Arbitration by Estoppel: North Carolina Court Holds That Arbitration Clauses Bind Nonsignatories Who Seek to Enforce the Contracts in Which the Clauses Appear

Charlotte Student Hous. DST v. Choate Constr. Co., 2018 NCBC LEXIS 88 (N.C. Super. Ct. Aug. 24, 2018).

This case arose from the construction of a student apartment complex known as Arcadia.  The plaintiffs, Arcadia’s current owner and landlord, asserted breach of warranty, negligence, and fraud claims against Arcadia’s original owner, the architect, the general contractor, and two subcontractors, alleging that defects in Arcadia’s design and construction caused millions of dollars in repairs and lost rent.

The general contractor, Choate Construction Company, and its geotechnical engineering subcontractor, Geoscience Group, moved to dismiss all claims asserted against them on the ground that they were subject to arbitration.  Choate and Geoscience pointed to arbitration clauses in their contracts with the original owner, both of which required all claims “arising out of or related to” those contracts to be arbitrated before the AAA in accordance with its Construction Industry Arbitration Rules.

The plaintiffs argued that the arbitration clauses were not binding on them because the contracts that contained them were not assigned to plaintiffs when they purchased Arcadia. They also argued that their tort claims were not subject to the arbitration clauses.

After determining that the issue of arbitrability was a decision for the court, the court proceeded to decide whether the plaintiffs were bound by the arbitration clauses.  It noted that courts have long recognized that 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.”  The court explained that it would be unfair to permit a party to take the benefit of the contract while at the same time repudiating the arbitration clause in that contract.

The plaintiffs argued that they had not received a benefit from Choate’s and Geoscience’s contracts because the contracts were not assigned to them as part of the purchase of Arcadia and because their claims did not arise from it.  They contended that their claim for breach of warranty against Choate was instead based on Choate’s “Contractor Warranty,” a standalone document that did not incorporate Choate’s construction contract or its arbitration clause.

The court held that the plaintiffs’ argument could not be squared with the language of the Contractor Warranty.  On its face, the Contractor Warranty stated that Choate performed all work “in accord with the Contract Documents.”  This express reference to Choate’s construction contract put the plaintiffs on notice of the contract’s existence.

The plaintiffs’ argument also could not be squared with their own allegations.  Their claim that Choate breached the Contractor Warranty rested on the allegation that Choate did not perform its work in accordance with “the plans and specifications” of Choate’s contract.  By seeking to hold Choate to this obligation, the plaintiffs’ warranty claim was functionally the equivalent of enforcing the terms of the contract itself.  Because their claim could “only be determined by reference to an agreement containing an arbitration clause,” the plaintiffs were estopped from repudiating that clause.

The plaintiffs also argued that their negligence and fraud claims did not arise from the contracts because the claims sounded in tort.  The court disagreed, finding that the tort claims clearly related to Choate’s and Geoscience’s duties under their contracts, and that the arbitration clauses were broad enough to capture “every dispute between the parties having a significant relationship to the contract[s] regardless of the label attached to the dispute.”  Accordingly, the court ruled that all of the plaintiffs’ claims were to be sent to arbitration.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Jane Fox Lehman

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