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Contract provisions requiring signatories to submit their disputes to arbitration are not uncommon, especially in the construction arena. Ohio’s long-standing public policy favors arbitration, but Ohio courts routinely confirm that arbitration is a “matter of contract,” in which the contracting parties waive their rights to a trial and agree to arbitrate their claims. In other words, a contractual provision mandating arbitration is enforceable, but a party cannot be required to arbitrate a dispute if it has not agreed to arbitration. However, exceptions exist to the arbitration rule. Ohio courts have identified (i) incorporation by reference, (ii) assumption, (iii) agency, (iv) veil piercing/alter ego, and (v) estoppel as situations where a party who is not a signatory to a contract with an arbitration provision can be forced to arbitrate.
On October 6, 2022, Ohio’s Fifth Appellate District most recently revisited these exceptions to the arbitration rule in
Peabody Landscape Construction, Inc. v. Welty Building Company, Ltd., et al., 2022 Ohio App. LEXIS 3371 (5
th Dist.). In
Peabody, Peabody Landscape Construction, Inc.’s (“Peabody”) subcontract with the general contractor, Welty Building Company, Ltd. (“Welty”) included an arbitration provision. The project owner, Lancaster Properties II, LLC (“Lancaster”) eventually hired a replacement contractor, Boldt Capital (“Boldt”) to complete the Project. After not allegedly receiving payment for its Project work, Peabody asserted claims against Welty, Lancaster and Boldt. Peabody then attempted to compel Lancaster and Boldt to arbitration, premised on the arbitration provision in its subcontract Welty, to which neither Lancaster nor Boldt were signatories. In support of its position, Peabody argued that the agency, estoppel and third-party beneficiary exceptions to the arbitration rule. The
Peabody court disagreed:
The Agency Exception
The agency exception applies when non-signatories to a contract are allowed “to invoke arbitration to avoid evisceration of the arbitration agreement between the signatories.” A party can be bound to a contract in agency if the party, by its words and conduct, causes the other party to the contract to reasonably believe that the party had authority to make the contract. Here, Peabody argued that by completing Welty’s project work, Lancaster and Boldt became Welty’s agents, and as Welty’s agents, the terms of Welty’s subcontract with Peabody, including the arbitration provision, applied. The court disagreed, finding that because Lancaster and Boldt were separate entities hired after Welty’s alleged Project delays, they were not Welty’s agents. Additionally, because neither Lancaster nor Boldt asserted any claims against Peabody, and because neither Lancaster nor Boldt attempted to invoke the arbitration clause, the agency exception also did not apply.
The Estoppel Exception
Peabody articulated that a party who knowingly accepts the direct benefits of an contract is estopped from denying a corresponding contractual obligation to arbitrate. However, Ohio courts have limited the estoppel exception to situations where a non-signatory is attempting to enforce the contract containing the arbitration clause. When a non-signatory asserts its own, independent claims, rather than advancing the the claims of the signatory, the non-signatory is not bound by the terms of the contract.
Here, neither Lancaster nor Boldt asserted any claims against Peabody. Neither Lancaster nor Boldt attempted to enforce any aspect of Peabody’s subcontract with Welty. Accordingly, the
Peabody court determined that the estoppel exception did not apply.
Peabody also asserted the alternate estoppel theory, where arbitration may be compelled due to the parties’ close relationship, or a strong relationship of the non-signatory’s alleged wrongs to its contractual requirements. However, Ohio courts limit this alternative estoppel theory to situations where a non-signatory tries to bind a signatory to arbitration, not where, as here, the signatory (Peabody) attempts to bind a non-signatory (Lancaster and Boldt).
The Third-Party Beneficiary Exception
Under a third-party beneficiary exception, a non-signatory third-party can be bound by a contractual arbitration provision when the specific identify of the non-signatory is either expressly named or sufficiently identified in the contract. To prevail on this exception, the non-signatory must prove that the contract was signed with the signatories’ express intention to benefit the non-signatory.
Here, non-signatories Lancaster nor Boldt were not identified, expressly or sufficiently, in the Welty / Peabody subcontract. They did not attempt to enforce the arbitration provision against Peabody, and asserted no claims against Peabody. The court also noted that the arbitration agreement specifically provided that only Welty, in its sole discretion, could elect arbitration. As such, the plain language of the contract clearly provided Welty, and only Welty, with the ability to elect arbitration.
Conclusion
The
Peabody decision reaffirms the difficulty in enforcing contractual arbitration provisions against entities which are not parties to the contract. The decision also highlights that the decision to compel a non-signatory to arbitrate is determined after a very fact-specific inquiry and the expenditure of considerable time and expense. A thorough analysis of any contractual alternative dispute resolution provisions, and understanding that “the devil is in the details,” are critical to risk mitigation strategies.