U.S. Supreme Court Affirms a Policy Preference for Arbitration

The United States Supreme Court has allowed the appeal in KPMG LLP v. Robert Cocchi, reinforcing its policy preference for arbitrability, even in cases where some causes of action are arbitrable, while others are not. In particular, the Court stated that “[a] court may not issue a blanket refusal to compel arbitration merely on the grounds that some of the claims could be resolved by the court without arbitration.”

The Decision

The case arose out of an action by a number of individuals and entities who bought limited partnership interests in one of three limited partnerships known as Rye Funds. The Rye Funds were invested with the financier Bernard Madoff and allegedly suffered severe losses as a result of a scheme to defraud the investors. Rye Funds were managed by Tremont Group Holding, Inc. and Tremont Partners Inc., both of which were audited by KPMG.

The claimants sued KPMG alleging four causes of action: negligent misrepresentation; violation of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA); professional malpractice; and aiding and abetting a breach of fiduciary duty. KPMG moved to compel arbitration on the basis of the audit services agreement between it and Tremont.

The Circuit Court denied the motion. The Fourth District Court of Appeal affirmed, on the basis that the claims for negligent misrepresentation and the violation of FDUTPA did not arise from the services KPMG performed under the audit services agreement. Because these claims were not “derivative”, they could not be arbitrated, unless all parties consented.

The United States Supreme Court reversed the Court of Appeal’s decision. It noted the “emphatic federal policy in favour of arbitral dispute resolution” (Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc. and emphasized that parties, having consented to an arbitration agreement, must be held to their bargain. The Supreme Court specifically criticized the “Court of Appeal’s apparent refusal to compel arbitration on any of the four claims based solely on a finding that two of them … were non-arbitrable.” This failure to consider whether the remaining claims were within the ambit of the arbitration agreement, and thus arbitration could be compelled on those claims, “failed to give effect to the plain meaning of the [Federal Arbitration] Act.”

The Supreme Court remanded the case back to the Court of Appeal, instructing it to examine whether the remaining two causes of action require arbitration.

Potential Significance

This decision is significant in reaffirming the U. S. Supreme Court’s policy preference for arbitration as a dispute resolution mechanism. The policy preference has previously been emphasized in Dean Witter Reynolds Inc. v. Byrd. This means that the question as to whether a particular claim is “derivative” or “direct” in respect of matters contemplated by the arbitration agreement must be examined separately for each cause of action. A finding that some causes of action fall outside the scope of the arbitration agreement is not a bar to the arbitration proceeding on the remaining claims.

In Canada, the decision’s significance is in its potential to signify a difference of opinion in the approach to arbitration between American and Canadian courts. Canadian courts’ overriding policy preference is the avoidance of multiplicity of proceedings. Thus, in McCulloch v. Peat Marwick Thorne (1991), 1 C.P.C. (3d) 149 at para. 24 (Alta Q.B.), Perras J. stated:

“It makes much more sense to have a dispute between the parties settled by one mechanism than to split the matter, for example, into breach of contract and accounting for arbitration and professional reputation and conspiracy for trial, and in that case have the dispute run on parallel tracks, with duplication of costs, inconvenience and the possibility of inconsistent results.”

Similarly, in Rosedale Motors Inc. v. Petro-Canada Inc. at para. 20 (O.C.J. [Gen. Div.]), Sharpe J. , as he then was, stated:

“The claim in contract is closely bound up with the other claims, especially that for misrepresentation, that are not arbitrable. Given the nature of the claims that have been asserted, it is highly desirable they proceed together before the same forum so as to avoid a multiplicity of proceedings.”

Sharpe J. then cited the Ontario Arbitration Act, which permits courts to stay proceedings in respect of matters within the arbitration agreement and continue the proceedings in respect of other matters where to do so would be “reasonable.”

Thus, the Cocchi decision of the Supreme Court may signify a conflict between Canadian and American courts in respect of approach to cases containing both arbitrable and non-arbitrable claims. While American federal courts, motivated by the desire to conserve judicial resources and considerations of freedom of contract, favour an expansive view of the applicability of arbitration clauses, Canadian courts, wary of the possibility of inconsistent results arising out of multiple proceedings, demonstrate greater willingness to restrict such clauses’ applicability.

Case Information

KPMG LLP v. Robert Cocchi et. al., 565 US __ - Supreme Court 2011.

US Supreme Court Docket Number: 10-1521

Decision: November 7, 2011

aiding and abetting a breach of fiduciary duty Bernie Madoff Florida Deceptive and Unfair Trade Practices Act KPMB limited partnership interests negligent misrepresentation professional malpractice Rye Funds Tremont Group Holding U.S. Supreme Court



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