Good afternoon, all! The sun was beautiful this morning rising over downtown Grand Rapids.
Today I read a recent unpublished Court of Appeals decision that originated out of Kalamazoo County, Michigan –
The case: Elluru v Great Lakes Plastic, Reconstructive, and Hand Surgery PC
A summary of the Facts:
- Plaintiff Elluru and defendant Holley practiced medicine together in the Company.
- Holley served as president and Elluru as secretary.
- They entered into employment agreements with the Company.
- The agreements provided for termination by the Company for cause upon written notice or without cause upon 90 days’ written notice.
- They also executed a Stock Redemption Agreement that provided that a shareholder must sell his shares to the Company if he voluntarily terminated his employment or if the Company discharged his employment with or without cause. See Elluru , page 1.
Then the business relationship took a turn for the worse…
- In 2015, Elluru began to express his desire to dissolve the Company.
- Elluru called for special meetings of the shareholders to discuss his proposals for dissolution.
- Holley disagreed with the plan to dissolve the corporation.
- Instead, on December 7, 2015, Holley sent a letter to Elluru that he had terminated Elluru’s employment with the Company.
- Elluru also was notified that, pursuant to the Stock Redemption Agreement, his shares were being acquired by the Company.
- Elluru was further notified that, because he was no longer employed by the Company, he was also terminated as an officer and director of the Company.
- The letter also reminded Elluru that he was subject to a non-compete agreement. Id, Page 1-2.
Not completely unexpected, Elluru sued Holley and Company and asked the Court to: A. Dissolve the Corporation and B. Set Aside his Termination.
Holley and the Company filed a motion to compel Elluru to Arbitration pursuant to an arbitration clause in the parties’ employment contract. Id. Page 2.
Holley argued that “the employment agreement required that the claims be submitted to arbitration. Holley argued that “arbitration was required because all of the claims arose out of the employment agreement.” Id.
The Circuit Court denied Holley’s motion. Holley appealed.
The Court of Appeals was presented with this issue:
“whether the issue of arbitrability should have been decided by the trial court or by the arbitrator.” Id.
About Arbitration Clauses…
Michigan law favors upholding arbitration clauses in contracts.
Under Michigan law, arbitration clauses are to be liberally construed with any doubts to be resolved in favor of arbitration. Amtower v William C. Roney & Co., 232 Mich App 226,233 (1998).
In this case, the Court noted that:
The Uniform Arbitration Act, MCL 691.1681 et seq…provides that, where there is an agreement to arbitrate, a trial court must order the parties to arbitrate unless the court determines that there is no enforceable arbitration agreement. The Act further provides that it is for the court in the first instance to determine arbitrability…” Id. (my emphasis).
There is an exception to the rule that the Court determines arbitrability…
The parties contractually agreed to delegate to the arbitrator the question of arbitrability. Id. Citing Rent-A-Center, West, Inc v Jackson, 561 US 63, 69 n 1; 130 S Ct 2772; 177 L Ed 2d 403 (2010).
In the instant case – the Court looked at the Employment Agreement:
“In paragraph 10 of the employment agreement, the parties agreed that ‘[a]ny controversy or claim arising out of or related to . . . this Employment Agreement . . . shall
be settled by arbitration . . . in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association . . . .’ Those rules provide that the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.'” Id. Page 3.
The Court of Appeals agreed with Holley: “that this matter should have been submitted to arbitration and that the trial court should have held the claims in abeyance pending the outcome of arbitration.” Id. page 2.
Lessons and General Arbitration Considerations:
1. Arbitration Clauses are favored. A Court generally decides whether the clause is enforceable, and whether or not the matters are arbitrable.” However, the parties’ can contract to allow the issue of arbitrability to be decided by the arbitrator.
2. This brings up a general point – the parties could have negotiated differently in their employment and shareholder agreements before signing. “Freedom of Contract.”
3. Arbitration clauses have the benefit that they are usually most cost-effective, quick, and they are private (as opposed to court cases which are public filings).
4. Where is the Other Party located? For a client who engages in business over state lines, an arbitration clause might not be effective if you are trying to quickly collect a debt owed. Instead, you might want a “Jurisdiction and Venue Selection Clause”
This clause would include language indicating that no matter where the dispute occurred, the contract will be interpreted under Michigan law, and the parties agree that any dispute shall only be resolved in _______ County (Typically, Kent County, Michigan, for my clients.) Therefore, if your contract contains a jurisdiction and forum selection clause, and you are owed money by a company in Florida, you would not need to retain a Florida attorney to try and collect.
5. Arbitration may be a gamble.
Businesses should realize that if you elect to arbitrate a matter and you do not like what the arbitrator finds – your rights to appeal may be severely limited.
Questions? Comments?
e-mail: Jeshua@dwlawpc.com
Twitter: @JeshuaTLauka
Purpose Driven General Counsel 