Can You Be Bound by an Arbitration Clause You Didn’t Agree to?
By: Law Office of Gem McDowell, P.A
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Can You Be Bound by an Arbitration Clause You Didn’t Agree to?
In June 2016, 90-year-old Bonnie Walker moved into the Brookdale Senior Living Center, a residential care facility in Charleston, SC. Six weeks later, she wandered out of the center one evening, and the following day her body was found by family members at a retention pond on the property, where she had been maimed and dismembered by an alligator.
This tragic event forms the basis of Weaver v. Brookdale Senior Living, Inc. (find the opinion here), a case heard by the South Carolina Court of Appeals in 2020. Walker’s granddaughter Stephanie Walker Weaver brought a lawsuit in her personal capacity (rather than on behalf of her deceased grandmother or anyone else) against the facility, its owner, and its director (collectively, the Appellants) for negligence, negligent infliction of emotional distress, and intentional infliction of emotional distress.
However, those aren’t the main issues for the court here. Instead, the court focuses on arbitration – specifically, whether the Appellants could compel Weaver to arbitration.
Arbitration and Potent Public Policy
Arbitration is an effective form of alternative dispute resolution (ADR) that settles matters out of the courtroom. In binding arbitration, the outcome is legally binding, just as it would be in litigation. Unlike litigation, however, arbitration is typically less expensive and faster in reaching a resolution. Another benefit of arbitration is that it keeps private business private, as opposed to resolving an issue in court where it becomes a matter of public record.
In this case, the Appellants say the trial court erred by denying their motion to compel Weaver to arbitration because there is strong state and federal policy favoring arbitration. The court of appeals agrees there is “potent” public policy favoring arbitration, but only in terms of interpreting and enforcing arbitration agreements that are entered into validly. The Federal Arbitration Act, which was signed in 1925 and applies to both state and federal courts, commands that arbitration agreements be treated like other contracts – no better or worse – but it doesn’t compel arbitration where mutual agreement among parties to arbitrate is absent. Nor does it give Appellants a “leg up,” in the words of the appeals court, in determining whether a valid arbitration agreement exists in the first place.
With this in mind, the issue in the present case is to determine whether a valid arbitration agreement exists: Are Weaver and the Appellants bound by a valid arbitration agreement?
When Nonsignatories Can Be Bound to Arbitration Agreements
If you’ve signed many contracts in your life or clicked “I Agree” on terms of service online, there’s a high chance you’ve agreed to binding arbitration with certain parties. That’s because standalone arbitration agreements and arbitration clauses within contracts are now commonplace. In those situations, you’ve agreed that you and the other party will settle disputes through arbitration rather than through litigation.
The residency agreement that Weaver’s grandmother signed when she entered the Brookdale facility contained an arbitration provision. It not only bound Walker to arbitration, but “third parties not signatories to this Arbitration provision,” including her family members, too.
However, Weaver herself never signed such an agreement with Brookdale, and there’s no evidence that she was aware of the content of the agreement her grandmother signed, yet the Appellants moved to compel her to arbitration. How is this possible?
In South Carolina, state law says that that nonsignatories can be bound to arbitration in an agreement they were not a party to under a number of theories, such as incorporation by reference, assumption, veil piercing/alter ego, and estoppel. For appellants, there’s only one theory: equitable estoppel, also called direct benefits estoppel in arbitration.
Equitable Estoppel, or Direct Benefits Estoppel
Equitable estoppel prevents someone taking legal action that goes against their previously stated words or prior behavior. The idea of equitable estoppel is that the party wishing to use it was in some way misled by the other party.
Under equitable estoppel/direct benefits estoppel, a nonsigner can be compelled to comply with a contract’s arbitration provision if all three of these conditions are met:
- The nonsigner’s claim arises from the contractual relationship;
- The nonsigner has “exploited” other parts of the contract by reaping its benefits; and
- The claim relies solely on the contract terms to impose liability
As to the first point, the court of appeals concludes that Weaver’s claims do not arise from the contractual relationship. Her claims are not about how the Appellants breached any provision(s) in the residency agreement entered into with her grandmother; rather, they’re about general duties Appellants owe to everyone.
For instance, the court notes that one of Weaver’s claims was for emotional distress over the Appellants’ mishandling and failure to safeguard her grandmother’s remains. There is no provision in the residency agreement Walker signed relating to handling of remains. So Weaver’s claims do not arise directly from the contractual relationship between Walker and the Appellants, meaning the first of the three conditions is not met.
As to the second point, the court concludes that Weaver “exploited” and otherwise benefited from the residency agreement as much as “a pedestrian run over by a truck has benefited from the contract for the purchase of the truck” – that is to say, not at all. Therefore the second condition is not met, either.
Since all three conditions must be met and the first two weren’t, equitable estoppel cannot be used here. The court of appeals concludes that there is no valid arbitration agreement between Weaver and Brookdale and therefore affirms the trial court’s denial of the Appellants’ motion to compel arbitration.
Legal Help for Strong Contracts
Whatever side of the agreement you’re on, it’s important to understand the rights and limitations relating to arbitration whenever you sign a contract or agree to terms of service that include an arbitration provision. South Carolina courts have enforced arbitration agreements when valid but do not go so far as to bind nonsignatories to arbitration except under certain conditions.
For help with arbitration clauses, contracts, and other business matters, contact Gem McDowell at the Gem McDowell Law Group in Mt. Pleasant, SC. He and his associates serve clients in the Charleston area and across South Carolina, protecting their business interests and helping them plan for the future. If you have an issue to discuss or are looking for an experienced business attorney to advise you, call Gem today at 843-284-1021 to schedule a free consultation.