December 12, 2014 Practice Points

Refusal to Compel Non-Signatory to Arbitration in Negligence Case

By Karl Bayer

The United States Court of Appeals for the Fifth Circuit has refused to enforce a mandatory arbitration provision against the spouse of a customer.

In Joy Zinante v. Drive Electric, LLC, No. 14-20072 (5th Cir. 2014), a Texas couple’s home was damaged in a fire that was apparently caused by a defective electric golf cart. After the wife filed a lawsuit against Drive Electric, the distributor of the golf cart, in a Texas court, the company removed the case to federal court. Drive Electric then moved to compel arbitration based on the arbitration clause included in a sales contract the husband signed when he purchased the golf cart online. The district court denied the company’s motion, and Drive Electric appealed.

The Fifth Circuit acknowledged that it was required to compel arbitration if the parties had agreed to arbitrate and that “no federal statute or policy” made the plaintiff’s claims non-arbitrable. The federal court next stated that Drive Electric must demonstrate that the parties “entered into a valid arbitration agreement” under Texas law. Although the plaintiff’s husband had agreed to arbitrate any future claims when he purchased the golf cart online, the company offered no evidence that his wife Joy had agreed to arbitration. Instead, Drive Electric relied on the doctrines of equitable estoppel and third-party beneficiary to allege that Joy should be compelled to arbitrate her claims.

The court rejected Drive Electric’s equitable estoppel argument. The court held that Drive Electric’s argument failed because Joy’s lawsuit was based on negligence and did not rely on any of the terms in the contract. According to the Fifth Circuit:

Drive Electric contends that pursuant to a variation of equitable estoppel—the doctrine of "intertwined claims"—[Joy] is suing on the contract. . . . Under the intertwined claims doctrine, when a non-signatory defendant has a "close relationship" with a signatory to a contract that contains an arbitration agreement, a court can compel the non-signatory defendant to arbitrate disputes that are "intimately founded in and intertwined with the underlying contractual obligations”. . . The doctrine does not apply here because . . . [Joy’s] claims are neither derived from, nor intertwined with, the terms of the contract between Mark and Drive Electric . . .

The court also rejected Drive Electric’s argument that Joy was a third-party beneficiary of the contract. After stating that Texas law presumes a party to a contract acted solely on his or her own behalf absent evidence to the contrary, the court stated that:

Drive Electric offers no evidence that Mark intended for his spouse, [Joy], to benefit from his purchase of the golf cart. Instead, Drive Electric contends that [Joy] is bound to the sales contract as the wife of a signatory because the purchase of the golf cart benefits the community estate. Drive Electric points to no case law that supports finding third-party beneficiary status based solely on the basis of shared community property.

Texas law does not confer third-party beneficiary status automatically upon one spouse when the other spouse enters a sales contract. . . . Accordingly, the spousal relationship alone does not make [Joy] a third-party beneficiary.

Because Drive Electric failed to demonstrate that Joy agreed to arbitrate her claims, the Fifth Circuit affirmed the denial of Drive Electric’s motion to compel arbitration.

Keywords: alternative dispute resolution, litigation, arbitration, non-signatory, equitable estoppel, intertwined claims, third party beneficiary, spouse, community property

Karl Bayer is the founder of Karl Bayer Dispute Resolution in Austin, Texas.

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