Merrimack College v. KPMG LLP

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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.