A dispute arose between the parties - a US trading company (Claimant) and a US production company (Respondent) - over Respondent's termination of an exclusive agreement for marketing products in Turkey. Claimant contends that in terminating the agreement Respondent reneged on a commitment it had made in a side letter not to circumvent Claimant's presence in the Turkish market and tortiously disrupted Claimant's relationship with its Turkish customers. After first considering the legal significance of the side letter and whether or not Respondent terminated the agreement with the intention of circumventing Claimant, and the relationship between the termination of the agreement and Claimant's decline in the Turkish market, the sole arbitrator examines the claim of tortious interference.

• Jurisdiction

• Scope of arbitration clause and Terms of Reference

• Applicable law

• Unlawful interference

'[Claimant] also charged [Respondent] with "improper interference with and misappropriation of [Claimant]'s prospective business relations with its Turkish customers". Such conduct qualifies as a tort under Washington law. See Pleas v. City of Seattle, 112 Wash. 2d 794, 774 P.2d 1158, 1163 (1989); Calbom v. Knudtzon, 65 Wash. 2d. 157; 396 P.2d 148 (1964); Island Air, Inc. v. LaBar, 18 Wash. App. 129, 566 P.2d 972, 978 (Ct. App. 1977).

[Claimant] described the wrong by claiming that, as a result of the termination, it

lost its principal supplier . . . . Encouraged by the prospect of direct dealings with [Respondent], many of [Claimant]'s larger customers eschewed further relations with [Claimant]. As a result, [Claimant]'s access to this important segment of the market was virtually eliminated. The loss of these customers also hampered [Claimant]'s efforts to sell to other segments of the market. [This was said to constitute] interference with and misappropriation of [Claimant]'s prospective business relations with its Turkish customers. . . .

A. Jurisdiction of the Tribunal

[Respondent] responds, first, that this is a claim sounding in tort and that it is therefore beyond the jurisdiction of the Tribunal.

Paragraph 10.3 of the . . . Agreement provides that the arbitral process may be invoked with respect to "[a]ny controversy or claim arising out of or relating to this Agreement, or to the breach thereof . . . ." The key phrase, "arising out of or relating to", is a widely used formulation, subject to considerable judicial interpretation. It is generally read broadly enough to reach claims sounding in tort. See Prima Paint Corp., 388 U.S. at 406; Mediterranean Enter. Inc., 708 F.2d at 1464; Acevedo Maldonado v. PPG Indus. Inc., 514 F.2d 614, 616 (lst Cir. 1975) ("Broad language of this nature covers contractgenerated or contractrelated disputes between the parties however labeled: it is immaterial whether claims are in contract or in tort . . . . Absent the contracts, there would be no occasion for a third party claim"); Altshul Stern & Co. v. Mitsui Bussan Raisha, Ltd., 385 F.2d 158, 159 (2nd Cir. 1967) ("Plaintiff cannot avoid the broad language of the arbitration clause by casting its complaint in tort"); McDonnell Douglass Corp. v. Kingdom of Denmark, 607 F.Supp. 1016, 1019 (D.C. Mo. 1985) ("the weight of authority supports the defendants' position that 'relating to' is generally regarded as broad rather than narrow language"). Courts comparing this language to other phrases such as "arise under", "arising out of", or "arising hereunder" have consistently held that the phrase "arising out of or relating to" is broader in its scope. See Mediterranean Enter. Inc., 708 F.2d at 1463 & n.5; In Re Kinoshita & Co., 287 F.2d 951, 953 (2nd Cir. 1961); Michelle Amoruso E. Figli v. Fisheries Dev. Corp., 499 F.Supp. 1074, 1080 (S.D.N.Y. 1980). In determining whether a claim arises out of or is related to the contract, the First Circuit Court has stated that "it is immaterial whether claims are in contract or in tort . . . . The key is determining whether the dispute is contractgenerated or contractrelated." Acevedo Maldonado, supra, 514 F.2d at 616.

[Claimant's claim that [Respondent] took advantage of the termination of the [Agreement] to "circumvent" [Claimant] can be fairly characterized as a dispute arising out of or relating to a breach of that agreement. [Claimant] claims that the termination which opened the way for the circumvention was a breach. In fact, the alleged act of circumvention itself, which constituted the claimed breach, was prohibited by the contract. In order to address the issue of circumvention the issue of breach of the contract must also be addressed. The two are inseparable.

[Claimant] put forward a serious and colorable claim that the same actions constituted both a contract breach and tortious interference. I have decided against the former claim on the merits, but it was fairly pleaded and legitimately advanced. The wrongful interference claim can legitimately be said to arise from acts which could also be colorably claimed to be a contract breach. The disputes clause reference to claims "relating to this agreement" is spacious enough to include a tort claim, since I have also held that "this agreement" includes the Side Letter assurance. The interference claim, in short, was fairly within the agreement to arbitrate.

It must be determined next whether the tort claim was also within the specific Terms of Reference in this case. Terms of Reference have as one of their principal purposes the definition of the issues between the parties, so that the tribunal shall know with precision the nature and bounds of what it must determine. In the process, each party receives fair notice of the matters it will be called upon to address.

Arbitration is the product not of an act of government, establishing a court of general jurisdiction open to determine disputes generally, but of the agreement of two particular private parties who voluntarily constitute a special and unique body with the authority, delegated by them through an act of contract, to determine the matter between them. The Terms of Reference to which those parties agree thus constitutes a private law between them, defining what the arbitral panel is to decide.

For this reason, it is important that the statement of a claim in the Terms of Reference precisely reflect the scope of the demands of each party. No new claim or counterclaim outside the limits fixed in the Terms of Reference may be made during the proceedings, in the absence of a formal amendment to the Terms of Reference signed by the parties. Article 16 of the ICC Rules provides:

The parties may make new claims or counterclaims before the arbitrator on condition that these remain within the limits fixed by the Terms of Reference provided for in Article 13 or that they are specified in a rider to that document, signed by the parties and communicated to the Court. [sic]

The thrust of Article 16 is to proscribe the adding of new claims outside the Terms of Reference, not the making of new arguments in support of claims set forth in the Terms of Reference. Where a party seeks to add new claims not within the scope of the Terms of Reference, the tribunal has an obligation to reject them; it has no authority or jurisdiction to pass on claims not expressly or implicitly covered by the Terms of Reference.

In this instance, in the "Summary of the Parties' Claims" in the Terms of Reference, [Claimant] put forward the following:

4. Termination of [Agreement]: [Respondent] illegally terminated the May, 1987 [Agreement] and failed to refer customer inquiries to [Claimant] during the 90day termination notice period.

And "Under Issues to be Determined", the Terms of Reference stipulated the following:

A. Did [Respondent] lawfully terminate the May, 1987 [Agreement] with [Claimant] pursuant to paragraph 9.4 of the Agreement?

B. Did [Respondent] owe [Claimant] any obligations after the notice of termination of the Agreement? If so, has [Respondent] failed to fulfill any such obligations?

C. To what relief, if any, is each party entitled for any violations of the Agreement or of any posttermination obligation?

The [Claimant] position as set forth in the Terms of Reference, then, is not explicitly limited to a breach of contract claim; the allegation is that the termination was "illegal". This is broad enough to reach illegality sounding in either tort or contract, either ex Iege or ex contractus. By the same token, the Terms of Reference directed the tribunal to determine whether the termination was "lawful"; here again, there is nothing which restricts that issue to the question whether the termination was to be measured solely against the provisions of the contract itself as opposed to an affront to the standards of behavior laid down in the tort doctrine of Washington.

In sum, the interference claim is within the Terms of Reference, and hence within the jurisdiction of this tribunal.

B. Choice of Law

I have found, as set forth above, that this claim is properly before the tribunal because under the Terms of Reference, it "relates" to the contract, and arises out of behavior which claimant colorably alleged constituted a "breach" of that contract. The [Agreement] provides in paragraph 10.3 that Washington law "shall govern all aspects of this Agreement, including its . . . performance, operation, and enforcement". Having held that the claim is properly before the tribunal because of its relationship to the performance of the contract, I am also inclined to think that for the same reason the governing law clause of the contract establishes the principles which are to control the decision. The issue of which law governs, however, is probably academic. The parties have not pointed out, and I have failed to find, any indication that the law of another jurisdiction which arguably might control the dispute - Virginia, for example, where the termination letter was received - is significantly different from the law of Washington. Even if one were to conclude that the law of the state where the alleged wrong occurred governed, there is something to be said for returning to Washington State law, in any event, since it was from Seattle that the termination fax was dispatched.

C. The Merits of the Claim

On the merits of the claim, however, [Claimant]'s position is less persuasive.

The claim is quite narrow. There is nothing here by way of disparagement. Except for the allegation that the very fact of termination itself, without more, constituted a loss of "credentials" for [Claimant] in the market - and I have, as stated above, concluded that the loss of the exclusivity credential did not cause the collapse of [Claimant]'s market - there was no showing that [Respondent] communicated anything to the Turkish customers or behaved toward them in a way which induced them to turn their back on [Claimant]. Other than the identity of [factories] in Turkey which purchased . . . on the international market, which I address below, there was nothing particularly proprietary about [Claimant]'s business methods. It had no secret formulae. Nor did it have any special good will which [Respondent] appropriated to itself and capitalized on. Indeed, Mr . . . insisted that [Claimant] was destroyed because it lost the right to put itself forward in the marketplace not just as a [commodity] source but as [Respondent]'s sole and exclusive outlet. If anything, this is consistent with the conclusion that it was [Respondent]'s good will and reputation . . . rather than [Claimant]'s, which was crucial in Turkey. So the claim comes down to the issue of the customers. It was their identity which gave rise in the first instance to Mr . . .'s concern for protection and led to the Side Letter assurance. It is hard to conclude that the identity of the customers constituted a trade secret, in connection with which [Claimant] could seek either protection or damages. The consequences of such a determination would be significant. It would be the equivalent to saying that the major buyers of . . . in Turkey remained the exclusive preserve of Mr . . . There was not much confidentiality about who they were. [Claimant] admits that it was not the identification of potential customers, but rather its hard work in persuading them to buy . . . from the United States, which was the key to its success:

While the names of the owners of the major Turkish [factories] was not a secret, convincing them to cooperate, and to look to the United States for their . . . requirements, was a formidable challenge. . . .

Indeed, several of the most important ones were too aggressive for Mr . . .'s taste in bringing their identity to the attention of [Respondent]. They palpably wanted to make themselves known to potential suppliers.

I have already set forth the reasons for concluding that [Respondent] did not appropriate to itself any specific transaction as to which [Claimant] could rightfully claim it was the procuring cause. Here . . . [Claimant] has not carried its burden of pointing to any actual sales consummated by [Respondent] which came to hand through [Claimant]'s efforts; [Respondent] did not usurp a specific opportunity first developed by [Claimant]. In fact, there is evidence in the record of one instance in which it actually turned down an inquiry and referred the customer to [Claimant]. The sales which were eventually made in 1989 by [Respondent] through . . . were sales which arose subsequent to the termination. No direct linkage was demonstrated between any of those sales and an inquiry which came to hand, either through [Claimant] or directly to [Respondent], during the [Claimant] exclusivity period.

I cannot therefore conclude that [Claimant] has made out a case of interference under Washington law; claimant has not satisfied its exacting standards with respect to an interference claim. The central element in such a claim is an intentional act of a defendant which in fact disrupts, induces, or causes the loss of plaintiff's contract for, or firm expectation of, an actual sale. See Pleas v. City of Seattle, 112 Wash. 2d 794, 800, 774 P.2d 1158, 1161 (1989).

Claimant relies on Island Air, Inc. v. LaBar, 17 Wash. App. 129, 566 P.2d 972, 978 (Ct. App. 1977). In that case, defendant used confidential information of plaintiff's contract with United Parcel, an important shipper, to make a better proposal. This persuaded United Parcel to jettison Island Air and substitute defendant. Island Air had provided defendant with confidential information as to its existing contract with United Parcel in response to defendant's overture to acquire the company, and the parties executed a specific confidentiality agreement that the information would be employed only to evaluate the purchase, and not to engage in competition.

The Island Air incident was an egregious instance of acquiring proprietary information under a clear confidentiality agreement and then misusing that information to go into direct competition with the plaintiff. That is not this case. In Island Air, defendant did precisely what it had bound itself in as many words not to do - use the information to compete with plaintiff and capture an existing contract. Here, the Side Letter is considerably less specific and exacting.

There was nothing here which carried with it a stipulation that [Respondent] could not compete, only that it would not "circumvent". Furthermore, there was nothing in the evidentiary record which would bring this case within the Island Air facts - nothing to show that [Respondent] used information disclosed to it under a commitment of confidentiality to outbid [Claimant] on an existing transaction. Thus, on three counts - the precision of the contractual promise, the nature of the behavior, and the appropriation of a specific business opportunity - the case is considerably different from Island Air.

Respondent also points to Birkenwald District v. Heublein. Inc. 55 Wash. App. 1, 776 P.2d 721 (Ct. App. 1989). That opinion could be said to exact a showing of illicit motive or purpose in interference cases. There was such a showing in Island Air. Here there is none, as the award explicitly concludes.

I have already determined that paragraph 9.4 of the [Agreement] was indeed qualified by the Side Letter which restrained [Respondent] from invoking the "no cause" cancellation provision in order to "circumvent", and I have held that [Claimant] would have to prove motive at the time of termination, as a matter of fact. I have determined that [Claimant] failed to carry its burden of persuasion on the issue of intent; for the reasons set forth in Part VI of this award, the record will not support a conclusion that [Respondent] terminated for the purpose of circumventing [Claimant]. Nor, once again, do I think that [Claimant] succeeded in proving that the collapse of its Turkish marketing was caused in a significant way by [Respondent]'s termination under paragraph 9.4.

For these reasons, it is also not possible to make an award in favor of [Claimant] with respect to its claim of interference.'