Have you ever copied contract language from other documents you’ve received when you were in a hurry to get a deal done? Perhaps you were in need of standard legalese for arbitration clauses or indemnity provisions? No harm. No foul. The deal and relationship continued without commercial litigation. Along comes another deal. Copy. Paste. Sign. Go. The relationship is humming. Was that a burp or a hiccup? Gasp. Is it a getting harder to breathe when you realize the lawyers are getting involved in a business contract dispute? Not to worry. The fees will be limited, and you’ll be back on track soon because you signed an arbitration agreement. Right?
Sometimes a simple yes or no answer is not so simple.
The Fifth Circuit issued a 2018 opinion providing insight into the application of arbitration clauses and the scope of an arbitrator’s authority. Lone Star Rentals v. Sunbelt Rentals
When Lone Star sold its assets to Sunbelt, they agreed to an incentive package to reward Lone Star for helping Sunbelt keep and grow the Lone Star accounts. Not surprisingly, a dispute arose over the correct amount of the first contingent payment. The parties submitted to arbitration as per the contract. The arbitrator agreed with Lone Star’s revenue calculation, which increased the calculated revenue earned, causing Lone Star to surpass the revenue threshold. What? Sunbelt then owed Lone Star an incentive payment. Wait. There’s always more. The arbitrator also reformed the contract’s revenue target. The revenue target is the actual revenue number that must be met to earn a contingent payment. The arbitrator ruled the parties made a mutual mistake in establishing the revenue target. Confused? That’s okay. The general rules will make sense.
The Million Dollar Comma
Do commas matter in a business lawsuit? Maybe. In this case, a missing comma could cost millions of dollars. One customer’s name was listed without a comma, but the actual company name included a comma. The comma was truly a million dollar mistake. Another million dollar question arose when one customer acquired another. The acquired company was part of the customer list for calculating the incentive payment, but the acquiring company was not. The contract language was not clear as to how to handle a customer acquisition. Both matters were settled in arbitration, but it would have been a lot cheaper and easier for both parties if the contract was more precise.
When the arbitrator ruled that both customers’ sales were included in the incentive calculation, Sunbelt would have owed Lone Star $6.4 million. The arbitrator, however, wasn’t finished. He reasoned that because he added a company to the revenue contingent incentive calculation, that same company’s sales should have been included when the companies set the target incentive. After all, the target incentive determines what revenue number must be reached in order for Lone Star to be eligible for a contingent payment. When the arbitrator reformed the agreement to fix the mutual mistake, the threshold increased and no payment was due.
Arbitrator’s Authority—A Hot Dispute
What can an arbitrator decide? The Fifth Circuit cited several Supreme Court cases:
- An arbitrator’s authority is “a matter of contract.”
- An arbitrator can resolve only disputes “the parties have agreed to submit to arbitration.”
- An arbitrator’s authority comes from what parties agree to in advance.
- Based on the Federal Arbitration Act, “when parties enter into an arbitration agreement, there is a presumption that the clause covers a dispute.”
- “Unambiguous language controls when the question is the scope of an arbitrator’s power…”[T]he policy that favors resolving doubts in favor of arbitration ‘cannot serve to stretch a contractual clause beyond the scope intended by the parties….’”
The Fifth Circuit ruled “[t]hat stretching occurred here.” In other words, the arbitrator exceeded his authority by finding a mutual mistake in the drafting of the contract. The Court reviewed the arbitration clause, the contract language, and the language of the engagement letter to the accountant. The contract required submitting the calculation and supporting documents to a CPA in case of a dispute. The Court reviewed both the original contract between the two parties, as well as the language in the engagement letter requesting the CPA’s scope of work before deciding that the arbitrator could not reform the contract.
Who Gets the Money?
Game over. Sunbelt owes Lone Star $6.4 million. Right? Wrong. The case goes back to the trial court to decide whether the mutual mistake claim is valid.
Contract Language Matters
Comma’s matter. When drafting an agreement, work with your attorney when he asks you about how you want different contingencies handled.
Arbitration Clauses – One Size Does Not Fit All
Documents may contain multiple clauses to handle different disputes that arise during a business deal. The Court did review all four arbitration clauses when reviewing the parties’ intent on the mutual mistake claim.
Arbitration Clauses Do Not Have To Be All or Nothing
Sometimes it makes sense to use arbitration provisions for part of your relationship, but not for other matters. Work with your attorney to determine what works best for you.
Before Submitting To Arbitration, Call Your Attorney
Even if you have an arbitration clause in your contract, before agreeing to arbitration, call a commercial litigation attorney.
Business contract disputes and litigation are costly. When you find yourself in need of a commercial litigator or breach of contract attorney to represent you at trial or in arbitration, we are ready to help.