Agreement to Arbitrate Disputes Did Not Survive Contract Termination

Agreement to Arbitrate Disputes Did Not Survive Contract Termination

      In a recent decision by the Sixth Circuit Court of Appeals, it was held that an agreement to arbitrate disputes did not survive the termination of the agreement that contained that provision. On that basis, there being no agreement to arbitrate disputes, an arbitration decision was essentially vacated with, presumably, the parties now left to litigate their dispute in court. Gridsmart Technologies, Inc. v. Marlin Controls, Inc., Case No. 17-5121, 2017 WL 3084419 (6^th Cir. July 20, 2017).

      Under the subject contract, Marlin Controls, Inc. had the exclusive right to distribute certain traffic-signal equipment manufactured by Gridsmart Technologies, Inc. On June 30, 2015, Gridsmart terminated that distribution agreement effective July 31, 2015. Thereafter, they attempted to reconcile how certain outstanding orders, delivered to Marlin on September 30, 2015, would be addressed. They were unable to come to agreement as to that point:

According to Marlin, it’s construction contracts did not pan out, so it sent the equipment for those projects back to Gridsmart. Gridsmart then demanded full payment for the returned equipment. Gridsmart argued that the returned equipment had been specifically made for Marlin and was obsolete by the time Marlin returned it.

      Ultimately, Gridsmart would file a claim with the American Arbitration Association. Marlin refused to participate in that arbitration. Ultimately, the arbitrator granted summary judgment to Gridsmart. Gridsmart then sought to enforce that arbitration judgment in court. After removing the case to federal court, Marlin moved that the district court vacate the arbitration award, which it ultimately did. Gridsmart then appealed to the Sixth Circuit Court of Appeals. It would determine that, under both the language of the agreement itself and the Tennessee Uniform Commercial Code, there was no agreement to arbitrate post-termination disputes.

     Section 6.2 of the subject Distribution Agreement provided (italics added by the court):

Effect of Termination on Unfulfilled Orders.  If at the time this Agreement is terminated for any reason by either Party, all orders for Products made by Distributor or the Company, that have not been fulfilled and/or shipped (whether partial or full) by the company to Distributor shall be fulfilled by mutual agreement between the Parties; provided, however, should Distributor terminate this Agreement for any reason within sixty (60) days of placing an order for Products, Distributor shall remain liable for payment of such order to the extent fulfilled by the Company unless the Company provides written notice that the order is deemed canceled.

      Applying this language, the court found:

Since the orders at issue were pending at the time the Distribution Agreement was terminated, those orders were subject to a different mutual agreement than the Distribution Agreement. Under the plain language of the contract, absent a second contract or new mutual agreement, the parties ceased to have any rights or obligations concerning the orders at issue.

      Also, applying the Tennessee UCC and specifically Tenn. Code Ann. § 47-2-106(3), which provides “all obligations which are still executory on both sides are discharged [upon termination of a contract] but any right based on prior breach or performance survives.”, the court held:

The Tennessee UCC instructs that once the Distribution Agreement was terminated, the parties’ rights and obligations, including the obligation to arbitrate disputes, as to those orders were also terminated.

      In response to suggestions that the agreement to arbitrate should survive termination, the court noted that in other instances particular provisions of the contract were identified as surviving termination. As the arbitration clause was not so identified as surviving termination, there was further support for the court’s to decision.

      The guidance of this case is rather clear. If there is an agreement to arbitrate disputes during the pendency of the contract, and it is desired that that right/obligation survive the contract termination, the agreement needs to so provide.