Parties to a contract may agree in that contract to arbitration. Where a valid arbitration agreement is found in a contract, the parties must first bring any legal claims they may have to arbitration before filing a lawsuit in court.
The Court of Appeals however, recently rejected the idea of a “contagion theory” of arbitration to force parties to arbitrate their legal claims when a party has an “arbitration agreement with one company, that company had arbitration agreements with defendants, and the disputes among the parties arose from the same circumstances.”
In W.J. O’Neil Co. v. Shepley, Bulfinch, Richardson, et al. (unpublished August 28, 2014), the plaintiff, a subcontractor for a hospital construction project at the University of Michigan, had brought claims against defendants, two companies hired by the University of Michigan to provide design services in constructing the hospital, for damages incurred as a result of defendants’ design failures.
However, prior to bringing their claim in federal court, the plaintiff had enforced an arbitration provision against the construction manager on the project regarding the same circumstances. The enforcement by plaintiff of that arbitration provision set off a chain reaction in which the construction manager enforced its own arbitration agreement with the University of Michigan for indemnity. The University, in turn, sought indemnity from the defendants in the federal case whom it had hired to provide design services.
The result of this chain reaction was a consolidated arbitration involving the plaintiff, defendants, the construction manager and the University. The arbitration lasted 42 days over the course of 9 months in which the parties introduced more than 1400 exhibits, and more than 50 witnesses testified. As a result of the arbitration, the plaintiff recovered $2.4 million from the construction manager. The plaintiff did not, however, recover any damages from the defendants, nor were any claims against them made at the arbitration. After the arbitration was complete, the plaintiff brought its claims against the defendants in federal district court.
The district court, however, dismissed the plaintiff’s claims under the doctrine of res judicata, a doctrine of law that prevents a matter from being re-litigated once it has been decided on the merits. The district court reasoned that the arbitration between the parties prevented it from hearing the claims against defendant regarding the same circumstances despite the fact that the plaintiff did not agree to arbitrate its claims against defendants.
The Court of Appeals rejected the dismissal of the claims by the district court and concluded that “an unreviewed arbitration award does not bar a later claim that the parties had not agreed to arbitrate.” Simplifying its ruling even more the Court of Appeals stated that “the premise of arbitration is consent and O’Neil did not consent to arbitrate the present claims. Our judicial doctrines do not force it to do so now.”
Please contact the attorneys at Demorest Law Firm if you have any questions.
