On July 19, 2021, the Superior Court of Pennsylvania affirmed the denial of a motion to compel arbitration. The court held that while the parties’ arbitration agreement covered all disputes relating to escrow services, the plaintiff’s claims did not relate to defendant’s duties as an escrow agent but rather to his duties as the plaintiff's lawyer. Dakota Oil Processing, LLC v. Hayes, 260 A.3d 150 (Pa. Super. Ct. 2021).
Dakota Oil Processing (Dakota) was a limited liability company formed to develop and operate an oil refinery near Trenton, North Dakota. To facilitate funding, it sought to obtain a standing letter of credit (SLOC) from Cal and Schwartz (C&S) in exchange for a payment of two and a half million dollars. The agreement required Dakota to deposit the two and a half million dollars into an escrow account pending issuance of the SLOC.
In August 2016, C&S requested that the parties use Hayes, a lawyer in Pennsylvania, to serve as the escrow agent. Counsel for Dakota inquired from Hayes whether his liability insurance would cover the escrow relationship. Hayes's insurance firm informed him that he would have to be practicing law in the transaction for coverage under the policy. Hayes sent an email to Dakota stating that it would be serving as its “escrow attorney” in the transaction.
In September 2016, the parties settled on their escrow agreement terms. The agreement specified that Hayes was to release the escrow funds to C&S only after it had gotten confirmation from a lender that it had loaned five million dollars to Dakota. All parties executed the agreement. In November 2016, representatives for Dakota contacted Hayes to confirm the money was still in the account. Dakota learned that the funds had been disbursed, C&S would not be sending the money back, and it could not secure a loan for its refinery.
Dakota instituted an action in October 2018, naming Hayes and his law firm as defendants. In January 2019, Dakota filed an amended complaint asserting claims for professional negligence, breach of contract, and breach of fiduciary duty. Hayes objected and sought to compel arbitration based on an arbitration agreement in the escrow agreement.
The trial court held that the claims brought by Dakota were outside the escrow agreement and Dakota would not be required to arbitrate them. The trial court inferred an attorney-client relationship based on Hayes's conduct and ruled the case could go to trial. Hayes appealed the decision to the superior court.
On appeal, the superior court stated that it reviews a trial court ruling on a motion to compel arbitration only for an abuse of discretion and to determine whether the court's findings are supported by substantial evidence. The court went on to state that it had a two-part test for determining whether a trial court should compel arbitration: (1) whether a valid agreement to arbitrate exists and (2) whether the dispute is within the scope of the agreement. Here, the only question was whether the dispute was within the scope of the agreement.
The court noted that arbitration is a matter of contract, and parties to a contract cannot require arbitration on an issue absent an agreement between them to arbitrate that given issue.
The arbitration clause said that “in any dispute” the parties were to resort to arbitration. However, the court went on to note that the agreement pertained to escrow services that Hayes would perform and what terms he was bound by in his role as escrow agent. As a result, the arbitration clause was limited to matters pertaining to escrow services.
The court reasoned that Dakota’s claims were not against Hayes as an escrow agent but related to his duty as its attorney. Thus, they were outside the terms of the arbitration agreement. The court held that although the language of the arbitration clause was broad, the clause is limited by the subject matter of the agreement itself. “Appellants point us to nothing in the revised escrow agreement that addresses, or contemplates, this attorney-client relationship between Dakota and Hayes in connection with the escrow transaction.”
The court also noted that the definitions of parties, per the agreement, mean “Client,” Dakota; the “Escrow Manager,” Hayes; and the “Provider,” C&S. Hayes's role in the agreement was escrow manager, but nowhere does it say he is an attorney for Dakota.
