Mandatory arbitration provisions are becoming commonplace. They are particularly favored by a current majority of the U.S. Supreme Court, which helps to explain their popularity. Mandatory arbitration clauses cannot always be used to compel arbitration, however.
In the case of Griswold v. Coventry First LLC, 2014 WL 3892995, 2014 U.S. App. LEXIS 15362 (3d Cir. August 11, 2014), the mandatory arbitration provision was typical. It was very broad: The arbitration clause encompassed “[a]ll disputes and controversies of every kind and nature between the Parties arising out of or in connection with this Agreement.” [Emphasis added.] The Third Circuit panel in this case described this provision accordingly: "By all accounts, the language in the arbitration provision is fairly standard and interpreted to apply broadly."
The decisions in this case by the U.S. District Court and by the Third Circuit have been concisely summarized in words that cannot be surpassed in their brevity: The Third Circuit "affirmed a federal judge in Pennsylvania's ruling denying a motion to compel arbitration ... because the allegations in his complaint stem from conduct that occurrred separate from the agreement," said Mealey's Insurance in their post on August 12, 2014.
The plaintiffs did not sign the contract that contained the mandatory arbitration provision. They alleged that in a separate agreement with someone else, but not them, the defendant, which the Third Circuit panel described as "a Pennsylvania-based insurer and significant player in the life settlement industry," engaged in conduct giving rise to their alleged claims of "common law fraud, fraudulent concealment, conversion, aiding and abetting the breach of fiduciary duties, unjust enrichment, and also violated state life settlement acts, the Sherman Act, and the Racketeer Influenced and Corrupt Organizations Act (RICO)."
The Third Circuit panel affirmed the District Judge's ruling denying the defendant's motion to compel arbitration because the non-signatories to the contract containing the provision did not base their claims on that contract, but on matters arising outside of and apart from that contract:
Here, what “saves the day” for Griswold is the fact that the alleged [separate] “Secret McGarrey Agreement” took place prior to and apart from the execution of the purchase agreement. Of course, that alleged fraud was related to the purchase agreement—it set the purchase price and, allegedly, the inflated, undisclosed broker's commission. But that alone is not sufficient to compel arbitration under the equitable estoppel doctrine: the claims must be based directly on the agreement. [Citation omitted.] Here, Appellees' Amended Complaint sufficiently
alleged their injury without mention of the purchase agreement. Put simply, Appellees do not allege breach of the purchase agreement; they allege fraud antecedent to the purchase agreement.
The Federal Courts' rulings in this life insurance case are broad enough to extend to all insurance contracts -- and to most if not all other forms of contracts too.
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