Scope of Arbitration Provision Determines Arbitrability of Claim

Posted by William J. Piercy on

In South Point Retail Partners, LLC v. North American Properties Atlanta, 2010 WL 2331437, the Georgia Court of Appeals determined the scope of an arbitration provision. In 2005, investors created South Point for the purpose of developing a shopping center in McDonough, Georgia. Toward that end, South Point entered into a contract (the “Pre-Development Agreement”) with North American Properties, (“NAP”) for assistance in applying for rezoning and negotiating with potential anchor tenants.

In 2006, South Point and NAP expressly terminated the Pre-Development Agreement, and entered into a new agreement (the “Consulting Agreement”). Pursuant to the Consulting Agreement, NAP would provide consulting services in return for payment at a set hourly rate. Further NAP would receive a commission for any buyer or tenant NAP procured. The Consulting Agreement further provided that South Point would reimburse NAP for $1,031,089 in pre-development costs that NAP had incurred pursuant to its work under the Pre-Development Agreement. These pre-development costs were to be repaid in installments “if, as and when” South point received installment payments from anchor tenants.

In the event of an early termination, the Consulting Agreement provided that if “parties involved are unable to agree on the total compensation owed to NAP, the matter shall be submitted to binding arbitration in accordance with the rules of the American Arbitration Association.”

Although South Point apparently received significant installment payments from anchor tenants, it paid only $106,441.65 to NAP as pre-development costs. NAP filed a demand for arbitration against South Point with the American Arbitration Association, seeking an award of the remaining $924,647.65 in unreimbursed pre-development costs.

South Point immediately filed a lawsuit in Fulton County Superior Court seeking (1) a declaratory judgment that the arbitration provision in the Consulting Agreement did not apply to the issue of whether predevelopment costs had properly been paid; and (2) an injunction preventing the arbitration from going forward until the scope of the arbitration clause was determined by the trial court. The trial court dismissed South Point’s lawsuit, finding that “the parties had agreed to arbitrate all disputes between them as to the total compensation owed to NAP …”

South Point appealed, arguing that the “total compensation owed to NAP” stated in the Consulting Agreement’s arbitration provision related only to compensation earned by NAP for consulting and marketing services pursuant to the Consulting Agreement, and did not relate to the reimbursement of pre-development costs that accrued under the Pre-Development Agreement. Alternatively, NAP argued that the concept of “compensation” can include “reimbursement” and that, as used in the Consulting Agreement, the phrase “the total compensation owed to NAP” includes reimbursement for pre-development costs.

The trial court determined that NAP’s claim for unpaid pre-development was subject to arbitration and entered an order compelling the parties to adjudicate that issue in the arbitration forum.

South Point appealed that ruling and the Court of Appeals reversed. In reaching this conclusion, the Court noted first that:


arbitration is a matter of contract, and a party cannot be required to submit o arbitration any dispute which he has not agreed to submit. Therefore, the question of arbitrability, i.e., whether an agreement creates a duty for the parties to arbitrate the particular grievance, is undeniably an issue for judicial determination.
From there, the Court reasoned that the primary purpose of the Consulting Agreement was to establish NAP’s prospective compensation for consulting and marketing services. Secondarily, the Court found that the Consulting Agreement also stipulated the balance of South Point’s remaining indebtedness to NAP for pre-development costs. Because the Consulting Agreement’s arbitration provision’s purpose was to resolve compensation issues as to which the parties were “unable to agree” and because the pre-development reimbursement costs were already fixed and specified in the Consulting Agreement, the Court determined that the amount or propriety of the pre-development costs was not subject to the Consulting Agreement’s arbitration clause. This holding did not leave NAP without a remedy. While it was unable to bring a claim for unreimbursed pre-development costs in arbitration, the Court’s ruling did not preclude NAP from filing a lawsuit to collect these sums.