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Conflicts Between Arbitration and Governing Law Clauses

Washington Court of Appeals

If you have reviewed more than a few commercial or employment agreements, you have probably seen some in which the boilerplate “arbitration” provision and the boilerplate “governing law” provision appear to either not nicely agree or directly conflict. Under a recent decision from a division of Washington State’s intermediate appellate court, parties to such an agreement should expect most inconsistencies between such provisions to be resolved in arbitration, not in court.

The case, Healy v. Seattle Rugby, LLC, No. 79658-5-I (Wn. Ct. App. Div. 1, Nov. 23, 2020), involves Seattle’s U.S. Major League Rugby team, the Seawolves, and its CEO, on the one hand, and the team’s prospective new head coach, Anthony Healy, on the other. Seattle Rugby offered Healy the head coaching job, and Healy accepted. But Healy, a citizen of Canada, was not able to obtain the required visa to come to the U.S. Seattle Rugby thus terminated Healy’s employment, and he thereafter brought suit against Seattle Rugby and its CEO in King County Superior Court, alleging claims of breach of contract, failure to pay wages, and willful withholding of wages. After some initial litigation in the state court, Seattle Rugby moved to compel arbitration in New York State under the auspices of the AAA, per the governing employment agreement, which motion the trial court granted. Healy opposed the motion and sought, and was granted, discretionary review of the trial court’s decision.

The employment agreement’s arbitration provision directs that “any claim or controversy that arises out of or relates to this Agreement, or the breach of this Agreement, shall be settled by arbitration in New York State under the rules then in effect of the American Arbitration Association.” (Slip op. at 1 (emphasis added).) So far, that’s clear enough. (Drafting point: compelling arbitration in “New York State” could require an arbitral proceeding in Buffalo or Albany; the more typical clause would refer to “New York County”—also known as the borough of Manhattan.)

But the agreement also includes a governing law clause among its various “General Provisions.” That clause states: “This Agreement shall be construed under and governed by the laws of the State of Washington. Company and Coach agree that all actions arising directly or indirectly out of this Agreement shall be litigated only in the State of Washington and the parties hereto consent to that jurisdiction and venue.” (Slip op. at 2 (emphasis added).) The question the Washington appellate court had to answer is whether the trial court erred in compelling arbitration in New York State despite the apparent conflict between the arbitration clause requiring “arbitration” there and the governing law clause requiring any “litigation” to take place in Washington State. The Court of Appeals of Washington affirmed the trial court’s order requiring the parties to arbitrate, but modified it on the issue of where the arbitration would take place.

Healy argued that the governing law clause’s requirement that actions “shall be litigated” in Washington precluded arbitration altogether, because “litigated” refers to a court proceeding. The Court of Appeals rejected this argument, concluding that “[a]rbitration is a specific mode of litigation.” (Slip op. at 3.) The court thus held “that the terms of the agreement include an agreement to arbitrate.” (Id.) As to the issue on which the employment agreement is most confused, where the arbitration must take place, the court left that to be decided by the arbitrator.

“Because venue is not a gateway issue,” the court held, “this dispute [over venue] must be resolved by the arbitrator, not the superior court.” (Slip op. at 4.) This conclusion is well supported by the federal appellate cases cited by the Court of Appeals and the logic of the “gateway dispute” paradigm. (See id.) The upshot of the opinion is that an arbitrator, presumably located somewhere in New York State, will decide whether the parties’ arbitration will proceed in the Empire State, as apparently required by the arbitration clause, or in the Evergreen State, as apparently required by the governing law clause. (The Court of Appeals stated in a footnote that, per the latter clause, Washington’s law would govern the arbitration, wherever it takes place, and Washington’s courts would “have ultimate authority to confirm or not confirm the arbitrator’s decision.” (Slip op. at 4 n.2.))

Healy shows that in Washington, where a contract’s agreement to arbitrate is clear, disputes over apparently conflicting terms governing “litigation” arising from the contract will likely be decided in arbitration.