If you are a frequent reader of these articles, or a follower of court rulings, you are aware of how often arbitration clauses are being litigated. This week’s article involves a recent trial court ruling in the Ninth Circuit deciding whether an arbitration clause would survive after one of the parties to the contract terminated the contract under its own terms.
Plaintiff Files for Class Action Lawsuit
Shivkov v. Artex Risk Sols. Inc. (D.Ariz. Aug. 5, 2019, No. CV-18-04514-PHX-
SMM) 2019 U.S.Dist.LEXIS 131646 involves claims stemming from an agreement to form and manage a captive insurance for businesses. A captive insurance company is one owned by its own insured. This arrangement has at least two advantages. First, the insured can take tax deductions for the premium payments. Second, for both the captive (company owned insurance company) and its owners, the premiums received are not taxable as income. To qualify, the captive must satisfy certain Internal Revenue Service criteria.
The plaintiffs hired the defendants to form and manage a captive for them.
Included in their agreements was what turned out to be a rather favorable
arbitration clause for the defendants. In their complaint, the plaintiffs alleged that after they had paid substantial fees to defendants to form and manage their captives, the claimed tax benefits where disallowed by the IRA and the plaintiffs were required to pay substantial back taxes, penalties, and interest. Plaintiffs then filed a class action with a putative class of “hundreds if not thousands” of similarly situated members.
Arbitration Clause Survives Termination of the Contract
While the court’s ruling involved a number of legal issues, the one relevant to this article was the enforceability of the arbitration clause in the agreement after the plaintiffs terminated their services. The plaintiffs argued that the agreement to arbitrate ended when the agreements were terminated, pursuant to its terms. More specifically, that since the “survival clause” contained in the agreement did not specifically, list the arbitration clause as a term that would survive termination, they should not be bound to arbitrate.
The Court disagreed, holding it “well-established” that “the termination of an agreement does not extinguish the duty to arbitrate disputes….” While it found the agreement’s language “ambiguous [as to] whether the Survival Clause is exhaustive, there is no clear implication that the parties did not intend the Arbitration Clause to survive termination of the Agreements and the presumption in favor of arbitrability dictates that the Clause survives expiration.” As a result, the court granted the defendants’ motion to stay proceedings and referred the matter to binding arbitration.
Takeaway
Need assistance with the drafting of your business contracts, or advice in resolving a pending or existing dispute? Contact CASHMAN LAW today for a free consultation to see how we might help guide you through the legalese.
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