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An arbitration provision in an initial contract applies to a dispute over the interpretation of a subsequent deed if the dispute cannot be resolved without reference to the initial contract, according to the Sixth Circuit Court of Appeals.
In Nestle Waters North America, Inc. v. Bollman, No. 07-1031, 2007 WL 2962842 (6th Cir. Oct. 12, 2007), Bollman and Nestle entered into a purchase and sale agreement (PSA) for the conveyance of certain water rights on Bollman’s land. This PSA included detailed provisions for arbitration of any controversy or claim arising out of the agreement. Subsequent to the execution of the PSA, the parties also executed a deed, which did not contain an arbitration provision.
A dispute arose over Nestle’s water pumping activities, where Bollman alleged Nestle was pumping water in a manner that allowed it to access water not contemplated by the parties. Before Bollman requested arbitration, Nestle sued seeking a declaratory judgment of its rights under the deed. Bollman moved to compel arbitration of the dispute, which the district court granted. The district court found that even though the deed did not contain an arbitration provision, the dispute fell within the scope of the PSA, which did contain such a provision.
On appeal, the Court found the deed to be the “basis of the dispute,” but nevertheless compelled arbitration of the dispute, holding that the dispute fell within the scope of the PSA and its arbitration provision.
First, the Court accepted Nestle’s characterization that the dispute was based solely on its rights under the deed. According to the Court, if Nestle wished to base its claim only on the deed, it was “master of [its] claim,” and the court would accept that the dispute brought arose primarily from the deed.
However, the Court then held that the dispute fell within the broad scope of the arbitration agreement within the initial PSA with Bollman. While the Court acknowledged that the deed was silent on the issue of arbitration, it did find that the deed dispute was encompassed by the PSA’s arbitration provision.
While the district court had applied the Seventh Circuit standard to determine the scope of broad clauses in multiple-contract relationships, one that asks whether the dispute had “origin or genesis” in the contract containing the arbitration provision, the Court found this unnecessary to resolve the question here.
Instead, the Court applied the general Sixth Circuit scope standard, one that asks whether the action could be maintained without reference to the contract containing the arbitration provision. Under that standard, the Court found that interpreting the terms of the deed would necessarily require reference to the other preceding and subsequent contracts between the parties, including the initial PSA containing the arbitration provision.
The Court also noted that the execution of the PSA required the subsequent execution of the deed, and observed that the specific qualifications enumerated for arbitrators, including expertise in water rights and utilities law, suggested that the parties intended the instant dispute over water rights to be decided by such an arbitrator.
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