The Sixth Circuit has affirmed an order vacating an arbitration award, agreeing with the district court that the mandatory arbitration clause at issue was unenforceable upon termination of the agreement in which it was contained.
The plaintiff, Gridsmart Technologies, Inc. (“Gridsmart”), manufactured camera equipment that it sold to the defendant, Marlin Controls, Inc. (“Marlin”). The parties had an agreement granting Marlin the exclusive right to distribute Gridsmart’s products within a defined region of the United States (the “Agreement”). An arbitration clause in the Agreement required the parties to submit all disputes arising under it to the American Arbitration Association.
Gridsmart exercised its right to terminate the Agreement in June 2015. Thereafter, the parties tried to reconcile the handling of outstanding orders that Gridsmart first delivered to Marlin in September 2015. Marlin ultimately returned these items to Gridsmart, claiming it was unable to sell them due to a lost construction contract. Gridsmart nevertheless demanded payment for the items and Marlin refused. Gridsmart filed an arbitration claim to resolve the issue, but Marlin did not participate. As such, the arbitrator granted an award in favor of Gridsmart, which Gridsmart then sought to enforce against Marlin in a Tennessee state court action.
Marlin removed the enforcement action to district court and moved to have the award vacated. The district court granted the motion, finding that the arbitration clause in the Agreement did not survive after it was terminated by Gridsmart in June 2015. The Sixth Circuit affirmed. Under the plain language of the Agreement, the Court found it was clear that the parties’ rights as to orders outstanding upon termination were to be governed by a separate “mutual agreement.” No such agreement existed here. The Court ruled that, absent a separate contract concerning the handling of outstanding orders, it was equally clear that the parties rights under the Agreement with respect to such orders – including the right to enforce the arbitration clause – immediately ceased when the Agreement was terminated in June 2015.
The Court held that Tennessee Uniform Commercial Code demanded the same conclusion. It provided that when, as here, a party terminates a contract for the sale of goods, all executory obligations on both sides are “discharged.” Moreover, after finding that Gridsmart waived additional contractual interpretation arguments, the Court went on to reject them in dicta. It held that the presence of “survival” language in certain other provisions of the Agreement – but not in the arbitration clause – plainly demonstrated that the parties did not intend for the arbitration clause to survive upon termination of the agreement.