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Non-Signatories and Arbitration

By  E. Glenn Waldrop, Jr.

Mr. Waldrop is a founding partner of Lightfoot, Franklin & White. His practice emphasizes business and commercial litigation as well as providing construction-related advice and litigation service to the firm= s construction industry clients. Mr. Waldrop was admitted to the bar in 1982 following receipt of his law degree from the University of Virginia. He served as President of the Business Torts and Antitrust Law Section of the Alabama State Bar in 1994-1995. He regularly represents clients in arbitration proceedings as well as in court. The following article is an edited version of Mr. Waldrop's 2005 AIM CLE lecture on this subject.

Allied Williams Companies, Inc. v. Davis, 901 So. 2d 696 (Ala. 2004), involved efforts by non-signatories to an arbitration agreement to compel arbitration. Plaintiffs attempted to sue not only the seller of the home that they had purchased, but also Terminix and Terminix's employee, Welch. The sales contract between the seller and the plaintiffs contained an arbitration clause requiring arbitration of  "any dispute relating to this agreement, to any breach thereof, to the relationship created by this agreement, or to the payment of fees. . . ."   Because the sales contract required the seller to provide a termite certification, and the seller had contracted with Terminix to provide the same, the Supreme Court found that the relationship of Terminix (and its employee, Welch) was a relationship created by virtue of the sales agreement, and thus was subsumed within the scope of the arbitration clause. Accordingly, Terminix and Welch were allowed to compel arbitration of the claims against them, despite the fact that they were not signatories to the contract containing the arbitration agreement.

Practitioners should take note of a couple of lessons from this result. First, careful attention must be paid to the precise language of the arbitration clause. If the clause is confined to the parties to the agreement, then non-signatories most likely will have no standing to compel arbitration of claims against them. SCI v. Fulmer, 883 So. 2d 621 (Ala. 2003).  On the other hand, if the clause is broad enough to cover both signatories and non-signatories alike, then a broader application of the right to arbitrate will be found.  If your practice involves drafting or negotiation of contracts that may contain agreements to arbitrate, you may wish to devote special attention to these factors, depending upon whether you prefer a broad or a narrow arbitration clause.

The Supreme Court in SCI Alabama Funeral Services, Inc. v. Lanyon, 896 So. 2d 495 (Ala. 2004),  reaffirmed its position that if a non-signatory has enjoyed the benefits of an agreement containing an arbitration provision, he may not avoid the arbitration provision simply because he did not sign the agreement. The underlying rationale for this holding appears to be that if a non-signatory claims the fruits or benefits of a contractual agreement, he must also take on the corresponding burdens, including any provisions in the contract requiring arbitration of claims.

In Bowen v. Security Pest Control, 879 So. 2d 1139 (Ala. 2003), a couple sued Security Pest Control over termite damage to their home. The husband had signed the contract containing the arbitration provision, but the wife had not. The Alabama Supreme Court found that the wife was bound by the arbitration agreement notwithstanding the fact that she had not signed the agreement. Though a signature traditionally serves as evidence of mutual assent, a signature is necessary to show mutual assent only where required by statute. Additionally, because the wife asserted claims for breach of contract, she was held to all of the provisions of the contract including the arbitration provisions thereof.

Similarly, in Philadelphia American Life Insurance Co. v. Bender, 893 So. 2d 1104 (Ala. 2004),  the Supreme Court compelled a non-signatory to arbitrate his claims. In that case, plaintiff sued defendants after the insured denied certain claims he submitted under a health insurance policy.  The insured had not signed the arbitration endorsement attached to the policy and argued that this precluded enforcement of the arbitration clause. Although plaintiff claimed that he had not received a copy of the policy, the Supreme Court held that he could not arbitrarily pick and choose the provisions in the policy that he wanted to apply. If he wanted to recover for a breach of the policy, he had to accept the terms of the contract including the agreement to arbitrate.

Non-signatories will not always be required to arbitrate their claims. For example, in Springhill Nursing Homes, Inc. v. McCurdy, 898 So. 2d 694 (Ala. 2004), a former patient sued a nursing home and several of its employees alleging negligent or wanton failure to provide her with proper health care. Plaintiff was admitted to the nursing home for rehabilitation following a stroke. The standard form admission contract contained an agreement to arbitrate, but plaintiff denied that she ever signed any admission contract. The Supreme Court held that the plaintiff was not seeking to avail herself of any benefit of the contract. Because the plaintiff had disavowed any claims under or arising through the contract, as a non-signatory she was not compelled to arbitration.

The lesson is straightforward. If a non-signatory claims benefits under or seeks to enforce rights arising under a contract, then the non-signatory will be held to any arbitration provisions in the contract the same as would be a signatory to the contract. As a corollary, if a non-signatory is not claiming rights under or dependent upon a contract that contains an arbitration provision, then the non-signatory likely will not be compelled to arbitrate claims under Alabama law.

Be forewarned, however, that the law is somewhat different if you are in federal court. In the case of Blinco v. Greentree Servicing LLC, 400 F.3d 1308 (11^th Cir. 2005), plaintiff mortgagors sued the defendants for alleged violations of the Real Estate Settlement Procedures Act found at 21 U.S.C. '  2605. The businesses removed the lawsuit to federal court and moved for a stay and to compel arbitration. The United States District Court for the Middle District of Florida denied arbitration and the defendants appealed. The Eleventh Circuit reversed the judgment of the district court and remanded with instructions to compel arbitration. In so ruling, the Eleventh Circuit made the following rulings or statements concerning arbitration and non-signatories:

Where a signatory's claims against a non-signatory depend on a contract containing an arbitration clause, the signatory must arbitrate with the non-signatory.

The doctrine of equitable estoppel precludes a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that the contract imposes. Equitable estoppel may be applied to compel arbitration where non-signatories to contracts containing an arbitration clause have sought to enforce alleged contractual rights.

In addition, it is well-recognized in the federal courts that a party whose arbitration agreement covers some but not all claims may be compelled to arbitrate the otherwise non-arbitrable claims if they are "inextricably intertwined" with arbitrable claims. In other words, if there are common or overlapping issues of fact and law, or if the arbitrable and non-arbitrable claims arise out of the same transaction or series of transactions, then the existence of arbitrable claims will require arbitration of the non-arbitrable claims as well. The rationale for this rule is that it avoids piecemeal adjudication and the risk of inconsistent results or outcomes.