Can A Third Party Compel Arbitration?

Law Talk

Sam K. Abdulaziz
Attorney at Law

In 1999, the Westras purchased an Arco Gas Station located in King City. Thereafter, the Westras filed suit against the sellers (Skyline), the agent/broker (Marcus & Millichap Real Estate Investment Brokerage Company, Inc.), and the tenant of the gas station (Paul Tran). The Westras were suing for real estate fraud and alleged that Tran was already broke and "on the verge of bankruptcy at the time of sale." This fact was hidden from the Westras until after they purchased the gas station that was already occupied by Tran. Since the filing of the case, Tran has filed for bankruptcy and is nowhere to be found.

The purchase contract contained an arbitration provision. This clause provided that any disputes over the purchase would be arbitrated. The problem was that the contract was between the Westras and Skyline - Marcus was not a party to the contract. Nevertheless, Marcus brought a motion to take the case out of the courtroom and arbitrate the dispute instead. The Westras felt that Marcus could not compel arbitration because it was not a party to the contract nor the arbitration provision.

The general rule is that if an agent was to become part of any arbitration agreement, it must show that it agrees usually by signing a contract containing an arbitration provision. Marcus did not agree to arbitration since it did not sign the arbitration provision or the purchase agreement. There is an exception to this rule: if there is a preexisting special relationship between one of the parties and the non-signatory, the non-signatory may compel arbitration. An agent-buyer relationship qualifies as a special relationship. In this case, Marcus was acting as an agent to both parties. Therefore, the court concluded that Marcus could compel arbitration.

The contract and the arbitration provision contained the following language: "Buyer, Seller and Agent agree that such controversy shall be settled by final, binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association..." This is a clear statement that all the parties agreed to arbitrate disputes.

Marcus's fallback argument was that it was an intended third-party beneficiary to the contract and as such can compel arbitration. A third-party beneficiary is one who the parties to the contract intend to benefit from the contract. In this case, Marcus as the agent of the parties, presumably would have received some kind of benefit, whether it be money or some other form of compensation. Therefore, even though Marcus did not sign the arbitration provision, it could still force arbitration under this theory. The court felt this argument was moot (irrelevant) in light of its analysis above and felt no reason to explore the argument further since they had already decided that an agent may compel arbitration.

In summary, the court recognized the general rule that only parties to a contract can enforce the arbitration provision. However, there is an exception for non-signatories who are in a preexisting special relationship with one or more of the parties.