Merrimack College v. KPMG LLP , 88 Mass. App. Ct. 803 ( 2016 )

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15-P-122 Appeals Court
MERRIMACK COLLEGE vs. KPMG LLP.
No. 15-P-122.
Suffolk. November 2, 2015. - January 6, 2016.
Present: Milkey, Carhart, & Massing, JJ.
Accountant. Negligence, Accountant. Arbitration, Arbitrable
question, Appropriateness of judicial proceedings.
Contract, Arbitration.
Civil action commenced in the Superior Court Department on
June 30, 2014.
A motion to compel arbitration was heard by Janet L.
Sanders, J.
Ira M. Feinberg, of New York (Christopher H. Lindstrom with
him) for the defendant.
T. Christopher Donnelly (Kelly A. Hoffman with him) for the
plaintiff.
MILKEY, J. The defendant, KPMG LLP (KPMG), is an
accounting firm that performed annual audits for the plaintiff,
Merrimack College (Merrimack). In the underlying action,
Merrimack alleges that KPMG committed malpractice when it failed
2
to detect serious financial irregularities that occurred in
Merrimack's financial aid office during fiscal years 1998
through 2004. Based on a dispute resolution provision included
in a contract the parties executed for fiscal year 2005, KPMG
argues that Merrimack waived its right to sue KPMG regarding
services it had provided in prior years and was required to
arbitrate those claims. In addition, KPMG maintains that
whether Merrimack's pre-2005 claims are subject to compulsory
arbitration must be resolved by arbitration. In a thoughtful
decision, a Superior Court judge rejected such arguments and
denied KPMG's motion to compel arbitration. We affirm.
Background. The essential facts are undisputed. For the
fiscal years at issue in the malpractice action, Merrimack had
hired KPMG through a succession of separate annual service
agreements. Each such agreement took the form of a letter that
KPMG sent to Merrimack that was then countersigned by Merrimack.
None of the annual agreements from 1998 through 2004, referred
to by the parties as "engagement letters," makes any mention of
arbitration as an available (much less mandatory) means for the
parties to resolve disputes that might arise between them.
In claiming that Merrimack's malpractice action
nevertheless is subject to binding arbitration, KPMG is relying
on the engagement letter that the parties executed for fiscal
year 2005. The 2005 agreement spelled out specific auditing
3
services that KPMG would provide to Merrimack during that year.
Unsurprisingly, in laying out KPMG's affirmative obligations,
the 2005 engagement letter is a forward-looking document,
referring, for example, to the audit report that KPMG "will
issue" in accordance with stated terms. The 2005 engagement
letter also expressly contemplated that KPMG could provide
"other services" to Merrimack, as may be agreed to by the
parties during the course of the year.1
For the first time in any of their annual agreements, the
2005 engagement letter included a mandatory dispute resolution
provision. In pertinent part, that provision stated as follows:
"Any dispute or claim arising out of or relating to the
engagement letter between the parties, the services
provided thereunder, or any other services provided by or
on behalf of KPMG or any of its subcontractors or agents to
[Merrimack] or at its request (including any dispute or
claim involving any person or entity for whose benefit the
services in question are or were provided) shall be
resolved in accordance with the dispute resolution
procedures [a two-tiered process of mediation and binding
arbitration] set forth in Appendix II, which constitute the
sole methodologies for the resolution of all such disputes.
By operation of this provision, the parties agree to forego
[sic] litigation over such disputes in any court of
competent jurisdiction."
Additional facts are reserved for later discussion.
1
For example, the 2005 engagement letter, which was
addressed to and countersigned by Merrimack's vice-president for
fiscal affairs, stated that KPMG "can provide other services to
provide you with additional information on internal control,
which we would be happy to discuss with you at your
convenience."
4
Discussion. It is axiomatic that "arbitration is a matter
of contract and a party cannot be required to submit to
arbitration any dispute which [it] has not agreed so to submit."
Massachusetts Hy. Dept. v. Perini Corp., 444 Mass. 366, 374
(2005), quoting from Local No. 1710, Intl. Assn. of Fire
Fighters v. Chicopee, 430 Mass. 417, 420-421 (1999). The
principal question we face is whether, as a matter of contract
law, the parties agreed that the dispute resolution provision in
the 2005 engagement letter was intended to apply retroactively
to disputes arising under their earlier agreements.2 In
addressing that question, "[t]he objective is to construe the
contract as a whole, in a reasonable and practical way,
consistent with its language, background, and purpose."
Sullivan v. Southland Life Ins. Co., 67 Mass. App. Ct. 439, 442
(2006), quoting from Massachusetts Property Ins. Underwriting
Assn. v. Wynn, 60 Mass. App. Ct. 824, 827 (2004). We begin by
examining the relevant language of the 2005 engagement letter.
As the excerpt quoted supra indicates, the dispute
resolution provision included in the 2005 engagement letter
2
KPMG insists that because the 2005 engagement letter
includes an express arbitration provision, we are to apply a
presumption that the current dispute is subject to arbitration.
See Falmouth Police Superior Officers Assn. v. Falmouth, 80
Mass. App. Ct. 833, 838-839 (2011). That would be true if the
current dispute arose under the 2005 contract, but it
indisputably did not. The parties agree that disputes arising
under the 2005 and subsequent engagement letters, including
post-2005 malpractice claims, must be resolved by arbitration.
5
applies to disputes "arising out of or relating to" three
categories of things: (1) "the engagement letter," (2) "the
services provided thereunder," and (3) "any other services" that
KPMG provided. KPMG acknowledges that the past services that it
provided to Merrimack pursuant to earlier engagement letters do
not fit within the first two categories. Instead, KPMG claims
that its pre-2005 services fit within the sweep of the third
category.
KPMG is, of course, correct that the phrase "any other
services provided" is broad enough that -- if "taken out of
context and read in isolation" -- it could be interpreted as
including services that KPMG already had provided before the
2005 agreement went into effect. Downer & Co., LLC v. STI
Holding, Inc., 76 Mass. App. Ct. 786, 792 (2010). "However,
meaning and ambiguity are creatures of context." Ibid., citing
Starr v. Fordham, 420 Mass. 178, 190 & n.11 (1995). See Rubin
v. Murray, 79 Mass. App. Ct. 64, 76 (2011) ("The words of a
contract must be considered in the context of the entire
contract rather than in isolation" [citation omitted]). The
fact that KPMG's preferred reading is linguistically possible
does not make it a reasonable interpretation of the parties'
agreement. See Downer & Co., LLC v. STI Holding, Inc., supra at
792-794 (rejecting linguistically possible interpretation of
contractual language as unreasonable when viewed in context).
6
The question before us is whether, by executing the 2005
engagement letter, Merrimack thereby signed away its right to
sue KPMG for malpractice based on services that KPMG previously
had provided under wholly separate contracts. In our view,
notwithstanding the facial breadth of the term "any other
services provided," the only reasonable interpretation of that
language in the context of this forward-looking agreement is in
reference to services that KPMG would perform after the new
contract was executed.3,4 Had KPMG wanted to insist that
3
KPMG accurately points out that the relevant portion of
the 2005 dispute resolution provision is phrased in the past
tense, referencing as it does other services "provided."
According to KPMG, an interpretation in Merrimack's favor
effectively would rewrite this language so as to refer to
services "to be provided." This argument ignores the fact that
disputes over KPMG's accounting services typically would arise,
as here, only after such services had been performed. In this
context, there is nothing unnatural or unexpected about a
dispute resolution provision using the past tense to refer to
services that were in dispute when the provision is triggered
(even though those services had not yet been performed when the
contract was executed). Conversely, if the parties instead had
referred to disputes over services "to be provided" (the
phrasing that KPMG insists is necessary to support Merrimack's
reading), the most natural reading of that language would be for
it to refer narrowly to future disputes over services that still
had not been provided when the dispute arose. Therefore, the
dispute resolution provision's reference to services "provided"
is of no appreciable import.
4
Our interpretation does not render superfluous the dispute
resolution provision's reference to "any other services
provided." As noted, the 2005 engagement letter contemplated
that KPMG may provide "other services" beyond those required by
the letter, and the dispute resolution provision makes it clear
that such services will be subject to the new dispute resolution
7
Merrimack forfeit its existing rights to pursue a civil action
for past disputes, it easily could have included language
expressly stating that the dispute resolution provision had
retroactive application. See McInnes v. LPL Financial, LLC, 466
Mass. 256, 265 (2013) (applying arbitration provision
retroactively where agreement required arbitration for "any
controversy . . . whether entered into prior, on or subsequent
to the date hereof"). As we recently observed, where "it would
have been a simple matter for" the contract drafter to include a
term it now claims is brought within the sweep of arguably
ambiguous contractual language, "[w]e see no reason to add
th[at] term[] now."5 Ajemenian v. Yahoo!, Inc., 83 Mass. App.
Ct. 565, 577 (2013).
Our conclusion finds support in analogous cases from other
jurisdictions. See, e.g., Security Watch, Inc. v. Sentinel
Sys., Inc., 176 F.3d 369, 373 (6th Cir. 1999), cert. denied sub
nom. American Tel. & Tel. Co. v. Security Watch, Inc., 528 U.S.
provision regardless of whether the services were performed
pursuant to the letter.
5
This principle has long been observed, see Higginson v.
Weld, 14 Gray 165, 171 (1859) ("If the defendants intended to
make their contract conditional upon the arrival of the vessel
at Calcutta, it would have been easy to say so in express terms.
In the absence of such a statement, the court cannot add it by
construction"), and it has been applied in the context of
arbitration agreements. See Combined Energies v. CCI, Inc., 514
F.3d 168, 174 (1st Cir. 2008) ("If the parties had intended the
arbitration clause to apply . . . , it would have been as easy
to state that expressly").
8
1181 (2000) (rejecting retroactive application of arbitration
provision in new, "forward-looking" contract, despite seeming
breadth of language denoting applicability of provision).6 The
cases that KPMG has cited in its favor are readily
distinguishable,7 or they are simply unpersuasive.
As a secondary argument, KPMG contends that the question
whether Merrimack gave up its right to have its malpractice
claim against KPMG decided in a judicial forum, itself, must be
6
See also Hendrick v. Brown & Root, Inc., 50 F. Supp. 2d
527, 534-535 (E.D. Va. 1999); Coffman v. Provost * Umphrey Law
Firm, L.L.P., 161 F. Supp. 2d 720, 726-727 (E.D. Tex. 2001),
aff'd, 33 Fed. Appx. 705 (5th Cir.), cert. denied, 537 U.S. 880
(2002).
7
The case on which KPMG places the most reliance is
Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006). That
case does provide some superficial support for KPMG in that the
court there held that a mandatory arbitration provision in a
subsequent contract applied to a dispute that arose under an
earlier contract even though the subsequent contract did not
include express language making that provision retroactive. Id.
at 34-36. However, the factual context there is materially
different from the one before us. Before the parties in
Kristian had executed their new contract, they had entered into
an intervening contract that included an arbitration provision
that expressly applied retroactively. Id. at 30, 33-34. The
court viewed the subsequent contract as a continuation of the
existing relationship established by the intervening contract
even though the retroactivity clause was for some reason not
included. Id. at 35-36. We also note that in an unpublished
decision on facts that are more comparable to those before us,
the United States Court of Appeals for the First Circuit
rejected an argument analogous to the one KPMG is making,
characterizing retroactive application of an arbitration
provision in a new contract as a "radical" interpretation that
the parties could not have intended. Choice Security Sys., Inc.
vs. AT&T Corp. & Lucent Technologies, Inc., U.S. Ct. App., No.
97-1774, slip op. at 1 (1st Cir. Feb. 25, 1998).
9
decided by arbitration. For this proposition, KPMG relies on
language in appendix II to the 2005 engagement letter. Appendix
II, entitled "Dispute Resolution Procedures," describes with
particularity how the new dispute resolution provision is to
work. The language on which KPMG relies states as follows:
"Any issue concerning the extent to which any dispute is
subject to arbitration, or any dispute concerning the
applicability, interpretation, or enforceability of these
procedures, including any contention that all or part of
these procedures are invalid or unenforceable, shall be
governed by the Federal Arbitration Act and resolved by the
arbitrators."
The question of arbitrability is ordinarily for a court to
decide, and courts will not defer that issue to arbitration
absent "clea[r] and unmistakabl[e] evidence" that the parties
agreed to do so. Massachusetts Hy. Dept. v. Perini Corp., 83
Mass. App. Ct. 96, 100-101, 104-105 (2013), quoting from First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).
"[A] court may order arbitration of a particular dispute only
where the court is satisfied that the parties agreed to
arbitrate that dispute." Granite Rock Co. v. International Bhd.
of Teamsters, 561 U.S. 287, 297 (2010). KPMG has not presented
clear and unmistakable evidence that Merrimack ever agreed that
only arbitrators could resolve whether disputes that arose under
prior agreements nevertheless were subject to the arbitration
provision in the 2005 engagement letter. Indeed, because
Merrimack never agreed that earlier disputes were subject to the
10
new dispute resolution provision (for the reasons set forth
supra), it follows that the procedures spelled out in appendix
II simply never came into play.
Order denying motion to
compel arbitration affirmed.