You Can't Crash My Party: Court Rules Mere Presence of Third Parties Does Not, by Itself, Prevent Arbitration

Construction projects involve multiple parties that have multiple contractual relationships. Some of these contracts may contain arbitration clauses and some may not. What happens, therefore, if a dispute arises involving multiple parties and not all of those parties agreed to arbitrate their disputes? Are the parties that want to arbitrate denied the right to its chosen method of dispute resolution or will those who did not want to arbitrate be forced into a forum they did not select? A recent Ohio appellate court decision addresses this very issue.

Tim and Vicky Murray engaged David Moore Builders, Inc. (DMB) to construct their home. They had a separate contract with an architect. According to the Murrays, they lived in the house for about a year and then discovered several structural defects. The Murrays filed suit against DMB under various theories and also against the architect. DMB’s insurance carrier eventually intervened in the dispute.

DMB asserted that its contract contained a mandatory arbitration clause and, therefore, moved the court to stay the proceeding pending arbitration. The trial court denied the motion stating that only two of the four parties to the lawsuit (DMB and the Murrays) were bound by the arbitration clause. The trial court reasoned that these other parties and the claims against them did not fall within the scope of the arbitration provision. DMB appealed.

The narrow issue decided by the appellate court was whether the presence of parties not governed by the arbitration clause (i.e. – the insurance company and architect) deprived the builder of his right to arbitrate under the terms of the contract. The court decided that enforcement of the arbitration clause could not be denied for that reason.
The court noted that Ohio has a strong public policy favoring arbitration and contracts with written arbitration clauses shall be enforced unless one of the statutory grounds to deny enforcement exists. It stated:

If any of the claims are subject to an arbitration agreement, R.C. 2711.02 requires a stay of the proceeding, regardless of whether the dispute also involves parties who cannot be compelled to arbitrate. [Citations omitted] Therefore, the presence of other parties in claims did not deprive [DMB] of its right to arbitrate qualifying disputes under the contract. To the extent that the Murray’s claims against [DMB] are subject to a valid arbitration provision, the trial court erred by denying the stay because of the presence of nonarbitable claims and parties who cannot be compelled to arbitrate.

That did not end the dispute, however. The court said that the presence and applicability of an arbitration clause is one vital step in the analysis. A court must go further and determine whether the arbitration provision is enforceable. The court therefore remanded the case to the trial court to make findings of fact and a ruling on the alternative grounds under which the stay would be denied.

Thus, the fact that some parties to a dispute may not have agreed to arbitrate it does not by itself deny a party the right to arbitrate. The decision does not address the question of whether the entities not a party to the arbitration agreement will be forced to join the arbitration. Case law addressing this issue does not provide a definitive answer, although it tends to support the conclusion that they will not be forced to join the arbitration. Therefore, you must consider the practical effects of attempting to litigate a dispute without all of the necessary parties. While the circumstances may justify such an approach, it should be carefully examined with your counsel. Nonetheless, it seems clear now that the presence of parties that have not agreed to arbitrate will not bar a party from pursing its arbitration rights.

Posted by: David C. Olson