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Arbitration in Breach of Contract

Arbitration in Breach of Contract

The Supreme Court of Kings County (Brooklyn) recently heard the case of Chelsea Auctions v. South Shore Alarms. This case involved interpretation of contractual language in the context of a provision for arbitration. Arbitration is another common real-world issue that crops up frequently in contractual disputes but that has not undergone much discussion in our ongoing series of posts about breach of contract law. Arbitration is a form of alternate dispute resolution (ADR) whereby the parties agree in the contract what to do in the event a dispute arises out of the contract. Arbitration is a nonjudicial administrative-type proceeding that may be binding or non-binding where each side makes his case before a neutral third party (often a retired judge) and the third party frequently renders a judgment. Most, but not all judgments are final, and courts generally defer to them. If interested, you can examine your cellular telephone contract, all major carriers tend to have arbitration provisions so that they may avoid the often not-so-tender mercies of a jury.

Background of the Case

The plaintiff (the opinion refers to the plaintiff as ‘petitioner’ and defendant as ‘respondent’ but for simplicity we will stick with our usual designations) desired an alarm system at its place of business. It entered into a contract with the defendant for the installation, monitoring, and servicing of same. Tatiana Gorobetz signed the contract on behalf of the plaintiff, Chelsea Auctions. Ms. Gorobetz also signed a personal guarantee. The relevant contractual language was paragraph 26 entitled “Legal Action.”

This language stated that any action or dispute between the parties, including “issues of arbitrability” shall at the option of either party, be determined by arbitration administered by [a named 3rd party called Arbitration Services.] The paragraph then stated that the proper form for starting an arbitration would be to serve notice (legal papers) to the other side via 1st Class United States Mail, FedEx, or UPS.

The personal guarantee, on the last page of the contract, in effect stated that Gorobetz personally guaranteed that Chelsea Auctions would abide by the agreement and agree to arbitrate any dispute.

In October, 2012 South Shore Alarms sent a letter to Chelsea Auctions demanding arbitration over what they felt was a breach of the contract. About a month later, Chelsea Auctions petitioned the court to prevent arbitration. Their stated reason was that “the contract only mentions arbitration in passing” and that the plaintiff was “unaware” of the arbitration provision in the contract.

Analysis

The court was not sympathetic to the plaintiff’s arguments. It noted that the arbitration provision, including the personal guarantee, was right above the line where Gorobetz signed her name to the agreement. The court also reasoned that the language about arbitration was “unequivocal” – or not subject to interpretation. Courts in general are extremely unsympathetic to arguments of this variety. They feel that parties to contracts ought to read the contracts carefully before they sign them. The court mentioned other defects in the plaintiff’s petition, most notably that under New York laws a party seeking to prevent arbitration has a very limited time period in which to petition the court, possibly as little as twenty days from receiving notice that the other side wishes to file for arbitration. Finally, it handily addressed plaintiff’s contention that the defendant’s notice of arbitration was somehow defective because defendant used 1st class U.S. mail without return receipt. While NY law does require return receipt under CPLR 7503(c) – it pointed out that the parties are free to change this kind of requirement via contract. The contract language, mentioned above, explicitly stated that ordinary 1st class mail was sufficient.

Contractual provisions such as arbitration can be a tricky matter – please don’t hesitate to contact our office for a consultation.

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