Arbitration clause covers contract breach

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In an unusual 3-2 split, the Rhode Island Supreme Court has held that the alleged breach of a ground lease agreement between the University of Rhode Island and a nonprofit organization is a dispute covered by the contract’s arbitration clause.

According to the complaint filed by URI, defendant Hellenic Society Paideia — Rhode Island Chapter did not follow through on its obligations under the lease to erect a building on the subject property at URI. The parties disagreed on whether their dispute could head to arbitration as the contract’s arbitration provision did not specifically cover a “breach” of the contract.

A Superior Court judge had denied the Hellenic Society’s motion to stay litigation in favor of arbitration.

But writing for the Supreme Court’s majority, Justice Francis X. Flaherty vacated the trial judge’s order, finding that the arbitration clause must be read together with the contract’s conciliation clause. The latter explicitly required “mutual discussions” in the event of a “breach.”

Reading the contract as a whole, Flaherty wrote that it was “apparent that the conciliation and arbitration provisions create a seamless two-step dispute resolution process, rather than two mutually exclusive processes pertaining to separate issues.”

Dissenting were Chief Justice Paul A. Suttell and Justice Maureen McKenna Goldberg, who said a separate part of the contract reserving the landlord’s rights and remedies dictated a different result.

The 19-page decision is Rhode Island Council on Postsecondary Education, et al. v. Hellenic Society Paideia — Rhode Island Chapter, Lawyers Weekly No. 60-019-19. The full text of the ruling can be found here.

Counsel for the plaintiffs is Paul V. Sullivan of Providence. Bruce W. Gladstone, Leah L. Miraldi and Justin T. Shay, all of Providence, represent the defendant. The attorneys had not responded to requests for comment by press time.

Stalled construction

In 2005, the University of Rhode Island and the Board of Governors for Higher Education leased land at URI’s Kingston campus to the defendant, the state chapter of the Hellenic Society Paideia.

The defendant agreed to build and maintain a Center for Hellenic Studies at the university. The initial term of the ground lease agreement was for 99 years following the completion of the building, with options to extend.

Although excavation was completed and a foundation laid, construction of the building came to a stop in 2012 and never restarted. In November of that year, the plaintiffs — URI and the Rhode Island Council on Postsecondary Education — advised the defendant of their intent to terminate the lease because construction had not been completed within 30 months as required by the lease.

After years with no resolution, the plaintiffs filed a complaint seeking a declaratory judgment that the defendant was in breach of the lease, as well as an order directing that the property be restored to its former condition.

The society moved for a stay of litigation, arguing that all disputes required arbitration.

But Superior Court Judge Michael A. Silverstein denied the defendant’s motion, ruling that the contractual language did not mandate arbitrating an alleged breach of the lease in light of what he viewed as a “conspicuous difference” between the conciliation and arbitration clauses.

Holistic reading

Flaherty first emphasized that arbitration was “a creature of the agreement between the parties.” In that context, he turned to the provisions of the lease to determine whether the parties agreed in “clear and unequivocal language” to arbitrate all disputes arising from their lease agreement, or merely a subset of those disputes.

Flaherty then explained why the majority disagreed with Silverstein’s analysis, with the crux of the question found in the two sections of the contract.

The conciliation clause required “mutual discussions” in regard to “any controversy, claim or dispute arising out of or relating to this Lease or with respect to any breach hereof.” On the other hand, the arbitration clause, which kicked in when the parties could not reach “amicable compromise” under the conciliation provision, omitted the “breach” phrase.

Silverstein had ruled that the consequence of that difference was a limitation in the scope of the arbitration clause.

“In other words,” Flaherty wrote, “the hearing justice reasoned that, because the arbitration clause omitted the words ‘with respect to any breach hereof,’ the parties did not intend to arbitrate issues involving a breach of the Lease.”

The majority disagreed with that result, finding the provisions should be read together.

“In our opinion, the conciliation and arbitration provisions cannot be read separately when conducting an analysis because … ‘in ascertaining what the intent is we must look at the instrument as a whole and not at some detached portion thereof,’” Flaherty continued.

He added that the proximity of the clauses in the same section of the lease led to “the inevitable conclusion that the two provisions ‘are associated with and take color from each other.’”

Because the two clauses could be reasonably construed to avoid conflict with each other, Silverstein unnecessarily resorted to the “specific-over-general” canon of construction, Flaherty said.

In the final analysis, the majority determined that the inclusion of one word in the arbitration provision — “such” — meant that the two clauses could be read together.

Homing in on the exact language, Flaherty explained that the conciliation clause obligated the parties, before resorting to the assistance of a third party, to engage in frank and good-faith discussions in an effort to iron out their differences regarding “any controversy, claim or dispute arising out of or relating to this Lease or with respect to any breach hereof.”

And the next section in the contract specified that should those discussions fail to resolve “any such controversy, claim or dispute,” it would go to arbitration.

“The use of the word ‘such’ in that dependent clause clearly refers back to the immediately preceding conciliation clause,” Flaherty wrote, adding that “such” must refer to some antecedent.

The majority therefore concluded that the drafters of the lease intended that clause “to be read in conjunction with the immediately preceding conciliation clause” that specifically referenced a breach.

‘Reservation of rights’ clause

The majority also rejected the plaintiffs’ argument that even if the arbitration clause applied, a third section of the contract gave them the option of pursuing litigation, as it reserved to the landlord “all rights and remedies allowed at law or in equity” upon default.

“[W]hen considering general arbitration clauses, other jurisdictions have held that a reservation of rights and remedies clause does no more than furnish an arbitrator with the full spectrum of remedies allowed by law,” Flaherty wrote. “[I]t is our opinion that the phrase ‘rights and remedies’ in the lease refers only to the redress available to a party aggrieved by the breach of his rights under the agreement; it does not refer to the forum for achieving that redress.”

Even if there were doubt, Flaherty pointed out that the court “faithfully followed the jurisprudence” of the U.S. Supreme Court in “resolving any doubts in favor of arbitration.”

But the reservation-of-rights provision served as the basis of the dissent by Suttell and Goldberg. Although they agreed with the “perfectly reasonable proposition” that “such” brought the conciliation language under the arbitration umbrella, the third clause was a fly in the ointment.

“In my opinion, the sweeping language of this provision, reserving to the plaintiff all rights and remedies at law or in equity, is broad enough to encompass recourse to the courts in the event of a default or breach of the Lease,” Suttell wrote. “It convinces me that the parties did not explicitly agree to arbitrate issues related to the defendant’s breach of contract.”

Like Flaherty, Suttell stressed that a duty to arbitrate arises only when a party agrees to do so under “clear and unequivocal language,” but he drew a different conclusion considering the landlord’s reservation of rights and remedies. In his opinion, Silverstein was correct in denying the society’s motion to stay litigation.

CASE: Rhode Island Council on Postsecondary Education, et al. v. Hellenic Society Paideia — Rhode Island Chapter, Lawyers Weekly No. 60-019-19

COURT: Rhode Island Supreme Court

ISSUE: Is the alleged breach of a ground lease agreement arbitrable under the terms of the contract?

DECISION: Yes, when the contract is read as a whole