Federal Arbitration Case Update | Bound and Determined

Owner Not Bound by Arbitration Clause in Engagement Agreement between Contractor and Law Firm Auto Parts Manufacturing Mississippi v. King Construction 2015 WL 1379980 United States Court of Appeals, Fifth Circuit

APMM contracted with Noatex to build a building and Noatex subcontracted with King. When Noatex deemed King’s work inadequate, King filed a stop work notice and informed APMM that Noatex owed King $260,000. This matter resulted in APMM’s interpleading the money while the federal court in Mississippi figured out who was entitled to what.

Meanwhile, Noatex’ lawyer, Kohn, filed suit in California against APMM alleging that an engagement agreement between Kohn and King conferred a lien over the money APMM owed to Noatex. The suit was stayed pending the resolution of the Mississippi suit.

Noatex and Kohn (but not King) moved the Mississippi court to compel arbitration against APMM pursuant to the arbitration clause found in the fee agreement between King and Kohn.  They argued that equitable estoppel prevented APMM from opposing the motion to arbitrate. The district court denied the motion and Noatex and Kohn appealed.

The United States Court of Appeals for the Fifth Circuit affirmed.  The Court wrote “this case does not fit the rationale of the equitable estoppel exception. APMM is not trying to ‘hav[e] it both ways’ by seeking to hold Noatex and Kohn liable pursuant to a contract that contains an arbitration provision and, at the same time, deny arbitration’s applicability.  We see no unfairness in refusing to compel a non-signatory party to arbitrate a dispute based on an arbitration clause contained in an attorney engagement agreement signed by two other parties. Because APMM has not agreed to arbitrate disputes with Noatex and Kohn, and is not required by equitable estoppel to arbitrate, we affirm the district court’s denial of appellants’ motion to compel arbitration and to stay the proceedings.”

District Court Affirmed on Finding Validity of Arbitration Clause, Reversed on Finding of Waiver Shy v. Navistar International Corp. 2015 WL 1383106 United States Court of Appeals, Sixth Circuit

As part of the settlement of a class action, Navistar entered into a consent decree that required it to participate in a program overseen by a Supplemental Benefits Committee (SBC).  When the SBC disputed some of Navistar’s financial records relating to Medicare payments, Navistar rejected requests for clarification.  The parties wrangled in court over Navistar’s obligations under the consent decree, until Navistar invoked an arbitration clause found in the consent decree specifically designating arbitration by accountants in disputes about financial information.  The district court found the dispute subject to arbitration, but also noted “Navistar’s reluctance to enter into arbitration over the Medicare subsidy payments prior to litigation, and the fact that Navistar did not seek to arbitrate the SBC’s first claim requesting information until after the court granted the SBC’s motion to intervene and found that these decisions were ‘completely inconsistent with any reliance on the [consent decree’s] dispute resolution procedures,’ and also caused a delay that prejudiced the SBC by delaying the resolution of the dispute and any payments that the SBC might be entitled to.”

The United States Court of Appeals affirmed the lower court’s finding that the dispute was subject to arbitration but reversed the finding that Navistar had waived its right to arbitrate.  As to the first point, the Court wrote “the contract disputes involved in the SBC’s classification-based arguments are relatively simple and closely related to accounting; it is reasonable to suppose that the parties to the agreement intended such disputes to be arbitrated.”  As to the second, it wrote “Navistar’s pre-litigation conduct and failure to raise arbitration in its response to the SBC’s motion to intervene at the start of litigation did not constitute a waiver of its right to arbitrate the claims raised by the SBC.”  The Court detailed Navistar’s actions and found them to be “completely consistent with a willingness to arbitrate.”