Not all arbitration agreements are mandatory. Strange as it may seem, some are optional.
In PowerShare, Inc. v. Syntel, Inc., ___ F.3d ___, No. 09-1625, slip op. (1st Cir. Mar. 1, 2010) the Court addressed a claim that the following arbitration clause was optional:
All disputes, controversies and claims directly or indirectly arising out of or in relation to this Agreement or the validity, interpretation, performance, breach, enforceability of the Agreement (collectively referred to as “Dispute”) shall be resolved amicably between Syntel and PowerShare at an operational level in consultation with the top management of both companies. If any such Dispute cannot be resolved, as stated above, the same shall be settled in accordance with the principles and procedures of the American Arbitration Association and per the decision of an accredited arbitrator acceptable to both parties. Nothing in this clause shall prejudice Syntel or PowerShare’s right to seek injunctive relief or any other equitable/legal relief or remedies available under law.
A dispute arose under the parties’ contract, and PowerShare commenced an action in the Federal District Court in Massachusetts. Syntel moved for a stay under Federal Arbitration Act Section 3. PowerShare said the arbitration agreement was optional, a Magistrate Judge denied the motion for a stay, and the District Court affirmed the Magistrate Judge’s order.
The key question before the First Circuit was whether the Magistrate Judge’s finding that the clause was optional was contrary to law. The First Circuit reversed, finding that the arbitration clause was mandatory. (The First Circuit also answered a question about the standard of review under which a district court should review a Magistrate Judge’s decision on a motion to stay litigation under Section 3 of the Federal Arbitration Act, but we need not dwell on that.)
The crux of the Magistrate Judge’s order, and PowerShare’s position on appeal, was the last sentence of the arbitration clause: “[n]othing in this clause shall prejudice Syntel or PowerShare’s right to seek injunctive relief or any other equitable/legal relief or remedies available under law.” The Magistrate Judge read that as preserving a party’s right to seek a jury trial in the event of a dispute — notwithstanding anything to the contrary in the arbitration clause — because a jury trial is a “remedy” “under law.”
But the First Circuit disagreed. According to the First Circuit, the parties’ choice-of-law clause required application of the laws of the United States, which the parties agreed brought into play federal common and statutory law. Under federal common law, “courts must be guided by commonsense rules of contract construction,” and one of those rules is that “an interpretation which gives effect to all the terms of a contract is preferable to one that harps on isolated provisions, heedless of context.” (citations and quotation omitted)
The Court reasoned that interpreting the third sentence as making arbitration optional would be to negate the mandatory nature of the second sentence:
[PowerShare's]. . . interpretation cannot be reconciled with the unvarnished language of Paragraph 18′s second sentence. That sentence states explicitly that disputes between the parties “shall” be settled through arbitration. The word “shall” denotes obligation, not choice; therefore, accepting PowerShare’s interpretation of the third sentence would drain the second sentence of its essential meaning. Put bluntly, the word “shall” in the second sentence would be rendered nugatory were we to read the arbitration provision as creating nothing more than an option. That PowerShare’s interpretation of Paragraph 18 would negate the obvious meaning of the second sentence is a powerful argument against accepting that interpretation. (citations and quotations omitted).
The Court concluded that the only “plausible interpretation” of the arbitration clause that gave effect to the “plain meaning” of the second sentence was that “the second sentence mandates arbitration and the third sentence furnishes the arbitrator with broad legal and equitable powers should either party seek special kinds of relief (say, an injunction).”
The Court based its decision solely on contract interpretation principles without deciding whether the federal presumption of arbitrability applied. The presumption of arbitrability requires ambiguities concerning the “scope” of an arbitration clause to be resolved in favor of arbitration. PowerShare argued that the presumption did not apply where, as here, the question was not the scope of an arbitration clause, but whether a mandatory arbitration clause existed in the first place.
