Having a client required to arbitrate a case — even though that client never signed off on an arbitration provision — is nothing new. Judge Conrad dealt with that situation late last month in Charlotte Student Housing DST v. Choate Construction Co., 2018 NCBC 88, where he said:
Because arbitration is a matter of contract, the usual rule is that “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” United Steelworkers of Am. v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960). In an appropriate case, though, “a nonsignatory can enforce, or be bound by, an arbitration provision within a contract executed by other parties.” Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen GmbH, 206 F.3d 411 , 415 (4th Cir. 2000).
Op. ¶14.
Plaintiffs, who had acquired a Charlotte apartment complex from its original owner, were suing the architect, general contractor and two subcontractors over design deficiencies in the construction.
Plaintiffs had not signed the Construction Contract containing the arbitration provision, but Judge Conrad ruled that they were required to arbitrate their claims.
He said that:
estoppel is dispositive here. In short, “[a] nonsignatory is estopped from refusing to comply with an arbitration clause when it receives a direct benefit from a contract containing an arbitration clause.” Int’l Paper, 206 F.3d at 418 (quotation marks omitted). It would be manifestly unfair to permit a party to take the benefit of the contract “despite [its] non-signatory status but then, during litigation, attempt to repudiate the arbitration clause in the contract.” Hellenic Inv. Fund, Inc. v. Det Norske Veritas, 464 F.3d 514, 517–18 (5th Cir. 2006); see also Int’l Paper, 206 F.3d at 418. That is what Plaintiffs seek to do here, and they are therefore estopped from refusing to arbitrate their claims against [the Defendants].
Op. Par. 23
Since the Plaintiffs were claiming that the Defendants had not performed their work in accord with the “Contract Documents,” they were bound by the terms of those documents, which contained the arbitration provision.
But what about that tricky question: who decides whether a matter should be arbitrated: Judge or Arbitrator? Judge Conrad here seized the right to make that decision for the Business Court. I’ve written about a Business Court decision on that point once before. The short answer is that it has to be “clear and unmistakeable” that the parties intended for the arbitrator, not the Court, to decide the question of arbitrability.
It was certainly clear and unmistakeable that the parties signing the contract containing the arbitration provision had delegated authority to determine arbitrability to the arbitrator. The arbitration clause invoked the AAA’s Construction Industry Rules, expressly delegate to the arbitrator “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement.”
But that wasn’t enough to bind the Plaintiffs, who were not signatories to the document referencing the Construction Industry Rules.
Those of you who aren’t at home hunkering down in fear of the impending hurricane are wondering why the Plaintiffs, who were found to beobligated to arbitrate, weren’t also obligated to have the arbitrator (as opposed to the Business Court Judge) decide whether they had to arbitrate the case in the first place.
Well, even though bound by the arbitration provision, there was nothing to show that the Plaintiffs shared the intent of the signatories to have the arbitrator decide the issue of arbitrability. As noted by Judge Conrad, “[c]ourts have generally found that agreements that do not mention or reference a particular non-signatory do not clearly or unmistakeably evidence an agreement by that non-signatory to have an arbitrator determine whether the agreement is arbitrable.” Op. ¶19 (quoting McKenna Long & Aldridge, LLP v. Ironshore Specialty Ins. Co., 2015 U.S. Dist. LEXIS 3347 at *14-15 (S.D.N.Y. Jan. 12, 2015).