Order compelling arbitration reversed by Maryland appellate court

In Thompson v. Witherspoon, No. 00012 (Md. App. Feb. 1, 2011), the Maryland Court of Special Appeals reversed the trial court's order compelling arbitration.  This was a case in which the signatory to a contract with an arbitration clause had successfully compelled a non-signatory to arbitrate.

Plaintiffs, who were owners and beneficiaries of a $4 million second-to-die life insurance policy purchased by their parents, brought suit against the insurer, Manulife, UBS Financial Services, and the broker who sold the policy, alleging negligent misrepresentation, deceit, conversion, negligence and breach of contract.

The policy was purchased in 1990, but in 2003 the parents established accounts at UBS.  The master account agreement contained an arbitration clause that stated that:

any and all controversies which may arise between UBS PaineWebber, any of UBS PainWebber's employees or agents and Client concerning any account, transaction, dispute or the construction, performance or breach of this Agreement or any other agreement, whether entered into prior to, on or subsequent to the date hereof, shall be determined by arbitration.

In the trial court, UBS and the broker moved to compel arbitration.  The plaintiffs argued that they were neither parties to, nor bound by, the UBS Account Agreements.  They also argued that the parents were never the owners of the Manulife policy, and that their rights in the policy do not flow from their potential status as heirs, beneficiaries, successors or assigns.  The trial court granted the motion to compel arbitration, stating in part that the plaintiffs causes of action were so intertwined with the contractual relationship between the parents and UBS that arbitration must be compelled.

On appeal, the Maryland Court of Special Appeals reversed.  The Court reasoned that the plaintiffs did not derive a "direct benefit" from the contract containing the arbitration clause, because those account agreements did not provide that the insurance policy was to be issued to the plaintiffs, and further, the policy itself was already purchased years before the parents signed the UBS account agreements.  Therefore, the plaintiffs could not be bound to the UBS arbitration clauses by estoppel.

The Court concluded that there was an insufficient factual and legal connection between the claims asserted in the complaint and the ternms of the UBS Agreements for the defendants to invoke the arbitration provisions against the plaintiffs.

This case is based on an unusual fact pattern that is unlikely to be repeated very often.  For the practitioner, the opinion is more important for the approach to the issues.  For example, in reaching its decision, the Court touched on the following important points:

  • It reaffirmed its view that principles of estoppel could permit a non-signatory to a contract with a mandatory arbitration provision to enforce the arbitration clause against a signatory to the agreement when the signatory's claims rely on the written agreement.
  • It reaffirmed that a court's order granting an order to compel arbitration is immediately appealable, even when one of the defendants was not affected by the order compelling arbitration.  An order compelling arbitration, even on directed at some but not all the parties, is an appealable judgment on the question of whether the issues raised in the plaintiff's suit were arbitrable.
  • The Court reaffirmed that, when construing the Maryland Uniform Arbitration Act, the Maryland courts look to federal decisions interpreting the Federal Arbitration Act, and in its opinion cited, and quoted, extensive federal precedent.
  • The Court agreed with the statement that all questions concerning the ambiguity of arbitration clauses must be resolved by the arbitrator, but noted that whether or not a matter is to be compelled to arbitration is an issue for the court, not the arbitrator.




Sometimes arbitration clauses don't even use the word arbitration

The U.S. District Court for the District of Maryland recently held in Independence Receivables Corp. v. Precision Recovery Analytics that an arbitration agreement in a contract between the plaintiff and one of the defendants is enforceable.  What is unusual in this case is that the contract made no reference to arbitration.  Instead, the agreement provided in pertinent part that "[a]ny controvery concerning this Agreement, which the Parties cannot resolve within thirty days, will first be directed to mediation in Austin, Travis County, Texas . . . . In the event the dispute is still not resolved through mediation[,] then the dispute shall be settled by a mini-trial in State Court in Austin, Texas . . . ."

The Court noted that:

Although it may sound strange to refer to mediation and a mini-trial as "arbitration," Precision Recovery has argued that the meaning of "arbitration" under the FAA broadly encompasses any situation where "the parties have agreed to submit a dispute for a decision by a third party." Parisi v. Netlearning, Inc., 139 F. Supp. 2d 745, 749 (E.D. Va. 2001) (internal quotation and citation omitted). Plaintiff concedes that the FAA applies.


Hot topics in arbitration

The FDCC Quarterly in its most recent issue has an article on the allowable standards for the review of arbitral awards.  Manifest disregard of the law may no longer be one of the standards.

Meanwhile, the D.C. Court of Appeals has nixed the immediate appeal of an order compelling arbitration, and the U.S. District Court for the District of Maryland has joined other circuits in requiring a surety to arbitrate if the performance bond incorporated by reference a construction contract that contains a mandatory arbitration clause.