In-House Advisor

Don’t Assume That Closely Related Agreements Will Be Interpreted As One Contract

June 13, 2019

 

In some transactions, such as those involving the acquisition of a business, the deal may be documented through a primary contract and subsidiary agreements that are referenced in, or even attached as Exhibits to, the primary. While there is nothing inherently good or bad about papering a transaction this way, it is important to keep in mind that doing so may mean that the dispute resolution provisions of the primary contract do not apply if litigation arises and only involves a claimed breach of a subsidiary contract. Indeed, that is the hard lesson that was learned by the defendant in National Dentix, LLC v. Gold.

In 2000, National Dentix acquired Phillip Gold’s business, and the transaction was documented with three agreements: a Stock Purchase Agreement (“SPA”), an Employment Agreement (“EA”) and a Non-Compete Agreement (“NCA”). While executing the EA and NCA were conditions precedent to – and even were attached to – the SPA, the EA and NCA contained standard integration clauses, which essentially said that each contract set forth the entire understanding between the parties with respect to the subject matter thereof. Further, while the SPA contained an arbitration clause, and the EA and NCA did not, that arbitration provision stated:

Except as … otherwise agreed by the parties, any controversy, dispute or claim between the parties arising out of, related to or in connection with this Agreement or the performance or breach hereof shall be submitted to and settled by arbitration conducted by the American Arbitration Association in Boston, Massachusetts, in accordance with its commercial arbitration rules as then in effect ….

Several years after the transaction closed, National Dentix sued Gold, claiming that he breached his obligations under the EA and NCA. (While National Dentix initially also asserted a claim for breach of the covenant of good faith and fair dealing in the SPA, that claim was abandoned.) Gold moved to dismiss and/or to compel arbitration, arguing that the case was subject to arbitration because even though the claims at issue were not direct violations of the SPA, they were “related to or in connection with [that] Agreement.”

In deciding that motion, the Federal District Court first noted that a motion to compel arbitration only may be granted if four elements are shown, the last of which is that “the claims asserted fall within the scope of the arbitration agreement.” The Court then made short work of the matter through the following logic:

None of the relevant contracts—the SPA, the EA, or the NCA—contains a clause explicitly incorporating all or part of any other contract. Though the SPA includes as exhibits unexecuted copies of the EA and the NCA, and identifies their signing as conditions precedent to the parties’ obligations under the SPA, this detail does not erase the merger clauses present in each document, nor does it change the fact that the relationship created by the SPA (that of buyer/seller) is distinct from and “independent of” the employer/employee relationship that arises from the EA and is at the core of the NCA. The EA’s sole reference to the SPA is a provision specifying that a particular paragraph of the EA does not change the SPA (or any other agreement between the parties). The NCA identifies the EA and the SPA as contemporaneous agreements between the parties and acknowledges that execution of the NCA was a “material inducement” to National Dentex in entering the larger transaction, but nowhere does it incorporate any part of the SPA by reference. In these circumstances, neither the law nor the facts justify extending the SPA’s arbitration provision to disputes arising under the EA and the NCA.

The bottom line is that even very closely related agreements still may be viewed as completely independent if there is a claim that only one of them has been breached. To avoid such uncertainty, in-house counsel should include specific language that either confirms the independence of each contract and/or identifies which provisions in one also apply to another. Leaving that decision to a judge, after-the-fact, is fraught with peril.

 

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