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Tort was not arbitrable
April 08, 2006 by Ross Runkel at LawMemo

The federal policy favoring arbitration applies only after a court decides that the parties have agreed to arbitrate a particular dispute. Agreeing to arbitrate a contract claim does not necessarily mean the parties have agreed to arbitrate a tort claim that may have some relationship to the contract.

An investor set up some accounts at Prudential Securities, and Prudential assigned employee Trumbo to be the broker on these accounts. After Trumbo was "permitted to resign" from Prudential, he took the accounts with him and allegedly mismanaged them.

The investor sued Prudential claiming Prudential breached its fiduciary duty by failing to warn of Trumbo's troubled history, and claiming this caused the investor to suffer losses.

A trial court ordered arbitration, and the arbitrator ruled against the investor.

Back in court, the investor sought to vacate the award, and lost, but the Florida Court of Appeals reversed, holding that the tort claim was not covered by the arbitration agreement.

There were two arbitration agreements:

• I agree that all controversies which may arise between us concerning any transaction (whether executed or to be executed within or outside of the United States), my account or this or any other agreement between us, whether entered into prior, on, or subsequent to the date indicated on the signature page, shall be determined by arbitration.
• The undersigned agrees, and by carrying an account for the undersigned you agree, all controversies which may arise between us concerning any transaction or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration.

The court held that the breach of fiduciary duty tort was not covered by these agreements to arbitrate. The alleged tort took place after the contract was terminated, the investor's complaint did not rely on the investor-Prudential agreements, and the resolution of the tort claim is not dependent on the construction of those agreement.

The message: The arbitration agreement controls what disputes are arbitrable. In this case the dispute was too far removed from what the parties agreed to arbitrate.

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