News & Noteworthy

Authored - NJ Contract Law Update - Arbitration Clause Ostensibly Applicable to Components of Transaction May Not Apply to Master Agreement
JANUARY 23, 2013 | Windels Marx - Commercial Litigation

In Marjam Supply Co., Inc. v. Columbia Forest Products Corp., 2012 WL 6195803 (N.J.App.Div. Dec. 13, 2012), the Court held that notwithstanding state and national policies strongly favoring arbitration, the parties to a 'master agreement' could not be compelled to arbitrate where that agreement did not contain a dispute resolution mechanism, arbitration clause, or choice of law provision, even though subsequent documents did. As detailed below, the Court concluded from this absence that, especially in the absence of an arbitration clause, litigation was the proper forum since arbitration in lieu of litigation can only occur by agreement.

The Facts

The facts (including the factual conclusions drawn by the Court) are as follows:

  1. Marjam is a building materials distributor and supplier.
  2. Columbia is reputed to be North America's largest manufacturer of hardwood plywood and hardwood veneer.
  3. An important distributor of Columbia products was Centre Lumber and Plywood Co., through a so-called "Enrollment Agreement" (a/k/a the 'master agreement').
  4. The key interface between Centre and Columbia was allegedly Centre's employee Alan Foxman.
  5. Marjam acquired Centre's assets (not stock), and thus, in some sense, its relationship with Columbia; though perhaps in a different sense then if there had been a stock acquisition.
  6. Marjam's major purpose for the acquisition of Centre was to 'inherit' Centre's Columbia-distributorship for the metropolitan area.
  7. "Four days after Centre was acquired by Marjam, Foxman quit and went to work for defendant LeNoble Lumber Co., Inc. (LeNoble), a competitor within Marjam's newly-acquired market area."
  8. After acquiring Centre's assets, Marjam apparently ordered enough building products/goods from Columbia to be considered a premier distributor. Nonetheless, "On June 24, 2011, without any prior notice or warning, and without explanation, Columbia terminated Marjam as its distributor within the market area, effective immediately, and appointed LeNoble in Marjam's place."
  9. Marjam's orders of goods were documented in the usual fashion, including invoices. Unlike the master Enrollment Agreement, each individual invoice (relating to specific orders of building products) contained an arbitration provision; which required arbitration in Oregon.
  10. 10. When a dispute arose, Marjam wished to litigate in New Jersey, and Columbia wished to arbitrate in Oregon.
  11. In light of the context--a master agreement not providing for arbitration anywhere (let alone Oregon), and the inherently narrow scope of the invoices--the Court found that Columbia's expansive arguments for applicability of the arbitration clause to the Enrollment-Agreement dispute (as opposed to disputes as to any individual products delivered) were not meritorious.
  12. Influencing the Court was the fact that the Enrollment Agreement was already in existence--without any sense that the distributor undertaking the arrangement would have to (a) travel to Oregon, as well as (b) arbitrate--before the invoices came in, with essentially inconspicuous references to arbitration in those invoices. While those references may have been conspicuous enough to require arbitration as to the individual products, the Court indicated 'not so' as to the master Enrollment Agreement.
  13. Columbia's reference to the invoices' inclusion (within the arbitration clause) of the phrase, "arising from any sale of goods by seller to buyer or otherwise" (emphasis added), was equally unavailing. The Court felt, in effect, that a reasonable contemporaneous interpretation by the parties would have indicated that the arbitrable disputes would have had to have something to do with the products ordered--not the master Enrollment Agreement that existed before the arbitration clauses were submitted as part of the invoices.1
  14. The Court added:
  • ...we are unwilling to treat the [invoices'] "otherwise" reference as a bargained-for tractor beam that attracts and pulls into its orbit every controversy imaginable, including those emanating from the Enrollment Agreement.

Rather, the Court indicated that there was no such intent; therefore, no expansive rule of interpretation could transform that obscure, ill-placed phrase into a material modification of the Enrollment Agreement.

Morals of the Story

The morals of the story are these:

  1. The termination clause relating to the distributorship is something that should have been, and perhaps was, studied in detail before Marjam made the investment to acquire Centre's assets.
  2. It is unknown whether the form of acquisition of Centre--assets rather than stock--had an influence on the decision to terminate the distributorship, or the evaluation of rights and obligations inherent in that decision.
  3. Under the circumstances presented (relating to the acquisition), some assurance of Foxman's continued employment would seem to have been important. It is unclear whether that issue was sufficiently evaluated at the time of the transaction.
  4. Clients rarely look at operational documents such as invoices. But when they don't, the boilerplate can come back to haunt them.
  5. That said, in light of the ostensible disparity in bargaining power between Columbia and Marjam, it is unclear what counsel could have done had the arbitration clause been noticed in 'real time'. Certainly any legal letter on the issue would have been bound to prompt a controversy.
  6. Documents may not be read in pari materia unless there is express contractual instruction to do so; especially if the documents are not created at the same time.2
  7. Beware of the 'battle of the forms' in terms of applicable completing boilerplate--both under the UCC (ยง2-207) and otherwise.
  8. Whichever outcome you wish--arbitration or not, local venue or not--it is a risky gamble to leave the issue unstated or uncertain.

Finally, it is unclear whether Marjam might have had rights under the New Jersey Franchise Practices Act. The issue is not raised in the Opinion; and evaluating it would require substantial additional facts not apparent from the Opinion.

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.

1 Another way of phrasing this analysis is that the invoices (1) really were not in pari materia with the Enrollment Agreement; and (2) could not implicitly (a) effect such a material alteration to the Enrollment Agreement; or (b) be viewed as the type of modification which was actually intended by the parties--rather than such a change being (i) 'snuck in', or (ii) the subject of afterthought or litigation tactics. Rather, if 'real', it would have been the subject of actual discussion and notice if not negotiation.

2 The issue can be unpredictable. See generally my July 31, 2012 Article "In Pari Materia--Whether you Want it or Not".

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