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Applicability of Contractually Mandated Arbitration Clauses to Third Parties

Mar 9, 2021 | Written by: Jacob A. Papay, Jr., Esq. |

Many courts recognize arbitration as “a favored means of dispute resolution” over litigation, provided there is a knowing waiver of the right to a trial.  Hojnowski v. Vans Skate Park, 187 N.J. 323, 342 (2006). Most arbitration situations arise from contracts that require the contracting parties to arbitrate their disputes and preclude the parties from filing suit to resolve those differences. However, sometimes contractually mandated arbitration clauses are binding upon parties who did not sign the contracts, such as intended beneficiaries. 

In such cases, the contract terms and circumstances clearly indicate the contracting parties’ intent to benefit a specific non-signatory from their fulfillment of the contract terms.  However, the fact that a non-signatory may benefit from enforcing a contract containing a mandatory arbitration clause does not alone render a non-signatory an intended beneficiary subject to the mandatory arbitration condition. The recently published Appellate Division Opinion Crystal Point Condominium Association, Inc. v. Kinsale Insurance Company, A-4621-19 (March 4, 2021) sheds some light on the situation.

In Crystal Point, a condominium association sued the developer, sponsors, general contractors, engineers, architects and contractors for construction and design defects of the condominium’s common elements.  A named geotechnical engineering group of defendants did not answer the complaint and defaulted. Obtained information suggested the defaulting parties were insureds of a surplus lines policy issued by Kinsale Insurance Company (“Kinsale”), in effect during a period covering the Association’s claim.  The Association tendered the defense of the defaulting parties to Kinsale.  Kinsale declined coverage and denied the defaulting parties were insureds under the policy(ies) entitled to a defense.  The Association obtained a default judgment against the group and filed a Declaration Judgment action against Kinsale seeking to compel the carrier to defend the defaulting parties and to indemnify the Association for the default judgment together with interest, fees, and costs.

Kinsale defended on numerous grounds, including but not limited to 1) the Association lacked standing to seek benefits from or enforcement of its policy terms, 2) the defaulting parties were not insured under its policy(ies), and 3) mandatory binding arbitration is the only forum to settle coverage and other disputes under the terms of its policy(ies). 

Binding arbitration is not always favorable to both parties.  Generally, contractually mandated binding arbitration does not provide for an appeal, may provide more limited remedies than available in a civil trial, may require that the losing party pay the costs, and may require the proceedings occur in an unfavorable location or are subject to another state’s laws.

Kinsale filed a motion to dismiss, which the trial court granted and the Association appealed.  During the pendency of the appeal, the Association corrected the standing issue and the appeal addressed the issue of whether the Association could sue or must submit the disputes for coverage of the Association’s claims against the defaulting parties to binding arbitration.

Kinsale argued that by seeking benefits under the surplus lines policy(ies), the Association was a beneficiary of the policy(ies) subject to the policy conditions, including the mandate to submit policy disputes to binding arbitration.  The carrier further argued estoppel precludes the Association from rejecting the policy mandate to submit policy disputes to binding arbitration while seeking to enforce other policy conditions.

The Appellate Court noted the insurance policy was a contract and distinguished the case from those in which a non-signatory seeking to enforce a contract was required to comply with the terms and conditions of the contract.  The Appellate Court detailed the differences between non-signatory intended versus incidental beneficiaries of a contract, and their respective obligations under the contract, which provide support for a fact-sensitive analysis of whether a mandatory arbitration contract clause is enforceable against a non-signatory. The Appellate Court emphasized that the Association did not sign the insurance policy contract(s) and was not a named Additional Insured of the insurance policy(ies).  Further, the Court noted there was no implied or express intent between the defaulting parties and Kinsale or in the mandated arbitration clause to suggest the policy was for the benefit of the Association.  The Appellate Court disposed of the estoppel argument, indicating that there was nothing in the mandatory arbitration clause to indicate the condition was applicable to non-signatories of the insurance contract.

Chrystal Point raised the issue whether a contractually mandated arbitration clause is enforceable against a non-signatory to the contract seeking some benefit from the fulfillment of the contract.  Depending on the factual circumstances, a third party seeking benefits from the terms and conditions of a contract may seek resolution of disputes arising under the contract beyond those available in contractually mandated binding arbitration.

Jacob Papay, Jr.Jacob A. Papay, Jr. is a partner with Gebhardt & Kiefer, PC, and practices primarily in the areas of construction defect claims, construction injury claims,  first-party insurer claims, insurance coverage disputes, subrogation, provider health care law, commercial law, defense of professional negligence, and public entity general liability.  He represents numerous insurers, Third Party Administrators, medical groups, and businesses, and he has successfully defended public entity officials and employers in wrongful death, discrimination, excessive force and other civil rights claims.  In addition, Mr. Papay represents small businesses in mergers, acquisitions, trade secrets, employment and unfair trade practice claims. 

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Any statements made herein are solely for informational purposes only and should not be relied upon or construed as legal advice.