On the heels of this post I wrote last month about the importance of how an arbitration clause is drafted, especially in the international context, I’m happy to report my colleagues recently defeated a motion to compel arbitration based on an incomplete provision.
The Arbitration Provision in Question
Our client (plaintiff) entered into a contract with a Chinese company and its principal (defendants) for the sale and purchase of vinyl disposable gloves. Each of the purchases were subject to a corresponding purchase order and proforma invoice, which contained an identical arbitration provision:
Arbitration: All disputes with this Sales Contract shall be settled between buyer and seller. If there is no settlement be reached for both sides, this case shall be submitted to the China International Economic and Trade Arbitration Commission. The conclusion from China international economic and trade arbitration commission shall be considered [sic]
As you can see, the provision had typographical errors and the final sentence was cut off.
Defendants’ Motion to Compel Arbitration
Our client filed a lawsuit in the Eastern District of New York, and defendants moved to compel arbitration based on the above arbitration clause. Where a party moves to compel arbitration, the courts need to apply a two-step approach to determine whether to grant that motion or not:
- Whether the parties have entered into a valid agreement to arbitrate; and
- If so, whether the dispute at issue comes within the scope of the arbitration agreement.
The party seeking to compel arbitration bears the burden of showing that the parties agreed to arbitrate in the first place. Here, the Court found defendants had failed to meet this burden.
The Opinion and Order
The Court first acknowledged that it is possible the parties intended to arbitrate, since there is an arbitration clause included in the invoices. However, the provision as written above, is not enough to show what the terms of that agreement was, since the provision ends with an unfinished sentence – the end of which could change the meaning of the agreement altogether. For example, the significance of the arbitration provision changes entirely if the last sentence finishes with “The conclusion from China international economic and trade arbitration commission shall be considered … non-binding and advisory only” versus “The conclusion from China international economic and trade arbitration commission shall be considered … final and binding.” The Court affirmed:
“Parties must agree to an arbitration’s essential terms. This proposition is derived from the basic principle of contract law that a contract is not enforceable if its material terms are not reasonably certain. Without knowing what terms of a contract exist, a court is simply unable to determine whether a contract has been breached. Since [defendant] is unable to produce all the material terms of the agreement to arbitrate, the parties cannot be compelled to arbitrate this dispute.”
Congratulations to Tom and the litigation team for this win!