Arbitration Agreement Rises from Ashes of Broken Deal

• Arbitration agreements survive the termination of an underlying contract, unless the parties specifically terminate the arbitrate provision.

• In disputes involving closely held businesses, the arbitration agreement may be invoked even if the business is no longer in existence.

• Unless there is a specific agreement on the question of ‘arbitrability’ of a dispute, it is an issue for a court to decide, not an arbitrator. 

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We are often asked to prepare an amended and restated operating agreement or contract.  Or, more often in my case, we are representing a party in a dispute between two parties over a second or third version of an agreement.

No one says a word about arbitration.  Do we need to go back and determine whether any of the old agreements had an

arbitration provision?  Is it enough that the second contract contains a standard integration clause that merges all prior negotiations and agreements into the final document? Probably not.

Survival of Arbitration Agreements in LLC Operating Agreements

Arbitration agreements do not just go away.  They survive the termination of an agreement and may even survive when that agreement was terminated because the parties negotiated a new or different deal.  If the parties want the agreement to arbitrate to end, they had better agree and put that decision in clear and unequivocal writing.

I was, for example, involved in a dispute over the failure of a business and saw an agreement to arbitrate resurrect itself years after the fact that, for all intents and purposes, the agreement it came from was no longer in force.  The case ended up in arbitration.

Arbitration Clause in Earlier NDA

The circumstances in a recent decision from the Third Circuit Court of Appeals in Field Intelligence v. Xylem Dewartering Solutions, in which the appellate court reversed the district court’s refusal to compel arbitration, were unique but not entirely atypical.

The standard for establishing that one agreement supersedes another can be a difficult threshold to meet that is governed by the terms of the agreement.  When combined with the presumptions in favor of arbitration, unless the language is clear, the court is likely to compel arbitration.

Without express language in which a later contract replaces a prior one, the standard under New Jersey is that the agreements both concern the same subject matter and are so inconsistent that both cannot be enforced.

The defendant in the case, Xylem Dewatering, makes large water pumps.  It wanted a way to allow customers to monitor the pumps that they manufactured and sold.  Field Intelligence, the plaintiff, is a technology company. Xylem approached Field to develop a remote monitoring system.

When the product had been developed, Xylem bought monitoring units from Feild Intelligence and bought monthly subscriptions to the software that allowed customers to monitor the units with information transmitted on satellite or cellular networks.

Xylem and Field Intelligence entered into two contracts, one with an arbitration provision and the other requiring litigation. The first agreement was contained in a 2014 confidentiality agreement executed before the parties started to do business together and, on its face, continued in effect during a period of time when there was no contract governing the purchase of the units or the use of the related software.

When Does One Contract Supersede Another?

In 2017, however, the parties entered into a license agreement.  That agreement contained an integration clause that provided that the license embodied all of the parties’ agreements.

A conflict arose between the businesses.  Xylem created its own product, which Field Intelligence contended was the result of improper reverse engineering. Field Intelligence filed a federal lawsuit alleging a breach of the 2017 licensing agreement.

After the parties were well into discovery, Xylem filed an arbitration based on the 2013 confidentiality agreement and moved to stay the federal litigation pending the outcome of that arbitration. Field Intelligence in opposition argued that the parties’ second contract superseded the first, eliminating the arbitration provision contained in the earlier agreement.

The trial court disagreed, holding that it had authority to decide the supersession issue and that the parties’ later agreement did supersede their earlier contract, eliminating any duty to arbitrate. Xylem appealed both rulings.

The Third Circuit, however, reversed in part and remanded the case to determine whether the duty to arbitrate created by the 2013 agreement was superseded by the second agreement in 2017 to license the products.

The Federal Arbitration Act, which governs the enforcement of agreements to arbitrate under federal law, was enacted to reverse judicial hostility to arbitration agreements and place them on the same footing as other contracts.

Parties may refer more than the merits of their disputes to arbitration, and they may also agree to delegate “gateway” questions of arbitrability to an arbitrator. The Third Circuit held that the trial judge rightly declined to send the arbitrability question—whether the second agreement superseded the first—because it was a matter of consent. The parties’ consent, the appeals court held, was for an arbitrator to decide without “clear and unmistakable” evidence that the parties agreed to do so.  That was lacking here.

The question of whether Xylem and Field Intelligence intended to extinguish their prior agreement and litigate any disputes between them moving forward was sent back to the trial court.  If Field Intelligence is correct that the 2017 contract superseded the 2013 agreement, then there is no arbitration agreement for us to enforce.

Severable Arbitration Clauses

The “severability” doctrine, under which an arbitration provision is severable from the contract in which it is contained, had not been addressed below, according to the Third Circuit. Under New Jersey law, which applied to the dispute, supersession is a question of the parties’ intent as discerned “from the contracts themselves.” A later contract does not supersede an earlier one unless both concern the same subject matter, and the later agreement is so inconsistent with the first that the “two cannot stand together.”

In opposing arbitration, Field Intelligence relied primarily on the integration agreement and language that it “supersedes any and all prior or contemporaneous understandings or agreements, whether written or oral.”  The language did not resolve the agreement, however, because it was unclear whether the two agreements covered identical subject matter.

We cannot say they do. The 2013 contract is a “NonDisclosure Agreement” that applies to the parties’ exchange of confidential and proprietary information during their “development of a custom telematics solution.”  The 2017 contract, by contrast, is a “Software Subscription Service Agreement,” entered after the telematics solution was developed, to provide Xylem and its customers access to Field Intelligence’s software for “monitor[ing] the status and operation of remotely located machinery.”  And while that later agreement, like the 2013 one, includes protections for Field Intelligence’s confidential information, those protections do not extend to information exchanged between the parties prior to their execution of the 2017 contract.

The court also noted that the only inconsistency between the two agreements was the arbitration obligation and that the later agreement failed to make mention of the first.  The failure to mention the first agreement was fatal to the argument that it had been waived or modified in writing.