may' in this context merely meant a party who did not want arbitration had the option to abandon the claim. ( Id., at p. 360 [, 105 Cal.Rptr. 564].) In Titan Group, Inc. v. Sonoma Valley [County] Sanitation Dist., [164 Cal. App.3d 1122, 211 Cal.Rptr. 62 (Ct.App. 1985)] ( Titan ), the agreement similarly stated that disputes `may' be subject to the decision of a third person to be agreed upon by the parties. However, it also provided that all disputes `... will be decided by arbitration if the parties hereto mutually agree, or in a court of competent jurisdiction within the State in which the owner is located.' ( Id., at p. 1125 [, 211 Cal.Rptr. 62], original and added [emphasis].) The court found no mandatory arbitration requirement, distinguishing Service Employees on the basis that the agreement in that case made no mention of a court proceeding as an available option. ( Id., at p. 1129 [, 211 Cal.Rptr. 62].) In Pacific Gas and Electric Co. v. The Superior Court of Sutter County, [15 Cal.App.4th 576, 19 Cal.Rptr.2d 295 (Ct.App.1993)] ( Pacific Gas & Electric ), the agreement stated disputes `may be submitted' by either party to arbitration. ( Id., at p. 595 [, 19 Cal.Rptr.2d 295].) The court concluded this provision mandated arbitration, stating, `In this context the may signifies the right of the party to invoke arbitration.' ( Ibid ). Applying these decisions, and keeping in mind the policy, discussed ante, favoring construction of agreements in favor of arbitration, we conclude the provision in this case should be interpreted to require arbitration rather than merely to permit it. As did the courts in Service Employees and Pacific Gas & Electric, we construe the permissive language to mean simply that a member may, in lieu of proceeding to arbitration, merely forgo further review and accept the proposed resolution of the grievance panel. 71 Cal.App.4th at 656-57, 84 Cal.Rptr.2d at 83 (some internal quotation marks omitted). Consequently, the court reversed the order of the trial court denying Aetna's motion to compel arbitration. Erickson is fully consistent with cases from federal courts addressing similar language. See, e.g., Held v. National R.R. Passenger Corp., 101 F.R.D. 420, 424 (D.D.C.1984) ([T]he use of the word `may' in an arbitration agreement does not imply that the parties to the agreement have the option of invoking some remedy other than arbitration.); Austin v. Owens-Brockway Glass Container, Inc., 78 F.3d 875, 879 (4th Cir.) (If the parties to such an agreement intended for arbitration to be permissive, there would be no reason to include... the arbitration provision in the contract, for the parties to an existing dispute could always voluntarily submit it to arbitration), cert. denied, 519 U.S. 980, 117 S.Ct. 432, 136 L.Ed.2d 330 (1996); American Italian Pasta Co. v. Austin Co., 914 F.2d 1103, 1104 (8th Cir.1990); Atkins v. Louisville & Nashville R.R., 819 F.2d 644, 648-49 (6th Cir.1987) (arbitration was mandatory, despite language stating that disputes may be referred by either party to an arbitration committee); Bonnot v. Congress of Indep. Unions, Local No. 14, 331 F.2d 355, 359 (8th Cir.1964); Deaton Truck Line, Inc. v. Local Union 612, 314 F.2d 418, 422 (5th Cir.1962); McCrea v. Drs. Copeland, Hyman & Shackman, P.A., 945 F.Supp. 879, 881 (D.Md.1996); Block 175 Corp. v. Fairmont Hotel Mgmt. Co., 648 F.Supp. 450 (D.Colo.1986). Moreover, IMS's argument that the Agreement makes arbitration optional to the aggrieved party, Brief of Appellee, at 30 (emphasis added and omitted), directly contradicts the express language of § XII.B. Specifically, that section begins: If within 30 days after the commencement of mediation, a resolution of the dispute has not been achieved, the dispute may thereafter be submitted by any party to binding arbitration under the commercial rules of the American Arbitration Association then in effect.... Thus, the right to proceed in arbitration is not secured for the aggrieved party only, as IMS contends, but for all parties. As a logical and practical matter, this provision can only mean what KSEA contends that § XII provides, namely, that neither party may force the other party into a judicial forum. Under the rules set forth in Erickson, IMS and KSEA merely agreed, either to arbitrate their disputes, or, to forgo further review and accept the [status of the dispute after mediation]. 71 Cal. App.4th at 657, 84 Cal.Rptr.2d at 83.
Next, IMS contends that its tort claims are outside the scope of the arbitration provision, and, therefore, may be decided in a judicial forum. Specifically, it argues: The arbitration provision ... states that the scope of arbitration shall be `strictly limited to ... a determination of whether a material breach ... permitting termination has occurred.' By the plain language of the provision, one and only one claim is contemplated, i.e., whether a breach justifying contract termination has occurred. Brief of Appellee, at 26 (emphasis in original). IMS thus insists that the arbitration clause does not include its tort claims of (1) intentional interference with business relations, (2) defamation, or (3) conspiracy. This argument simply ignores crucial portions of § XII. As we noted earlier in this opinion, § XII.A. provides: [A]ny dispute relating to whether a material breach of this agreement has occurred by any party ... shall initially be attempted to be resolved by the involved parties through non-binding mediation.... For ease of discussion, we shall refer to this clause as ¶ 1. Next, § XII.B. provides: [T]he dispute may [after failure of mediation] be submitted by any party to binding arbitration.... The scope of binding arbitration shall, as noted, be strictly limited to ... a determination of whether a material breach of this agreement permitting termination has occurred... and the award of compensatory damages therefor, if any, ... and shall in no manner encompass any issues respecting the validity, enforceability or infringement of any KSEA trademarks or trade dress, or unfair competition or any like cause or issue related thereto.... We shall refer to this provision as ¶ 2. We construe these provisions according to the well-established California rule, for-bidding construction of contract terms in isolation. See Cal. Civ.Code § 1641 (The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other). The contract must be construed as a whole; detached words or clauses standing alone are not controlling on the question of interpretation, each being viewed in relation to the agreement as an entity. Cedars-Sinai Med. Ctr. v. State Bd. of Equalization, 162 Cal.App.3d 1182, 1188, 208 Cal.Rptr. 837, 840 (1984); see also SDC/Pullman Partners v. Tolo Inc., 60 Cal.App.4th 37, 46, 70 Cal.Rptr.2d 62, 67 (1997) (contract terms cannot be read in isolation); Transamerica Ins. Co. v. Sayble, 193 Cal.App.3d 1562, 1566, 239 Cal.Rptr. 201, 203 (1987) (The contract must be construed as a whole, without giving a distorting emphasis to isolated words or phrases). IMS's construction runs afoul of this principle. This is so, because it focuses on ¶ 2 in isolation, ignoring ¶ 1. However, ¶ 2 must be read to harmonize with ¶ 1, and with § XII as a whole. The second sentence of ¶ 2 states that the scope of binding arbitration shall [be] as noted. As noted refers the reader back to ¶ 1, where it was previously noted. In other words, as noted makes clear that the scope of ¶ 2 is not intended to be different than the scope of ¶ 1. Reading the two provisions as a whole broadens the arbitration clause beyond the scope attributed to it by IMS. However, it merely brings ¶ 2 into harmony with ¶ 1. When the two portions are combined, the arbitration clause provides: [A]ny dispute relating to whether a material breach of this agreement [permitting termination] has occurred by any party.... may [after failure of mediation] be submitted by any party to binding arbitration.... Moreover, it is often observed that the words relating to in the arbitration context are given a broad construction. See Beaver Constr. Co. v. Lake-house, 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). IMS also relies on the words permitting termination, arguing that the scope of arbitration is strictly limited to such breaches as would permit termination of the Agreement. [1] Nonmaterial breaches would, according to IMS, be outside the scope of the arbitration clause and would be triable in a judicial forum. The logical weakness of this argument is apparent. Whether a breach is material is ordinarily a question for the trier of fact. Fantasy, 984 F.2d at 1530. Thus, any judicial inquiry into the materiality of an alleged breach would necessarily involve the court in, at least, a de facto resolution of the merits of the breach-of-contract claim. Such a process would render entirely illusory the right to a resolution through arbitration. However, it is presumed that parties intend to make reasonable contracts. Ex parte Bonds, 581 So.2d 484, 487 (Ala.1991) (emphasis added) (internal quotations omitted). We can only presume that the parties did not intend the arbitration provision to be illusory. Finally, IMS argues that the scope of ¶ 2 is subject to the further restriction that arbitration shall in no manner encompass any issues respecting the validity, enforceability or infringement of any KSEA trademarks or trade dress, or unfair competition or any like cause or issue related thereto.  (Emphasis added.) This clause does not aid IMS. It is merely a restatement of § IV.A., which provides: Neither this agreement, nor the fact of compliance by any party ..., is intended... to define or circumscribe ... past, present or future activities constituting... trademark or trade dress infringement or unfair competition with respect to activities performed on or to a KARL STORZ Rigid Endoscope. Section IV.A. defines the scope of the Agreement in relation to  activities [IMS] perform[s] on or to a KARL STORZ Rigid Endoscope.  (Emphasis added.) Indeed, it is KSEA and not IMS that holds rights redressable by such claims. Thus, the reiteration of this language in the arbitration clause does not, somehow, expand the scope of IMS's right to sue KSEA. In cases interpreting a variety of arbitration provisions, California courts have noted that the fact that [the] action sounds in tort rather than contract is not a valid basis for [an] order denying [a] petition to compel arbitration. Merrick v. Writers Guild of America, West, Inc ., [2] 130 Cal.App.3d 212, 219-20, 181 Cal.Rptr. 530, 534 (1982). California courts will compel arbitration as long as the action has its roots in the relationship between the parties which was created by the ... agreement. Id. at 219, 181 Cal.Rptr. at 534 (emphasis added). See also Coast Plaza Doctors Hosp. v. Blue Cross of California, 83 Cal.App.4th 677, 99 Cal.Rptr.2d 809 (2000); Wolitarsky v. Blue Cross of California, 53 Cal.App.4th 338, 61 Cal.Rptr.2d 629 (1997); Vianna v. Doctors' Mgmt. Co., 27 Cal.App.4th 1186, 33 Cal.Rptr.2d 188 (1994); Izzi v. Mesquite Country Club, 186 Cal.App.3d 1309, 1315-16, 231 Cal.Rptr. 315, 317 (1986); Bos Material Handling, Inc. v. Crown Controls Corp., 137 Cal. App.3d 99, 186 Cal.Rptr. 740 (1982); Berman v. Dean Witter & Co., 44 Cal.App.3d 999, 1003, 119 Cal.Rptr. 130, 133 (1975). Merrick, for example, involved an arbitration clause that provided in part: Except as otherwise specifically provided in this Article or elsewhere in this basic Agreement, the following matters shall be submitted to ... arbitration as hereinafter provided, and no other matters shall be submitted to ... arbitration: [¶] 1. Any dispute between the [Writers Guild of America, West, Inc., (`Guild')] and the Company concerning the interpretation of any of the terms of this Basic Agreement and the application and effect of such terms as determined by an interpretation thereof .... 130 Cal.App.3d at 217, 181 Cal.Rptr. at 532-33 (emphasis added). Pursuant to that provision, the Guild brought to arbitration a claim of two of its members against [motion-picture producer David] Merrick for breach of his agreement to compensate them for writing a screenplay. Id. at 215, 181 Cal.Rptr. at 531. After an arbitrator ruled in favor of Merrick, Merrick sued the Guild, seeking compensation for malicious prosecution, abuse of process, and `prima facie tort.' Id. The trial court denied the Guild's motion to compel arbitration on the ground that Merrick's claims of malicious prosecution and abuse of process [arose] out of tort, not contract, and therefore [did] not come within the scope of the arbitration provisions. Id. at 216, 181 Cal.Rptr. at 532. The Court of Appeal reversed the order denying arbitration. Explaining that the complaint did not assert claims which [were] wholly independent of the arbitration provisions, id. at 219, 181 Cal.Rptr. at 534, the court concluded that the action ha[d] its roots in the relationship between the parties which was created by the ... agreement. Id. The scope of the arbitration clause in the Agreement is comparable to the scope of the clause in Merrick. The inquiry must, therefore, focus on whether the facts alleged in the complaint as the basis for IMS's tort claims have their roots in the relationship between the parties which was created by the ... agreement. Merrick, 130 Cal.App.3d at 219, 181 Cal.Rptr. at 534. The intentional interference claim rests upon allegations that KSEA intentionally interfered with IMS's customer relations by, among other things, falsely and repeatedly inform[ing] IMS customers (1) that IMS is not qualified to repair or service Storz endoscopes; (2) that IMS repairs do not meet Storz specifications; and (3) that IMS is overcharging customers for the repair or exchange of Storz [E]ndoscopes. These allegations directly implicate § II of the Agreement. Section II is styled UNDERTAKINGS OF IMS ... WITH RESPECT TO REPAIRS/SERVICES IN CONNECTION WITH KARL STORZ RIGID ENDOSCOPES. It comprehensively defines IMS's rights and duties in connection with its repair of Storz Endoscope. Furthermore, § II.C. requires IMS to inform any customer or client seeking `repair' of a Storz Endoscope that it cannot make the repair, if such repair would violate the detailed specifications set out in the Agreement. These allegations, therefore, not only [have their] roots in the relationship between the parties which was created by the ... agreement, Merrick, 130 Cal. App.3d at 219, 181 Cal.Rptr. at 534, but would constitute proof of both the breach-of-contract claim and the intentional interference claim. The same may be said of the defamation claim, which alleged that KSEA published or caused to be published oral and written statements which are defamatory and injurious to IMS's reputation. This claim also rests, at least in part, upon the allegations that KSEA was informing IMS customers (1) that IMS is not qualified to repair or service Storz endoscopes; (2) that IMS repairs do not meet Storz specifications. Moreover, § IX of the Agreement, styled STATEMENT, dealt expressly with the type of information that could be disseminated by the parties regarding the substance of the settlement. We conclude, therefore, that the arbitration provisions in the Agreement are broad enough to encompass IMS's tort claims. This conclusion is buttressed by the correspondence between IMS and KSEA from October 20, 1998, to January 1999. For example, in its October 20, 1998, letter to KSEA, IMS complained specifically that KSEA was breaching the Agreement by charging `repair-exchange' prices to IMS customers that exceed[ed] standard rates. It also accused KSEA's sales representatives of breaching § IX by telling customers across the country that the settlement represent[ed] a defeat for IMS and a surrender to Storz's demands. In its letter of November 4, 1998, IMS asserted that KSEA's predatory pricing and disparagement ... constitute[d] breaches of the settlement agreement. In its letter of November 17, 1998, IMS stated that the campaign of misrepresentation and disinformation which Storz rep[resentatives were] waging against IMS across the country necessitated immediate mediation pursuant to the Agreement. The essence of the tort claims was thus asserted in the letters of IMS to KSEA and characterized as breaches of the Agreement. Moreover, in its response to IMS's claims, KSEA's November 6, 1998, letter discussed the terms predatory pricing and disparagement within the context of specific provisions of the Agreement. Specifically, it stated: What you have elected to term as `predatory pricing' is, as we understand it, nothing of the sort. The agreement provides that, for services performed by KSEA for [IMS] customers (for example, the provision of `refurbish/exchange' scopes), KSEA will bill the customer at KSEA's then-existing standard rates therefor. We are not aware of any instance where KSEA's billing to the customer was not in strict compliance with this agreement provision based upon the existing KSEA standard list prices. It is always possible, or course, that some instances of miscommunication might have occurred between IMS reps and KSEA's customer service department in connection with requests for pricing. This is precisely why we have requested details from you so that we can see if anything of this nature may have inadvertently occurred, and we would continue to encourage you to give us some specifics. As for what you have elected to term as `disparagement,' you appear to be unaware that, at the meeting last week, KSEA too expressed concerns about instances of misinformation and/or misrepresentation by IMS sales reps that had come to its attention. We understand that the conclusion of the meeting in this respect was that the parties would each draft for review a suitable clarifying communication to their respective sales forces regarding the agreement relationship. To be sure, the torts as pleaded in IMS's second amended complaint bore less facial resemblance to the breach-of-contract claim than did the tort claim in the initial complaint. As this Court has noted, however, [t]he ability of competent counsel to sharpen the issue relating to the arbitration clause progressively over time is readily apparent. Jones v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 604 So.2d 332, 338 (Ala.1991). For these reasons, we conclude that IMS's tort claims are within the scope of the arbitration provisions of the Agreement. The trial court erred in refusing to compel arbitration of this dispute. Consequently, the order of the trial court is reversed, and the cause is remanded. REVERSED AND REMANDED. HOUSTON, SEE, BROWN, HARWOOD, and STUART, JJ. concur. LYONS, J., concurs in part and dissents in part as to the rationale, and dissents from the judgment. JOHNSTONE, J., dissents.