The Tennessee Court of Appeals at Jackson recently enforced a NY choice-of-law provision against an arbitration challenge, holding that courts determine contract-formation issues, while arbitrators decide the scope and unconscionability of the arbitration agreement. The Court relied on the “intertwining doctrine” to send claims against a non-signatory employee to arbitration.
In Mid-South Maintenance, Inc. v. Paychex, Inc., No. W2014-02329-COA-R3-CV (TN App. – Jackson, August 14, 2015), the Court reversed the Chancery Court, holding it improperly relied on Tennessee law in refusing to compel arbitration.
Mid-South’s bookkeeper used the Paychex system to embezzle $1.8M. Mid-South sued Paychex and its customer representative in Chancery Court for breach of duty, negligence and failure to supervise in allegedly aiding-and-abetting the embezzlement. The parties’ agreements contained a narrow arbitration clause (disputes “arising out of” the Agreement), with a NY choice of law clause and reserving Paychex’s unilateral ability to file collections suits in court.
The Tennessee Court of Appeals held:
- The Federal Arbitration Act governs because the transactions were in interstate commerce. Tennessee law allows enforcement of the parties’ choice of NY law to govern their relationship.
- Arbitrability and related questions “are substantive in nature. Consequently, we will apply the FAA and New York state law to substantive matters, while Tennessee law will govern procedural issues.”
- Contract formation issues require judicial determination initially, but Mid-South waived the argument by not raising it expressly on appeal.
- Arbitrators decide scope and unconscionability issues. Although analyzing the claim that the clause was unconscionable for lack of mutuality, the Court did not even cite the Tennessee Supreme Court’s June 5 Berent decision on the issue (although this analysis was under NY law). We discussed that decision here.
- The “intertwining” doctrine allowed the non-signatory employee defendant to compel arbitration of Mid-South’s claim against him because the “all disputes under the agreement” clause was not limited to signatories and the claims were factually and legall intertwined with those against signatory Paychex.