Fifth Circuit Refuses to Compel Non-Signatory to Arbitration in Texas Negligence Case

The United States Court of Appeals for the Fifth Circuit has refused to enforce a mandatory arbitration provision that was included in a sales agreement against the spouse of a customer.  In Joy Zinante v. Drive Electric, L.L.C., No. 14-20072 (5th Cir. 2014), a Texas couple’s home was unfortunately damaged in a fire that was apparently caused by a defective electric golf cart.  After the wife filed a lawsuit against the distributor of the golf cart, Drive Electric, in a Texas court, the company removed the case to federal court.  Drive Electric then filed a motion to compel the dispute to arbitration based on the terms and conditions included in a sales contract the husband signed when he purchased the allegedly defective golf cart.  A district court denied the company’s motion and Drive Electric appealed the case to the nation’s Fifth Circuit Court of Appeals.

First, the appellate court stated it was required to compel the dispute to arbitration if the parties agreed to arbitration and “no federal statute or policy” made the plaintiff’s claims non-arbitrable.  The federal court next said that Drive Electric must demonstrate that the parties “entered into a valid arbitration agreement” under Texas law.  Although the plaintiff’s husband agreed to arbitrate his future claims against Drive Electric when he purchased the golf cart online, the company offered no evidence to demonstrate the non-signatory wife agreed to engage in binding arbitration with Drive Electric.  Instead, Drive Electric relied on the doctrines of equitable estoppel and third-party beneficiary to allege the wife should be compelled to arbitrate her claims against the golf cart distributor.

Next, the Court of Appeals dismissed Drive Electric’s claim that the plaintiff was equitably estopped from arguing the arbitration agreement at issue did not apply to her since the woman’s case was founded on the underlying contract.  The court said the golf cart distributor’s argument failed because the wife’s lawsuit was based on the company’s alleged negligence.  In fact, the court stated the woman’s case did not rely on any of the terms included in the contract.   According to the Fifth Circuit:

Despite the absence of any claims asserted under the contract, Drive Electric contends that pursuant to a variation of equitable estoppel—the doctrine of “intertwined claims”—Zinante is suing on the contract. In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 193-94 (Tex. 2007); Cotton Commercial USA, Inc. v. Clear Creek Indep. Sch. Dist., 387 S.W.3d 99, 105 (Tex App. 2012). Under the intertwined claims doctrine, when a non-signatory defendant has a “close relationship” with a signatory to a contract that contains an arbitration agreement, a court can compel the non-signatory defendant to arbitrate disputes that are “intimately founded in and intertwined with the underlying contractual obligations.” Cotton Commercial USA, Inc., 387 S.W.3d at 105 (quotation omitted). The doctrine does not apply here because Zinante is a non-signatory plaintiff who is suing a party that alleges an arbitration agreement exists with her, a third-party. Moreover, as discussed, Zinante’s claims are neither derived from, nor intertwined with, the terms of the contract between Mark and Drive Electric so the doctrine of equitable estoppel does not bind her to the terms of the contract.

The appellate court then held Drive Electric’s assertion that the plaintiff was a third-party beneficiary of the contract was without merit.  After stating that Texas law presumes a party to a contract acted solely on his or her own behalf absent evidence to the contrary, the court found:

Drive Electric offers no evidence that Mark intended for his spouse, Zinante, to benefit from his purchase of the golf cart. Instead, Drive Electric contends that Zinante is bound to the sales contract as the wife of a signatory because the purchase of the golf cart benefits the community estate. Drive Electric points to no case law that supports finding third-party beneficiary status based solely on the basis of shared community property.

Texas law does not confer third-party beneficiary status automatically upon one spouse when the other spouse enters a sales contract. Compare In re Conseco Fin. Serv. Corp., 19 S.W.3d 562, 571 (Tex. App. 2000) (noting that a non-signatory wife of a signatory to a mobile home sales contract that included an arbitration agreement is not bound to the agreement and, therefore, is not compelled to arbitrate her claims against the mobile home seller) with Nationwide of Bryan, Inc., 969 S.W.2d at 520 (compelling a non-signatory wife of a signatory to arbitrate breach of contract and related claims because she derived her standing to sue from the contract that contained the arbitration clause). Accordingly, the spousal relationship alone does not make Zinante a third-party beneficiary to the contract. Furthermore, as discussed, Zinante’s claims of negligence and gross negligence do not derive from or relate to the contract. Therefore, Drive Electric failed to establish that Zinante is bound to the terms of the contract, including the arbitration agreement, as a third-party beneficiary.

Because the golf cart distributor failed to demonstrate that the plaintiff agreed to arbitrate her claims against it, the Fifth Circuit Court of Appeals affirmed the lower court’s decision denying the company’s motion to compel arbitration.

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