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Courts Continue Defining Scope of Arbitration Clause Survivability

By Henry R. Chalmers, Litigation News Associate Editor – Februrary 10, 2009

Even non-lawyers can tell you that contractual obligations should cease to exist after a contract expires. Like so much in the law, however, exceptions exist. Parties to expired labor contracts, for instance, may find themselves bound by arbitration provisions in the contracts, even for conduct occurring after the expiration. But when asked recently to expand this precedent to general commercial contracts, a district court declined.


Background
Unlike most parts of an agreement, the U.S. Supreme Court has found that structural provisions relating to remedies and dispute resolution can survive a contract’s termination in order to enforce duties “arising under the contract.” Litton Bus. Sys., Inc. v. Nat’l Labor Rels. Bd.


Post-expiration claims may “arise under a contract” if they involve facts and occurrences that took place prior to the contract’s expiration. There, the agreement to arbitrate survives the contract’s expiration, but only for that particular claim.


“An example of where this might occur is when a franchise agreement with an arbitration clause is terminated, but the franchisee continues using the franchisor’s trademarks,” says Edward M. Mullins, Miami, FL, cochair of the Section of Litigation’s Alternative Dispute Resolution Committee.“Even though the contract itself is no longer enforceable, the agreement in the contract to arbitrate may be,” Mullins explains.


Survival of Arbitration Clauses
“If you want to make sure the arbitration provision governs” in this situation, drafters should include language “explicitly stating that the arbitration clause survives the contract’s termination,” advises Lori A. Sochin, Miami, cochair of the Section’s Alternative Disputes Resolution Committee. For those obligations that both arise and are breached after the contract’s termination, however, the contract’s arbitration provision generally is not available. Unless, that is, the contract is a collective bargaining agreement.


Collective Bargaining Agreements
In that narrow field, employers and unions who continue their relationships with one another after expiration of their collective bargaining agreements may be able to force arbitration, even where the obligations that were violated arose after the written contract had expired.


As the Third Circuit describes it, “The employer’s uninterrupted fidelity to the arbitration provision stood as the implied consideration for the employees’ continued diligent and loyal service.” Luden’s Inc. v. Local Union No. 6 of Bakery, Confectionary and Tobacco Workers’ Int’l.


By accepting the benefits of the employees’ continued labor after the collective bargaining agreement had expired, the employer implicitly assented to an implied-in-fact agreement to arbitrate. This then begs the question: Should not this reasoning apply equally in nonlabor contexts where parties continue conducting business with one another after their contract expires? The answer, thus far, appears to be no.


Recent Dispute
A court in the Eastern District of Pennsylvania was recently asked this exact question. The parties in Vantage Technologies Knowledge Assessment, LLC v. College Entrance Exam. Bd. [PDF] entered into a contract, with an arbitration clause, for the defendant to administer the plaintiff’s online college board prep courses. The contract expired, but the defendant continued to provide its administrative services.


When a dispute erupted over payment for the defendant’s post-contractual services, the defendant initiated arbitration, and the plaintiff filed suit. The defendant relied heavily on Luden to argue that the arbitration provision survived the contract’s expiration. The court disagreed, distinguishing labor contracts, where arbitration clauses are “typically included for the express benefit of labor in exchange for a promise not to strike.”


“No similar exchange exists,” the court found, “where two sophisticated commercial entities mutually decide to continue their relationship on a day-to-day basis in the absence of an agreement signed by both.”


For now, at least, courts seem to be holding the line on implied-in-fact arbitration provisions.


Keywords: Vantage Technologies Knowledge Assessment, LLC v. College Entrance Exam. Bd., arbitration clause, survivability, collective bargaining


 

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