When you enter into a commercial agreement, it is important to understand each element of the contract you sign, since even seemingly minor clauses and phrases can have dramatic results. A recent 2d District Court of Appeal case demonstrated this, when a dispute between members of an LLC avoided arbitration because the parties’ arbitration clause was a narrow one that covered only certain specific topics, and the lawsuit filed by one of the members did not touch on any of those topics.
The business relationship began when Burton Sherwood and Leonard Slazinski established Everclear Network LLC for the purpose of purchasing and running a South Florida TV station. The LLC had both an operating agreement and a supplemental agreement that governed it. After Slazinski, who was the financial backer of the Everclear venture, became uneasy about the performance of Sherwood and another member, Jason Sherwood, he sued the Sherwoods, seeking an injunction and declaratory relief.
The Sherwoods asked the court to order arbitration, contending that the LLC’s operating and supplemental agreements compelled it. Slazinski opposed the idea of arbitration, and the trial court sided with him, ruling that the Sherwoods’ case “presented no arbitrable issue.”
The Sherwoods appealed but were not successful. The appeals court rejected their claim that the issue of whether they had met the required conditions for arbitration was something that should have been submitted to an arbitrator. The court explained that this argument missed a step. Under the Florida Statutes, while an arbitrator decides whether the “conditions precedent to arbitration” are satisfied, the courts must first decide the “gateway issue” of whether a valid arbitration agreement exists and, if it does, whether it covers the subject matter of the dispute in question.
That subject matter analysis was the key to Slazinski’s victory. While the appeals court agreed with the Sherwoods that the operating and supplemental agreements contained valid, enforceable arbitration provisions, the Sherwoods’ appeal still had a fatal problem, which was the breadth of the arbitration provisions. The members could have drafted the arbitration clause in such a way that it governed any dispute between the members, but they did not do that. The arbitration language, which was contained in the supplemental agreement, only required members to arbitrate disputes if they related to “an impasse in decision-making” or member duties.
The appeals court ultimately concluded that the issues, as framed by Slazinski in his lawsuit, did not implicate decision-making matters or any other topic that would trigger the narrowly written arbitration clause to which the parties agreed. This meant that the trial court was correct to conclude that Slazinski’s lawsuit did not present any issues that were arbitrable in nature and that the Sherwoods had no basis to demand arbitration of the dispute.
Sometimes, the difference between going to court or going to arbitration can be as small as a few words in an operating agreement. For clear advice and skilled representation in your business law and commercial litigation matters, consult the commercial law attorneys at Stok Folk + Kon. Our attorneys have the experience and determination necessary to protect your business interests.
Contact us online or by calling (954) 237-1777 to schedule your consultation.
More blog posts:
Courts OKs Minimal Bond For Injunction Freezing Millions in Bank Funds, Florida Business Lawyers Blog, Jan. 8, 2015
Florida Court Allowed to Appoint Referee to Facilitate Board Meetings for Delaware Business Entities, Florida Business Lawyers Blog, Dec. 3, 2014