In Gray vs. Ward, Ward and Gray started a limited partnership where Ward was a limited partner and Gray was a limited partner and the manager of the general partner. No. 05-18-00266-CV, 2019 Tex. App. LEXIS 6992 (Tex. App.—Dallas August 9, 2019, no pet.). Ward was also an employee of the partnership, but there was no written employment agreement. Ward wanted to exit the relationship, and the parties had a dispute concerning the amount to buy him out. Ward alleged that Gray fired him, but told employees that Ward resigned. Ward sued Gray and the general partner for breach of contract and fiduciary duties arising out of the buy-out of his interests, wrongful termination related to his firing, and defamation. Gray filed a motion to compel arbitration due to the following arbitration clause in the partnership agreement:
All disputes and claims relating to this Agreement, the rights and obligations of the parties hereto, or any claims or causes of action relating to the performance of either party that have not been settled through mediation will be settled by arbitration by the American Arbitration Association in either Boca Raton, Florida or Arizona in accordance with the Federal Arbitration Act and the Commercial Arbitration Rules of the American Arbitration Association.
Id. The trial court compelled the buy-out claims to arbitration but retained the employment and defamation claims. Gray appealed.
The court of appeals reversed the trial court and held that all of Ward’s claims should have been compelled to arbitration. The trial court first reviewed an argument that the arbitrator should have decided the arbitrability issue due to the incorporation of the AAA rules into the arbitration clause. The AAA rules expressly state that the arbitrator, not a trial court, shall determine arbitrability issues. The court of appeals did not disagree with that argument, but held that Gray waived that argument by failing to raise it in the trial court:
In the court below, Accidents argued only that all of the claims were within the scope of the arbitration clause and urged the court to compel arbitration on all claims. Because the arbitrability of the scope issue was first raised on appeal, we do not consider whether the parties agreed to arbitrate arbitrability and instead limit our review to whether the excluded claims fall within the clause’s scope.
Id. The court then reviewed whether the trial court abused its discretion in deciding that the employment and defamation claims were not arbitrable and fell outside the scope of the arbitration clause.
Ward argued that two independent relationships were at issue: (i) his employment relationship and (ii) his relationship with and interest in the partnership. According to Ward, only the latter relationship pertains to the partnership agreement containing the arbitration provision, and thus the employment relationship claims were not subject to arbitration. The court disagreed. The court noted that the agreement provided that no general partner or interest holder will receive any salary for services rendered on the partnership’s behalf except as provided in the agreement. It further provided that if a limited partner serves as an employee or agent of the partnership, the agent or employee will not be deemed to be participating in the control of the business for liability purposes. Thus, at a minimum, the agreement “relate[d] to” Ward’s employment by the partnership. Additionally, the agreement provided that if a party resigns while he owns a limited partnership interest, the partnership is obligated to purchase that party’s interest within ninety days. The parties disagreed about this provision’s applicability when the limited partner’s employment status was terminated. This disagreement was the linchpin of the parties’ dispute. The court held: “Thus, there can be no question that Ward’s employment status ‘relates to’ the LP Agreement.” Id. Regarding Ward’s two-relationship argument, the court stated: “But even if there is a separate oral employment agreement that exists apart from the LP Agreement, our analysis does not change. The LP Agreement expressly relates to such employment. And an arbitrable claim can relate to two agreements at the same time.” Id. The court compelled all claims to arbitration.
There was a dissenting justice, who would have affirmed the trial court’s arbitration order. That justice took a much more narrow view of the partnership agreement and fundamentally disagreed with the majority’s application of the phrase “relating to.”
Interesting Note. It is very common for partners or members of a limited liability company or limited partnership to also be employees of the entity that they own. However, there is rarely a written employment agreement in addition to the partnership or company agreement. In business divorce cases, partners or members sue each other for various claims. Where the plaintiff fights the application of an arbitration clause in the partnership or company agreement, the plaintiff often makes a two-relationship argument: my claim is based on my unwritten employment relationship and not the written partnership or company agreement. The Gray opinion is yet another opinion that supports the breadth of arbitration clauses and compels arbitration for all of the parties’ claims that relate to the partnership or company agreement. A best practice would involve drafting an arbitration clause that states that it applies to “all disputes between the parties, whether arising from this Agreement or not.” Further, where a partner or member is also acting as an employee, the entity should have a written employment agreement that has a similarly broad arbitration clause.