November 26, 2013
ERIC BAKER ARCHITECTURE, P.C., Plaintiff-Appellant,
ROBERT F. MEHMEL and BARBARA A. MEHMEL, Defendants-Respondents.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued November 19, 2013
On appeal from Superior Court of New Jersey, Law Division, Somerset County, Docket No. L-1085-12.
Thomas G. DeLuca argued the cause for appellant (DeLuca & Forster, attorneys; Mr. DeLuca, on the brief).
John P. Michalski argued the cause for respondents (McElroy, Deutsch, Mulvaney & Carpenter, attorneys; Mr. Michalski, on the brief).
Before Judges Ostrer and Carroll.
Plaintiff, Eric Baker Architecture, P.C. (Baker), appeals from a September 27, 2012 Law Division order denying Baker's request to compel defendants, Robert F. Mehmels and Barbara A. Mehmels (the Mehmels), to submit their claims to arbitration. The Mehmels had asserted those claims against Baker in a separate action dealing with alleged defects in a home the Mehmels purchased from Louis F. Molinari and Linda Molinari (the Molinaris), which was designed by Baker (the underlying action). The trial judge found that no agreement existed between the Mehmels and Baker that would require the Mehmels' claims against Baker be arbitrated. We affirm.
This matter has its genesis in the construction of a new home by the Molinaris. In April 2004, the Molinaris entered into a written agreement with Baker (the architectural contract), pursuant to which the Molinaris engaged Baker to provide architectural services for the design of the new home. The architectural contract contained a broad arbitration provision, which required Baker and the Molinaris to arbitrate "[a]ny controversy or claim arising out of or relating to this contract, or breach of this contract."
Following construction of the home, the Molinaris resided in it for several years, until they sold the home to the Mehmels in September 2010. The Mehmels thereafter discovered several alleged structural and design defects in the home. Consequently, they commenced the underlying action, in which they sought damages from the Molinaris, various contractors, the real estate broker, and the attorney who represented them in the purchase.
The Molinaris answered, and filed a third-party complaint against Baker and others. The Molinaris and Baker then entered into a consent order, requiring that the Molinaris arbitrate their claim against Baker, pursuant to the arbitration provision contained in the architectural contract.
The Mehmels subsequently amended their complaint to include claims directly against Baker, including negligence, malpractice, breach of warranties, and breach of the implied covenant of good faith and fair dealing. Baker answered, denying the material allegations of the complaint, and raising arbitration as a defense, predicated on the arbitration provision contained in the architectural contract. Baker then filed this summary action against the Mehmels to compel arbitration of their dispute.
After hearing oral argument, Judge Edward M. Coleman denied Baker's application. In a cogent written decision which accompanied his September 27, 2012 order, the judge began by expressing the well-settled public policy favoring arbitration as a means of settling disputes. The judge then distinguished certain authority cited by Baker in support of its contention that non-signatories to arbitration provisions can be compelled to submit a dispute to arbitration, including Bruno v. Mark MaGrann Assocs., Inc.,  388 N.J.Super. 539, 546 (App. Div. 2006). Judge Coleman concluded:
[U[like the plaintiffs in Bruno, here the Mehmels  have never signed an arbitration agreement. They were not a party, nor a signatory, to the contract between the Molinaris and Baker, and they have no nexus to that contract other than the fact that they bought the Molinaris' home. "In the absence of a consensual understanding, neither party is entitled to force the other to arbitrate their dispute." [citation omitted].
This appeal followed.
Orders compelling or denying arbitration are deemed final and appealable as of right as of the date entered. R. 2:2-3(a); GMAC v. Pittella, 205 N.J. 572, 587 (2011). We review the judge's decision to compel or deny arbitration de novo. Hirsch v. Amper Financial Serv., 215 N.J. 174, 186 (2013).
The issue whether the parties have agreed to arbitrate is a question of law for the court. Bd. of Educ. of Twp. of Bloomfield v. Bloomfield Educ. Ass'n, 251 N.J.Super. 379, 383 (App. Div. 1990) ("Whether the parties are contractually obligated to arbitrate a particular dispute is a matter for judicial resolution."), aff'd, 126 N.J. 300 (1991); Moreira Constr. Co. v. Twp. of Wayne, 98 N.J.Super. 570, 575 (App. Div.) ("[I]t is inescapably the duty of the judiciary to construe the contract to resolve any disagreement of the parties as to whether they have agreed to arbitrate[.]"), certif. denied, 51 N.J. 467 (1968).
Generally speaking, New Jersey "has recognized arbitration as a favored method for resolving disputes." Garfinkel v. Morristown Obstetrics & Gynecology Assocs., P.A., 168 N.J. 124, 131 (2001). The Legislature, in adopting the Arbitration Act, N.J.S.A. 2A:23B-1 to -32, has endorsed a similar policy. "Because of the favored status afforded to arbitration, '[a]n agreement to arbitrate should be read liberally in favor of arbitration.'" Id. at 132 (citing Marchak v. Claridge Commons, Inc., 134 N.J. 275, 282 (1993)).
At the same time, however, the policy favoring arbitration is "not without limits, " and "neither party is entitled to force the other to arbitrate their dispute" unless both parties agreed to do so. Garfinkel, supra, 168 N.J. at 132. It is thus necessary that we determine whether a valid agreement to arbitrate exists.
This preliminary question, commonly referred to as arbitrability, underscores the fundamental principle that a party must agree to submit to arbitration. Garfinkel, supra, 168 N.J. at 13. ("The point is to assure that the parties know that in electing arbitration as the exclusive remedy, they are waiving their time-honored right to sue." (internal quotation marks omitted)); Guidotti v. Legal Helpers Debt Resolution, L.L.C., 716 F.3d 764, 771 (3d Cir. 2013) (explaining that "a judicial mandate to arbitrate must be predicated upon the parties' consent" (citation omitted)). Notably, the arbitrability analysis is expressly included in the Arbitration Act. See N.J.S.A. 2A:23B–6(b) ("The court shall decide whether an agreement to arbitrate exists . . . .").
[Hirsch, supra, 215 N.J. at 187-88].
On appeal, Baker acknowledges that it has no arbitration agreement with the Mehmels. However, Baker argues that the Mehmels should be bound by the arbitration provision contained in Baker's architectural contract with the Molinaris, under theories of equitable estoppel and "direct benefit" estoppel. Baker asserts that its dispute with the Mehmels has its nexus in the services that it provided under the architectural contract, in essence contending that the parties and claims are intertwined, and that plaintiff's causes of action are predicated on that contract, which contained an arbitration provision. Baker again cites Bruno, supra, and Epix Holdings Corp. v. Marsh & McLennan Cos., Inc., 410 N.J.Super. 453 (App. Div. 2009),  overruled in part by Hirsch, supra, 215 N.J. at 193, as support for its position.
A similar argument was recently considered, and rejected, in Hirsch, supra, 215 N.J. 174, 179-80, where the Court indicated that "[e]quitable estoppel should be used sparingly to compel arbitration, " and that this doctrine "is more properly viewed as a shield to prevent injustice rather than a sword to compel arbitration." In Hirsch, plaintiffs were investors who allegedly lost a significant sum of money based on investment advice given by a brokerage firm (SAI), to whom plaintiffs were referred by their accounting firm (Eisner-Amper) and its associated financial services firm (AFS). Plaintiffs' agreements with SAI included an arbitration provision. When their investments soured, plaintiffs instituted an arbitration proceeding against SAI, and a Law Division action against AFS and Eisner Amper, who in turn filed a third-party complaint against SAI. SAI then moved to compel arbitration on various grounds, including equitable estoppel. Relying on the analysis contained in EPIX Holdings, the trial court granted the application, reasoning that the complex and intertwined relationship between the parties was an integral one which provided sufficient basis to invoke estoppel. Ultimately the Supreme Court reversed, stating:
At the outset, it must be acknowledged that, as a matter of New Jersey law, courts properly have recognized that arbitration may be compelled by a non-signatory against a signatory to a contract on the basis of agency principles. That said, although equitable estoppel may be used in certain circumstances as a basis to compel arbitration, its use has limited applicability. Application of estoppel to compel arbitration, when the rationale rests solely on the connection between the parties and claims, overlooks our case law emphasizing that parties are giving up their right to sue in court when they agree to use the alternative dispute resolution technique of arbitration.
Stated simply, we reject intertwinement as a theory for compelling arbitration when its application is untethered to any written arbitration clause between the parties, evidence of detrimental reliance, or at a minimum an oral agreement to submit to arbitration. As explained earlier, equitable estoppel is invoked in the interests of justice, morality and common fairness. Estoppel cannot be applied solely because the parties and claims are intertwined, and, to the extent that EPIX Holdings suggests otherwise in its rationale, it extends equitable estoppel beyond its proper scope.
We have not yet had the occasion to review the underlying rationale used in EPIX Holdings to compel arbitration. The decision to compel arbitration in EPIX Holdings was appropriate given the agency relationship between the parent and subsidiary insurance corporations in the litigation. However, we reject that panel's reliance on a theory of intertwinement under the guise of equitable estoppel. The Appellate Division was mistaken in concluding that the intertwinement of claims and parties in the litigation—in and of itself—was sufficient to give a non-signatory corporation standing to compel arbitration.
[Hirsch, supra, 215 N.J. at 192-193 (internal citations and quotation marks omitted).]
Further, "the doctrine of equitable estoppel does not apply absent proof that a party detrimentally rely on another party's conduct." Id. at 193. Here, the Mehmels took no action that prompted reliance by Baker. We find Hirsch controlling, and similarly find the estoppel doctrine unavailing in Baker's efforts to compel the Mehmels to arbitrate this dispute between them. While Baker cites the Mehmels' status as the Molinaris' successor in interest under the architectural contract, there is no allegation that the Mehmels are the Molinaris' agent, or assignee. Likewise, there is no evidence that the Mehmels either sought or obtained any direct benefit under the architectural contract during its lifetime, and then later, during litigation, attempted to repudiate its arbitration provision. The Mehmels never signed any arbitration agreement, nor do we find any other independent basis to deprive them of the right to litigate their claims.