IN THE SUPREME COURT
OF ALABAMA
CHARLES H. MCDOUGLE, JR. and RAMSEY, BAXLEY, & MCDOUGLE,
Appellants, vs. GARY D. SILVERNELL and BARBARA J. SILVERNELL,
Appellees. |
) ) ) ) ) ) ) ) ) ) ) |
SC CASE NO. 1972204 |
APPEAL FROM THE CIRCUIT COURT OF BARBOUR COUNTY, ALABAMA
CIVIL ACTION NO. CV-98-018
BRIEF OF APPELLEES
Oral Argument Requested, ARAP 34(a)
Deborah W. Hicks
Attorney & Counselor at Law
1132 No. Eufaula Avenue
Eufaula, AL 36027
(334) 687-8369 Phone
(334) 687-7613 Fax
Attorney for Plaintiffs/Appellees
Gary D. Silvernell & Barbara J. Silvernell
Of Counsel:
F. Paul Bland, Jr.
Trial Lawyers for Public Justice
1717 Massachusetts Avenue, NW
Suite 800
Washington, DC 20036
(202) 797-8600 (phone)
(202) 232-7203 (fax)
TABLE OF CONTENTS
STATEMENT OF THE CASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
STATEMENT OF THE ISSUES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
STATEMENT OF THE FACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
STANDARD OF REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
SUMMARY OF ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
I. ARBITRATION MAY ONLY BE IMPOSED WHERE BOTH PARTIES HAVE CONSENTED TO IT. . . . . . . . . . . . . . . . . . . . . . . . 11
II. BECAUSE THE ARBITRATION CLAUSE WAS A MATERIAL TERM THAT WAS NOT COMMUNICATED TO THE PLAINTIFFS UNTIL AFTER THE LAND WAS PURCHASED, AND AFTER IT WAS IMPOSSIBLE FOR THE PLAINTIFFS TO REVERSE THE CONTRACT, IT IS NOT A PART OF THE CONTRACT. . . . . . . . . . . . . . . . . . . . . . . . . .13
A. WHERE ONE PARTY TO A CONTRACT ATTEMPTS TO ADD A MATERIAL ADDITIONAL TERM TO THE CONTRACT AFTER THE DEAL HAS BEEN REACHED, THAT TERM WILL NOT BE PART OF THE CONTRACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
B. THE ARBITRATION CLAUSE TO THIS CONTRACT WAS A MATERIAL TERM, AND THEREFORE IT IS NOT A PART OF THE CONTRACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
1.The Great Wealth of Authority Supports the Proposition that Arbitration Clauses Are Material Terms to Contracts. . . . . . . . . . . . . . . . . . . . . . . 16
2. An Analysis of the Effect and Nature of Arbitration Clauses Supports the Proposition that Arbitration Clauses Are Material Terms to Contracts. . . . . . . . . . . . . . . . . . . .22
3.The Rager and Hill Cases Relied Upon in McDougle’s Brief Are Easily Distinguished From This Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
C. THE OTHER ARGUMENTS MADE IN MCDOUGLE’S BRIEF DO NOT ADDRESS OR RELATE TO THE ISSUES POSED BY THIS APPEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
III. MCDOUGLE CANNOT ENFORCE THE ARBITRATION CLAUSE AT ISSUE IN THIS CASE, AS THEY ARE NOT PARTIES TO THE CONTRACT CONTAINING THAT CLAUSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
TABLE OF AUTHORITIES
CASES
A.G. Edwards & Sons, Inc. v. Clark, 558 So.2d 358 (Ala. 1990). . . . . . . . . . 11, 29
Allied-Bruce v. Dobson, 684 So.2d 102 (Ala. 1995). . . . . . . . . . . . . . . . . . . .11, 31
Allied-Bruce Terminex Cos. v. Dobson, 513 U.S. 265 (1995). . . . . . . . . . . . . . . 11
AT&T Tech., Inc. v. Communications Workers, 475 U.S. 643 (1986). . . . . . . . . .11
Berger v. Cantor Fitzgerald Securities, 942 F. Supp. 963 (S.D.N.Y. 1996). . . . .34
Bollingbrook Park District v. National-Ben Franklin Ins. Co. of Illinois,
420 N.E.2d 741 (Ill. Ct. App. 1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Boston Teachers Union, Local 66 v. School Committee of Boston,
363 N.E.2d 492 (Mass. Sup. Jud. Ct. 1977). . . . . . . . . . . . . . . . . . . . . . . 21
Capital Investment Group v. Woodson. 694 So.2d 1268 (Ala. 1997). . . . . . . 13-14
Coastal Industries, Inc. v. Automatic Steam Products Corp.,
654 F. 2d 375 (5th Cir. 1981). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 28
Companion Life Ins. Co. v. Whitesell Mfg., Inc., 670 So.2d 897
(Ala. 1995). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Continental Grain Co. v. Beasley, 628 So.2d 319 (Ala. 1993). . . . . . 11, 12, 29, 36
Crown Pontiac, Inc. v. McCarrell, 695 So.2d 615 (Ala. 1997). . . . . . . . . . . . . . .12
Davis v. Prudential Securities, 59 F.3d 1186 (11th Cir. 1995). . . . . . . . . . . . . . . .25
DeMarco California Fabrics, Inc. v. Nygard International, No. 90 Civ. 0461,
1990 U.S. Dist. LEXIS 3842 (S.D.N.Y. 1990). . . . . . . . . . . . . . . . . . . . . 19
Ex Parte Dickinson, 711 So.2d 984 (Ala. 1998). . . . . . . . . . . . . . . . . . . . . . . . . . 35
Di Russa v. Dean Witter Reynolds Inc., 121 F.3d 818 (2d Cir. 1997),
cert. denied, 118 S. Ct. 695 (1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Diskin v. J.P. Stevens & Co., 836 F. 2d 47 (1st Cir. 1987). . . . . . . . . . . . . 17-18, 28
Duffield v. Robertson Stephens & Co., __ F.3d __, 1998 WL 227469
(9th Cir. May 8, 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Duplan Corp. v. W.B. Davis Hosiery Mills, Inc., 442 F. Supp. 86
(S.D.N.Y. 1977). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Electrical Box & Enclosure, Inc. v. Comeq, Inc., 626 So. 2d 1250
(Ala. 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16, 17
Fairfield- Noble Corp. v. Pressman-Gutman Co., 475 F. Supp. 899
(S.D.N.Y. 1979). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Fidelity National Title Insurance Co. of Tennessee v. Jericho Management,
Inc., No. 1950828, 1998 WL 178783 (Ala. April 17, 1998). . . . . . . . . . . 31
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). . . . . . . . . . . 11, 13
Folson v. Wynn, 631 So. 2d 890 (Ala. 1993). . . . . . . . . . . . . . . . . . . . . . . . . .23, 29
Frances Hosiery Mills, Inc. v. Burlington Indus., Inc., 204 S.E. 2d 834
(N.C. 1974). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Gibson v. Neighborhood Health Clinics, Inc., 121 F.3d 1126
(7th Cir. 1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Ex Parte Gray, 686 So. 2d 250 (Ala. 1996). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Henderson v. Alabama Power Co., 627 So. 2d 878 (Ala. 1993). . . . . . . . . . .23, 29
Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997). . . . . . . . . . . . .26, 30-31
Hooters of America, Inc. v. Phillips. 1998 U.S. Dist. LEXIS 3962
(D.S.C. 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
IDS Life Ins. Co. v. SunAmerica Life Ins. Co., 136 F.3d 537 (7th Cir. 1998). . . . 25
J&C Dyeing, Inc. v. Drakon, Inc., 93 Civ. 4283, 1994 U.S. Dist.
LEXIS 15194 (S.D.N.Y. 1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-19
John Thallon & Co. v. M&N Meat Co., 396 F. Supp. 1239 (E.D.N.Y. 1975). . . .18
Ex parte Jones, 686 So. 2d 1166 (Ala. 1996). . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Just Born, Inc. v. Stein Hall & Co., 59 D. & C. 2d 407 (Pa. D. & C. 1971). . . . . 20
Matter of Marlene Indus. Corp. v. Carnac Textiles, Inc., 408 N.Y.S. 2d 410,
45 N.Y. 2d 325, 380 N.E. 2d 239 (1978). . . . . . . . . . . . . . . . . . . . . . . . . .19
Ex parte Martin, 703 So. 2d 883 (Ala. 1996). . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995). . . . . . . . . .11
Montes v. Shearson Lehman Brothers, Inc., 128 F.3d 1456 (11th Cir. 1997). . . . 25
N&D Fashions, Inc. v. DHJ Indus., Inc., 548 F.2d 722 (8th Cir. 1977). . . . . . . . .18
Old Republic Ins. Co. v. Lanier, 644 So. 2d 1258 (Ala. 1994). . . . . . . . . . . . 11, 29
Ex Parte Pointer, 714 So.2d 971 (Ala. 1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Prudential Securities, Inc. v. Micro-Fab, Inc., 689 So. 2d 829 (Ala. 1997). . . . . 36
Ex Parte Rager, 712 So.2d 333 (Ala. 1998). . . . . . . . . . . . . . . . . . . . . . . . . . .26-30
Roberts v. McNamara, 360 N.W.2d 279 (Mich. App. 1984). . . . . . . . . . . . . . . . 13
Rosenberg v. Merrill Lynch Pierce Fenner & Smith, 995 F. Supp. 190
(D. Mass. 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 34
Ryan Warranty Services, Inc. v. Welch, 694 So. 2d 1271 (Ala. 1997). . . . . . . 9, 32
Schulze and Burch Biscuit Co. v. Tree Top, Inc., 831 F.2d 709
(7th Cir. 1987). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Southeastern Enameling Corp. v. General Bronze Corp., 434 F. 2d 330
(5th Cir. 1970). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Supak & Sons Mfg. Co. v. Pervel Indus., Inc., 593 F.2d 135
(4th Cir. 1979). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-18, 28
Ex parte Stallings & Sons, Inc., 670 So. 2d 861 (Ala. 1995). . . . . . . . . . . . . .11, 29
Stanley-Bostitch, Inc. v. Regenerative Environmental Equipment Co.,
697 A.2d 323 (R.I. 1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Universal Plumbing and Piping Supply, Inc. v. John C. Grimberg Co.,
596 F. Supp. 1383 (W.D. Pa. 1984). . . . . . . . . . . . . . . . . . . . . . . . . . .18, 20
Valmont Indus. v. Mitsui & Co., 419 F. Supp. 1238 (D. Neb. 1976). . . . . . . . . . .18
Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468 (1989). . . . . . . . . . .11
Weddington Productions v. Flick, 60 Cal. App.4th 793, 71 Cal.
Rptr.2d 265 (1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Windsor Mills, Inc. v. Collins & Aikman Corp., 25 Cal. App. 3d 987,
995 Cal. Rptr. 347 (1972). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Wrightson v. ITT Financial Services, 617 So.2d 334 (Fla. Dist.
Ct. App. 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CONSTITUTIONAL AND STATUTORY PROVISIONS
Alabama Constitution, Article I, § 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22-23
SECONDARY SOURCES
Kirby Behre, Arbitration: A Permissible or Desirable Method for Resolving
Disputes Involving Federal Acquisition and Assistance Contracts?,
16 Pub. Cont. L.J. 66, 72 (1986). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24-25
L. Bingham, Employment Arbitration: The Repeat Player Effect, 1 Emply. Rts.
& Empl. Policy Journal 1 (1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
James L. Guill, Edward A. Slavin, Jr., Rush to Unfairness: The Downside
of ADR, 28 Judges’ Journal No. 3, 8 (1989). . . . . . . . . . . . . . . . . . . . . . . 24
Richard A. Lord, 2 Williston on Contracts (4th Ed. 1991). . . . . . . . . . . . . . . . . . .20
D. Schwartz, Enforcing Small Print to Protect Big Business: Employee
and Consumer Rights Claims in an Age of Compelled Arbitration,
1997 Wisc. L.Rev. 33 (1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
J. Sternlight, Panacea or Corporate Tool?: Debunking the Supreme Court’s
Preference for Binding Arbitration, 74 Wash. U.L.Q. 637 (1996). . . . . . 24
Travalio, Clearing the Air After the Battle: Reconciling Fairness and
Efficiency in a Formal Approach to U.C.C. Section 2-207, 33 Case W.
Res. L. Rev. 327 (1983). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
On February 19, 1998, Gary D. Silvernell and Barbara J. Silvernell (hereafter “plaintiffs” or “the Silvernells”) brought this action against Appellants Charles McDougle and Ramsey, Baxley, McDougle & Collier, n/k/a Ramsey, Baxley & McDougle (collectively “McDougle”), as well as First American Title Insurance Company (“FATIC”) and Coldwell Banker Real Estate Corp., Alfred Saliba Realty Corp., and Lan Darty (collectively “the Real Estate Defendants”), for claims arising out of the sale of real property. Plaintiffs alleged fraud, wantonness, negligence, and breach of fiduciary by McDougle under the Legal Services Liability Act.
On March 10, 1998, McDougle filed an Answer, C52, as well as a First Request for Production of Documents to Plaintiffs, C41, and Interrogatories to Plaintiffs. C35.
On March 23, 1998, McDougle filed a Motion to Compel Arbitration or, In the Alternative, Motion to Stay Proceedings in order to Pursue Arbitration. C60.
On April 21, 1998, the Plaintiffs filed their Objection to Defendant's Motion to Compel Arbitration, C140-178, and on June 25, 1998, Plaintiffs filed a Supplemental Objection to Defendant's Motion to Compel Arbitration. C252-341. This Supplemental Objection raised factual and legal questions, among other things, relating to the possibility of bias by the arbitrators. E.g. C261-64. On the same date, Plaintiffs also filed discovery requests with FATIC regarding the arbitration processes and fora, C241-248. Plaintiffs asked, for example, for information about communications between FATIC and potential arbitrators, and about prior relationships that might exist there. FATIC has refused to answer this discovery. C368-370; 359-363.
On July 23, 1998, the Circuit Court entered its order denying McDougle’s Motion to Compel Arbitration. C350-351. The Circuit Court found that the Silvernells had received no notice of the arbitration clause until after the closing, C.351, and noted that at the time the Silvernells did receive the arbitration clause they could not “back out of the policy and thereby back out of the sale of the realty.” C.351.
On August 20, 1998, McDougle filed this appeal. C364-365.
STATEMENT OF THE ISSUES
I. WHERE AN ARBITRATION CLAUSE IN A TITLE INSURANCE POLICY WAS SENT TO THE INSUREDS AFTER IT WAS IMPOSSIBLE FOR THEM TO UNWIND THE SALE OF THE PROPERTY, WAS IT CLEARLY ERRONEOUS FOR THE CIRCUIT COURT TO FIND THAT THE PLAINTIFFS HAD NOT AGREED TO ARBITRATE ANY AND ALL CLAIMS THAT THEY MIGHT HAVE WITH RESPECT TO THE SALE OF THE PROPERTY? (No.)
II. WHERE APPELLANTS WERE NOT PARTIES TO A CONTRACT, DID THE CIRCUIT COURT ABUSE ITS DISCRETION IN HOLDING THAT THEY DID NOT HAVE STANDING TO INVOKE AN ARBITRATION CLAUSE CONTAINED IN THAT CONTRACT? (No.)
On September 15, 1994, the Silvernell's attended a real estate closing at the law offices of McDougle. At this closing, they consummated their purchase of "Bama Hill Farm," consisting of approximately 583 contiguous acres situate in Sections 16 & 21, Township 11 North, Range 26 East, Barbour County, Alabama, for the sum of $350,000, and an additional $10,000 on the real estate commission. C14-15, 189-90, 194.
The Purchase Agreement required the Seller to execute and deliver a good and sufficient Warranty Deed upon payment of the full purchase price, pay the cost to have the property surveyed for the plaintiffs, and pay the premium for an owner policy of title insurance insuring plaintiffs fee simple ownership of the property and marketable/merchantable title thereto. C4-30, C14-15, 189-90, 194. The title insurance policy premium and commitment fee was paid in full at closing.
At the closing, Plaintiffs were shown a commitment for title insurance
for Parcels 1 and 2, which revealed no apparent defects or apparent irregularities
with respect to the property to be purchased except "the policy will not insure the
legal right of access to and from the land described in Parcel 2" and "no insurance
is afforded as to the exact amount of acreage contained in the property described
herein." C193.
Relying upon the commitment for title insurance, and relying upon the terms of the contract that Seller would convey the whole of the property contracted for by Warranty Deed, the Silvernells purchased Bama Hill Farm and tendered $359,887.50. C-4, 97-104; 119-125; 189-192. The Silvernells proceeded with the closing, even though the contract had expired at the date.
After the closing, the Silvernells learned, counter to the terms of the contract for the purchase of the land, the Warranty Deed, and representations made on behalf of the Seller by McDougle and the real estate agent, that among other things, not all the patents to the Bama Hill Farm had been issued by the State of Alabama. The Silvernells were required to engage the services of an attorney to obtain a disclaimer, a patent, and a Corrected Patent. C4-30.
Had the Silvernells understood that the terms of Purchase Agreement were being varied and that they were taking title to the property designated as Fraction W on the survey prepared by Robert E. Green, Ala. Surveyor, without warranty of title; taking title to a portion of Fraction D, Sec. 21, to which adjoining landowner Frank Fenn had a deed and was paying taxes on and which the Seller Carnes did not have a deed to; taking title to a portion of Fraction "R", Sec. 16 to which adjoining landowner the Warr's had a deed and were paying taxes on; taking title to a portion of the property in Sec. 21 by Quit Claim Deed to which they were to obtain title by Warranty Deed; taking title subject to the hunting and fishing rights of Sandra Watson’s three grown children; that the survey was a "possession" type survey, not in accordance with the MTS and not in accord with the Seller Carne's deed; that part of the surveyed property was owned by others thereby negating deeded access, making all that part of the subject property south of Indian Boundary line landlocked and not contiguous; that not all of the lands in Sec. 16 had been patented according to the Secretary of State Department of Archives map by the State of Alabama; and that the Seller Carnes did not therefore, have good and marketable title thereto, plaintiffs would not have purchased the property. C-4; 97-104; 119-125; 189-192. Had plaintiffs known that the State of Alabama had not issued the patent(s) to the "no man's land" lying South of Fraction W as shown on the SOS map, which is part of Fraction W as shown on the survey prepared by Robert E. Green, they would not have purchased the subject property thinking they only had a surveyor/boundary line problem with the property situate west of the fence in Sec. 16 vs a complete failure of title without a patent. C-4, 97-104; 119-125; 189-192.
At the September 15, 1994 closing, the Silvernells were not given any document containing an arbitration clause concerning any party, nor were they advised by any defendant of any documents containing an arbitration clause. C189-192. The Silvernell's did not sign any document agreeing to arbitrate any matters with any of the Defendants. C189-200.
At the September 15, 1994 closing, McDougle gave to the Silvernells a FATIC commitment for an owners policy of title insurance. C193. McDougle did not discuss with the Silvernells or explain to the Silvernells any of the pre-printed information on the commitment cover pages, nor did McDougle show the Silvernells the title insurance policy or the title insurance policy preprinted cover sheet. The terms of the title insurance commitment and policy were not negotiated or bargained for with FATIC or McDougle. The Silvernells simply included in their real estate contract that the Seller was to provide them with an owner policy of title insurance to insure that the Seller conveyed to them good and merchantable fee simple title to the property specified in the contract. At the closing the Silvernell's were handed the title insurance commitment. A couple of weeks later, the owner policy was delivered to the Silvernell's via mail. C189-192; 201-209. The owner policy that arrived in the mail was accompanied by a letter from McDougle, but this letter did not mention the arbitration clause. C201; 190. The Silvernells were not told that they could reject the policy or the arbitration clause. C190.
In requesting and obtaining an owner policy of title insurance, the Silvernell's never knowingly consented, nor did they intend to waive any constitutional rights. C189-91. By requesting and obtaining an owner policy of title insurance, the Silvernells thought it would guarantee them good and merchantable fee simple title to the property they had contracted to purchase. It was never their intention or understanding that the title insurance policy was to be used to vary the terms of the contract or to be used as a vehicle to deliver to them less, different, or other property than what the Silvernells had contracted to buy. By requesting and obtaining an owner policy of title insurance, the Silvernells thought any title defects would have to be remedied prior to closing by the Seller so that the Seller conveyed to the buyers by Warranty Deed fee simple title to the property as set forth in the contract, not that the policy would just list as an exception some, but not all, of the title defects and that the buyer took title subject to the defects. C189-192.
McDougle did not communicate to the Silvernells any distinctions between arbitration and the civil justice system. McDougle did not explain, for example, that the decisions of arbitrators are final and binding and virtually exempt from all but rare and severely limited judicial review; that arbitrators need not be judges or lawyers; that arbitration hearings are private and not subject to public scrutiny or review; that discovery is limited to the opinion of the arbitrator; that the power to subpoena witnesses is vested in the arbitrator; that arbitrators need not conform to legal rules of evidence; that an arbitrator is not required to make findings of fact; that an arbitration board's decision cannot be reviewed on the basis that its conclusion or reasoning is legally erroneous, or that it misinterpreted, misstated or misapplied the law; that the State of Alabama has not adopted an Arbitration Code to regulate arbitration proceedings in the State of Alabama or to set forth grounds for vacating an arbitrator's award; nor that arbitration would involve financial costs to the Silvernells. C191-192.
STANDARD OF REVIEW
Oddly, McDougle’s brief does not mention the standard of review appropriate for this appeal. This Court has held that where a trial court denies a motion to compel arbitration, that holding will only be reviewed for abuse of discretion. Companion Life Ins. Co. v. Whitesell Mfg., Inc., 670 So.2d 897, 899 (Ala. 1995). The Circuit Court’s judgment is “not to be disturbed by this Court unless clearly erroneous.” Ryan Warranty Services, Inc. v. Welch, 694 So. 2d 1271, 1272-73 (Ala. 1997).
SUMMARY OF ARGUMENTIn this case, the contracts for the sale of land and the provisions of title insurance were entered at the closing of the property -- offers were accepted, enforceable agreements were reached. The uncontradicted testimony of the Silvernells was that they never intended, or agreed that they should lose their right to pursue any claims through trial by jury. C. 169-192. When the arbitration clause, C. 208, was sent to the Silvernells some weeks after the closing, C. 201, it was part of a written policy, C. 202, that confirmed the earlier deal. It could not be otherwise, for it was too late at that point for the Silvernells to unscramble the egg of the land transaction -- the land was theirs, and the seller was gone. In addition, the Silvernells’ claims against McDougle had already arisen prior to the time that they received the arbitration clause.
There are a large number of authorities addressing this set of circumstances, where a written confirmation of a contract attempts to add an arbitration requirement. In more than 15 such cases, including more than half a dozen federal and state appellate decisions, courts have found that the arbitration clause was a material term that did not become part of the contract unless both parties expressly, affirmatively agreed. Because there was no such agreement here, the lower court did not abuse its discretion in refusing to enforce the arbitration clause.
McDougle makes no mention of any of these cases in their brief, looking instead to two cases where the arbitration clause was included in the offer, and where the consumers accepted that offer by not exercising their opportunities to cancel the contract within a set period of time. As the Circuit Court explained, these case have no application here.
This brief will also identify a number of authorities fleshing out the reason that arbitration clauses are treated as material terms that cannot be unilaterally added after an agreement has been reached. Arbitration materially differs from the civil justice system in a number of respects, not the least of which is that citizens lose their right under the Alabama Constitution to receive a trial by jury.
Finally, McDougle were not parties to the contract between the Silvernells and FATIC. Accordingly, as this Court has held in a number of recent cases, these appellants do not have standing to invoke the arbitration clause here. ARGUMENT
I. ARBITRATION MAY ONLY BE IMPOSED WHERE BOTH PARTIES HAVE CONSENTED TO IT.
“This Court has clearly and consistently held that ‘a party cannot be required to submit to arbitration any dispute that he has not agreed to submit,’” Ex parte Stallings & Sons, Inc., 670 So. 2d 861, 862 (Ala. 1995). See also Old Republic Ins. Co. v. Lanier, 644 So. 2d 1258, 1260 (Ala. 1994); Continental Grain Co. v. Beasley, 628 So.2d 319, 322 (Ala. 1993); A.G. Edwards & Sons, Inc. v. Clark, 558 So.2d 358, 262 (Ala. 1990). Put another way, “A party may not be required to arbitrate a dispute it did not agree to arbitrate; ‘[i]f the contract does not [provide for arbitration], then no Federal law requires arbitration.’” Allied-Bruce v. Dobson, 684 So.2d 102, 107 (Ala. 1995) (citation omitted).
The United States Supreme Court has also repeatedly stressed that “arbitration under the [Federal Arbitration Act] is a matter of consent, not coercion.” Allied-Bruce Terminex Cos. v. Dobson, 513 U.S. 265, 270 (1995); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995); Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 55-56 (1995); Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 478 (1989). See also AT&T Tech., Inc. v. Communications Workers, 475 U.S. 643, 648 (1986) (“[a] party cannot be required to submit to arbitration any dispute which he has not agreed so to submit....”) (citation omitted).
Decisions of this Court make clear that the existence of meaningful consent is truly a prerequisite to enforcing an arbitration clause. This Court has refused to compel arbitration in a number of cases where one of the parties had not directly consented to it. E.g., Ex Parte Pointer, 714 So.2d 971, 972 (Ala. 1997) (“There was no mutual agreement to submit the claims Pointer has made against Regal Nissan. . . . Pointer has shown a clear right to an order directing the trial court to set aside its order compelling arbitration.”); Crown Pontiac, Inc. v. McCarrell, 695 So.2d 615, 618-19 (Ala. 1997) (“in this case the absence of a signature under the arbitration clause shows a lack of mutuality and assent, where the contract contains a signature line, specifically for the arbitration clause, but where McCarrell did not sign on that line, although he signed on other lines that similarly indicated agreement to specific terms.”) (emphasis in original); Continental Grain Co., 628 So.2d at 322 (“Because Beasley did not agree in writing to submit to arbitration any dispute he might have with the defendants, the trial court properly refused to compel arbitration of his fraud claim.”)
McDougle suggests that federal law favors arbitration, but that is only true in cases where a valid agreement to arbitrate exists. The F.A.A. does not establish a presumption that a valid arbitration agreement exists – it only favors arbitration after that fact has been established. See First Options of Chicago v. Kaplan, 514 U.S. 938, 943-44 (1995) (“arbitration is simply a matter of contract between the parties; it is a way to resolve those disputes – but only those disputes – that the parties have agreed to submit to arbitration.”) In fact, the party seeking to compel arbitration bears the burden of showing that the other party waived their right to go to court. See Gibson v. Neighborhood Health Clinics, Inc., 121 F.3d 1126, 1126 (7th Cir. 1997) (applying Indiana law); Roberts v. McNamara, 360 N.W.2d 279, 281 (Mich. App. 1984) (“the burden is on the defendant to show that plaintiff knowingly, intelligently, and voluntarily waived his or her right to court access.”)
II. BECAUSE THE ARBITRATION CLAUSE WAS A MATERIAL TERM THAT WAS NOT COMMUNICATED TO THE PLAINTIFFS UNTIL AFTER THE LAND WAS PURCHASED, AND AFTER IT WAS IMPOSSIBLE FOR THE PLAINTIFFS TO REVERSE THE CONTRACT, IT IS NOT A PART OF THE CONTRACT.
As set forth above in the Statement of Facts, the plaintiffs did not receive the arbitration clause to the title insurance policy until “several weeks” after the closing on the property. C. 189-90. The plaintiffs also had received no notice of the existence of the arbitration clause prior to receiving that clause in the mail. Id. The plaintiffs claim against McDougle had already arisen before they first received the arbitration clause. See Capital Inv. Group, Inc. v. Woodson, 694 So.2d 1268, 1270 (Ala. 1997) (“We cannot hold that Woodson agreed to submit anything to arbitration under the Customer Agreement before the agreement was even submitted to him.”)
In addition, by the time the plaintiffs did receive the arbitration clause, it was too late for them to do anything. As the Circuit Court stated in its opinion denying the motion to compel arbitration:
Once the sale of the real estate was closed (deed and money exchanged) and then later the policy issued, where, for the first time the purchasers realize they are obligated to arbitrate their disputes regarding the title to the property, they cannot back out of the policy and thereby back out of the sale of the realty.
C. 351. Recognizing that a party cannot compel another party to engage in arbitration by unilaterally tacking an arbitration clause onto a contract after it is impossible for the other party to undo the deal, the Circuit Court correctly declined to require arbitration.
A. WHERE ONE PARTY TO A CONTRACT ATTEMPTS TO ADD A MATERIAL ADDITIONAL TERM TO THE CONTRACT AFTER THE DEAL HAS BEEN REACHED, THAT TERM WILL NOT BE PART OF THE CONTRACT.
As set forth above, the plaintiffs and FATIC reached an agreement and had a contract on the day of the closing. C. 193. Under this agreement, the insurance policy that was to be (and was) sent to plaintiffs several weeks later was to confirm and embody the contractual terms reached. While parties may add immaterial terms in a written confirmation, the insurer was obviously not free to add material terms to this written summary of the deal.
A useful analogy comes from the “battle of the forms” context where two merchants agree upon terms for a binding contract, and then one merchant attempts to add a material term that was not agreed upon by the parties. Alabama law in this setting was discussed by the U.S. Court of Appeals for the Fifth Circuit in Southeastern Enameling Corp. v. General Bronze Corp., 434 F. 2d 330, 334 (5th Cir. 1970). The Court explained that where a “written confirmation” (like the FATIC policy form mailed to plaintiffs after the closing) contains “terms additional to . . . those already agreed on” (like the arbitration clause in the FATIC policy form), “[i]f they are such as materially to alter the original bargain, they will not be included unless expressly agreed to by the other party.” (emphasis in opinion, citation omitted).
In Supak & Sons Mfg. Co. v. Pervel Indus., Inc., 593 F.2d 135 (4th Cir. 1979), similarly, the parties reached an oral agreement by telephone. During the conversation, no mention was made of any arbitration agreement. The seller subsequently sent a “confirmation form” that included an arbitration clause. Applying § 2-207 of the U.C.C., the Fourth Circuit held “[w]hen a written confirmation form contains terms in addition to those reached in the oral sales contract between merchants and the party receiving the form does not make timely objection, then the additional terms become part of the contract unless they ‘materially alter’ it.” 593 F.2d at 136.
While this case is not within the scope of the U.C.C., the same principles should govern here. Surely, consumers purchasing title insurance deserve protection against the post-agreement addition of material terms that is at least as strong as the protection provided to sophisticated merchants engaged in large commercial transactions. See Electrical Box & Enclosure, Inc. v. Comeq, Inc., 626 So. 2d 1250, 1252 (Ala. 1993) (in enforcing an arbitration clause, this Court noted that “[t]his case involves an agreement voluntarily entered into by sophisticated and knowledgeable businessmen.”)
B. THE ARBITRATION CLAUSE TO THIS CONTRACT WAS A MATERIAL TERM, AND THEREFORE IT IS NOT A PART OF THE CONTRACT.
1. The Great Wealth of Authority Supports the Proposition that Arbitration Clauses Are Material Terms to Contracts.
More than a dozen federal and state courts have held that arbitration clauses are material terms to a contract. In the Supak case discussed above, for example, the U.S. Court of Appeals for the Fourth Circuit concluded that when one party to a verbal contract attempted to add an arbitration clause by including it in a written confirmation form, that this clause was a material term: “Moreover, courts of last resort of both states [New York and North Carolina] have held that the addition of an arbitration clause constitutes a per se material alteration of the contract . . . . Thus, under the law of either state, the arbitration clause did not become part of the contract.” 593 F.2d at 136. (citations omitted). The Court of Appeals for the Fifth Circuit reached the same conclusion on similar facts in Coastal Industries, Inc. v. Automatic Steam Products Corp., 654 F. 2d 375 (5th Cir. 1981). In holding that an arbitration clause added as a term to a contract was a “material” term, the Fifth Circuit explained:
By requiring evidence of an express agreement before permitting the inclusion of an arbitration provision into the contract, a court protects the litigant who will be unwillingly deprived of a judicial forum in which to air his grievance or defense.
654 F. 2d at 379. This Court specifically took note of Coastal Industries in Electrical Box & Enclosure, Inc. v. Comeq, Inc., 626 So. 2d 1250, 1252 (Ala. 1993), though this Court distinguished the Coastal Industries case on the grounds that “the elements essential to the holding in Coastal Industries -- the addition of an arbitration clause in a contract after an oral agreement between the parties that established the fundamental bargain, thus constituting a material alteration under § 7-2-207 -- is absent from this case.” 626 S. 2d at 1252. Those elements are present in this case, however, and this Court should reassert here its respect for the Coastal Industries precedent.
See also Diskin v. J.P. Stevens & Co., 836 F. 2d 47 (1st Cir. 1987) (similar
facts and same holding as in Supak & Sons); N&D Fashions, Inc. v. DHJ Indus.,
Inc., 548 F.2d 722, 727 (8th Cir. 1977) (“we cannot say on this record that the
District Court was clearly erroneous in holding that the arbitration provision in
DHJ’s acknowledgement form was a ‘material alteration.’”); Universal Plumbing
and Piping Supply, Inc. v. John C. Grimberg Co., 596 F. Supp. 1383, 1385 (W.D.
Pa. 1984) (similar facts and same holding as in Supak & Sons) (noting “[o]ther
courts have held that an arbitration clause is a material alteration requiring the
parties’ assent.”); Fairfield- Noble Corp. v. Pressman-Gutman Co., 475 F. Supp.
899, 903 (S.D.N.Y. 1979) (“Thus, arbitration was a term ‘additional to or different
from’ those agreed upon. As such, the arbitration provision, unilaterally inserted
by the defendant, was a material alteration of the contract and accordingly did not
become a part thereof.”); Duplan Corp. v. W.B. Davis Hosiery Mills, Inc., 442 F.
Supp. 86 (S.D.N.Y. 1977) (similar facts and same holding as in Supak & Sons);
Valmont Indus. v. Mitsui & Co., 419 F. Supp. 1238, 1240 (D. Neb. 1976) (similar
facts and same holding as in Supak & Sons); John Thallon & Co. v. M&N Meat
Co., 396 F. Supp. 1239 (E.D.N.Y. 1975) (very similar facts and same holding as
in Supak & Sons) (“the arbitration clause and the correlative forfeiture by plaintiff
of its right to trial by jury in the courts, ‘alter[ed] the original bargain’ and
involved an ‘element of unreasonable surprise.’”) (citations omitted); J&C
Dyeing, Inc. v. Drakon, Inc., 93 Civ. 4283, 1994 U.S. Dist. LEXIS 15194 at *6,
*8 (S.D.N.Y. 1994) (“it is clear that an arbitration clause is a material addition
which can become part of a contract only if it is expressly assented to by both
parties.”) (“Although Drakon did not object to the arbitration clause, the mere
retention of confirmation slips without any additional conduct indicative of a
desire to arbitrate cannot bind Drakon, for it does not rise to the level of assent
required to bind parties to arbitration provisions.”) (citation omitted); DeMarco
California Fabrics, Inc. v. Nygard International, No. 90 Civ. 0461, 1990 U.S.
Dist. LEXIS 3842 at *7 (S.D.N.Y. 1990) (“provision for arbitration is ‘clearly a
proposed additional term’ to the parties’ agreement which ‘materially alters’ the
agreement . . . .”); Windsor Mills, Inc. v. Collins & Aikman Corp., 25 Cal. App.
3d 987, 995, Cal. Rptr. 347, 352 (1972) (“it is clear that a provision for arbitration
inserted in the acceptance or confirmation of an offer to purchase goods
‘materially alters’ the offer.”); Matter of Marlene Indus. Corp. v. Carnac Textiles,
Inc., 408 N.Y.S. 2d 410, 45 N.Y. 2d 325, 380 N.E. 2d 239 (1978) (“the inclusion
of an arbitration agreement materially alters a contract for the sale of goods . . . .
[B]y agreeing to arbitrate a party waives in large part many of his normal rights
under the procedural and substantive law of the State, and it would be unfair to
infer such a significant waiver on the basis of anything less than a clear indication
of intent”) (“citation omitted”); Frances Hosiery Mills, Inc. v. Burlington Indus.,
Inc., 204 S.E. 2d 834, 842 (N.C. 1974) (“Beyond question, [the addition of an
arbitration clause] would be a material alteration of [the contract].”); Just Born,
Inc. v. Stein Hall & Co., 59 D. & C. 2d 407 (Pa. D. & C. 1971) (similar facts and
same holding as Supak & Sons) (cited in Universal Plumbing, 596 F. Supp. at
1385); Stanley-Bostitch, Inc. v. Regenerative Environmental Equipment Co., 697
A.2d 323, 329 (R.I. 1997) (“We are of the opinion that a provision compelling a
party to submit to binding arbitration materially alters the terms of the parties’
agreement.”). A number of scholarly commentators have also reached the same
conclusion. E.g. Richard A. Lord, 2 Williston on Contracts, § 6:22 at 208-09 (4th
Ed. 1991) (“It is now generally recognized that an arbitration provision contained
in an acceptance or confirmation constitutes a material alteration although, again,
if the trade is one in which arbitration provisions are the norm, the provision
might nevertheless become part of the contract as one not unfairly surprising or
causing hardship.”); Travalio, Clearing the Air After the Battle: Reconciling
Fairness and Efficiency in a Formal Approach to U.C.C. Section 2-207, 33 Case
W. Res. L. Rev. 327, 334 (1983) (“Whether the arbitration provision becomes part
of the contract depends upon its materiality. As courts in most jurisdictions
would consider such a term material, it probably would not become part of the
contract.”) (quoted in Universal Plumbing, 596 F. Supp. at 1385).
Finally, a number of courts deciding issues unrelated to the one here have held
that arbitration clauses are material terms to a contract. See, e.g.,Weddington
Productions v. Flick, 60 Cal. App.4th 793, 815, 71 Cal. Rptr.2d 265, 280 (1998)
(finding that no enforceable licensing contract existed where the parties had not
agreed upon “such material terms as ... whether the license would contain an
arbitration clause or whether the right to jury trial would be preserved, etc.”);
Bollingbrook Park District v. National-Ben Franklin Ins. Co. of Illinois, 420
N.E.2d 741, 744 (Ill. Ct. App. 1981) (one reason given for enforcing an arbitration
clause was that it “is a material term of the contract.”); Boston Teachers Union,
Local 66 v. School Committee of Boston, 363 N.E.2d 492, 493 (Mass. Sup. Jud.
Ct. 1977) (one reason given for enforcing arbitration clause was that “it was a
material term of those agreements that alleged violations must be submitted to
grievance procedures with ultimate disposition through grievance arbitration.”)
2. An Analysis of the Effect and Nature of Arbitration Clauses Supports the Proposition that Arbitration Clauses Are Material Terms to Contracts.
Even if a host of courts across the country had not held that arbitration clauses are material terms when added to contracts, that conclusion must necessarily flow from an analysis of the nature of arbitration clauses.
First, this conclusion is evident from this Court’s repeated insistence that arbitration not be imposed except where both of the parties consent. Why insist upon consent if the requirement of arbitration is not material? Similarly, why would the Federal Arbitration Act extend its protections only to “written” arbitration agreements if arbitration were not material? And why would litigants have pursued disputes regarding the enforceability of mandatory arbitration clauses to this Court in more than 20 cases in the last ten years if those clauses were not material? If this Court’s many statements about the consent requirement are to have meaning, arbitration clauses must be seen as material.
Second, when a person is compelled to pursue her or his claims through arbitration rather than the civil justice system, they necessarily lose their right to have a trial of their claims to a jury. Our point here is not to claim that arbitration is unconstitutional or illegal. Instead, our point is that losing the right to a jury trial is a serious event, easily enough to qualify as “material.” Article I, § 11 of the Alabama State Constitution guarantees “[t]hat the right of trial by jury shall remain inviolate.” This Court has correctly observed that “[t]he right to a timely civil jury trial . . . . is especially important to American jurisprudence, and that right is guaranteed by both our federal and state constitutions.” Folson v. Wynn, 631 So. 2d 890, 898 (Ala. 1993). This Court went on to say that “[a] right so fundamental and sacred to the citizen . . . should be jealously guarded by the courts.” 631 So. 2d at 898 (citations omitted). It would be inconsistent to argue that this right is “especially important” to our system of law, and “fundamental and sacred to the citizen,” but that it is not “material” to an individual entering a contract. Indeed, this Court has sharply warned against the adoption of positions that would undermine the protection afforded this right. “For such a right to remain inviolate, it must not diminish over time and must be protected from all assaults to its fundamental guarantees.” Henderson v. Alabama Power Co., 627 So. 2d 878, 885 (Ala. 1993). If this Court were to hold that the right to a jury trial is “immaterial,” such that it could be unilaterally stripped from insureds, consumers and others after deals had been reached, that would surely be a grievous “assault” against this “fundamental” right.
Third, it is beyond question that arbitrators are materially different from judges. Judges are paid by the state, and elected by the public, ensuring that they are generally independent of the litigants in a case. Arbitrators, by contrast, often face powerful economic incentives that can affect their neutrality. Many arbitrators compete for the same business. If an arbitrator rules against a corporate client too often, the company can easily take its business to another arbitrator. As a result, arbitrators often favor large corporate “repeat player” clients. See D. Schwartz, Enforcing Small Print to Protect Big Business: Employee and Consumer Rights Claims in an Age of Compelled Arbitration, 1997 Wisc. L.Rev. 33, 60-61 (1997) ; L. Bingham, Employment Arbitration: The Repeat Player Effect, 1 Emply. Rts. & Empl. Policy Journal 1 (1997) (employees recover a lower proportion of their claims in repeat player cases than in non-repeat player cases); J. Sternlight, Panacea or Corporate Tool?: Debunking the Supreme Court’s Preference for Binding Arbitration, 74 Wash. U.L.Q. 637, 684-85 (1996), James L. Guill, Edward A. Slavin, Jr., Rush to Unfairness: The Downside of ADR, 28 Judges’ Journal No. 3, at 8, 11 (1989) (“[A]n arbitrator’s decision might be influenced by the desire for future employment by the parties. . . . Some arbitrators openly solicit work. They write letters to parties noting their availability, sometimes enclosing samples of their awards. They occasionally call on parties at their offices for the same purpose . . . .”) (citations omitted); Kirby Behre, Arbitration: A Permissible or Desirable Method for Resolving Disputes Involving Federal Acquisition and Assistance Contracts?, 16 Pub. Cont. L.J. 66, 72 (1986) (discussing possibility “that an arbitrator will make a decision with an eye toward his role in future disputes involving one or both of the parties -- that is, an arbitrator’s decision might be influenced by the desire for future employment by the parties.”) Judges are less prone to these temptations.
Arbitrators are also materially different from judges in that arbitrators have far greater practical leeway to not follow the law. Many arbitrators are trained that they are “not strictly bound by case precedent or statutory law.” Rosenberg v. Merrill Lynch Pierce Fenner & Smith, 995 F. Supp. 190, 198 (D. Mass. 1998). See also IDS Life Ins. Co. v. SunAmerica Life Ins. Co., 136 F.3d 537, 543 (7th Cir. 1998) (“judges follow the law . . ., while arbitrators, who often . . . are not lawyers and cannot be compelled to follow the law and their errors cannot be corrected on appeal (there are no appeals in arbitration), although there are some limitations on the power of arbitrators to flout the law.”) Arbitrators need not follow rules of evidence, and may consider hearsay evidence. See Davis v. Prudential Securities, 59 F.3d 1186, 1190 (11th Cir. 1995). These material distinctions between the judiciary and arbitrators are aggravated by the fact that arbitrators’ decisions are generally exempt from meaningful judicial or appellate review. See, e.g., Montes v. Shearson Lehman Brothers, Inc., 128 F.3d 1456 (11th Cir. 1997) (“We do not permit review under these circumstances and reject any argument that to err legally always equates to a ‘manifest disregard of the law.’”); and Di Russa v. Dean Witter Reynolds Inc., 121 F.3d 818, 821 (2d Cir. 1997) (to modify or vacate an arbitration award, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case), cert. denied, 118 S. Ct. 695 (1998).
Advocates of mandatory arbitration often argue that arbitration is faster, cheaper, and more efficient than the judicial system, and the plaintiffs here would take issue with those assertions. But whatever one’s views may be of its merits, there can be no serious argument that arbitration is not a materially different system of resolving disputes than the civil justice system.
3. The Rager and Hill cases relied upon in McDougle’s brief are easily distinguished from this case.
McDougle’s brief states:
Moreover, it is irrelevant that the arbitration clause was contained in the policy received after purchasing Bama Hill Farm. The Supreme Court of Alabama and federal courts have held enforceable an arbitration clause contained in an insurance policy or material received after the purchase. See Ex Part Rager, No. 1970004, 1998 WL 96547 (Ala. March 6, 1998) and Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997).
McDougle’s argument is flatly wrong. It most assuredly is relevant that the plaintiffs received no notice of the arbitration clause until well after the contract was reached and well after it was too late for them to do anything about it, as the wealth of authorities cited above plainly establish.
In addition, neither of the two cases cited by McDougle addresses the factual situation posed in this case. In Ex Parte Rager, 712 So.2d 333 (Ala. 1998), this Court compelled arbitration in a case where a person purchased health insurance, and the health insurance policy sent to him some time afterward included an arbitration clause. This Court stated:
Even if the inclusion of the arbitration provision was a material alteration of the policy applied for – and we would say it was not – the petitioners would have accepted the counter-offer by not returning the policy and, instead, paying the premiums on it.
712 So.2d at 335-336. On its face, this holding is plainly distinguishable from the circumstances of this case. As this Court stressed, the plaintiffs in Rager could easily have returned the policy and undone the transaction. Id. In this case, by contrast, as the Circuit Court emphasized,
C. 351, the plaintiffs could not have unraveled the property purchase at the time they finally received the title insurance policy including the arbitration clause.
In addition, the language in the Rager case relating to materiality is plainly dicta -- this Court explicitly said in Rager that it would not have affected its holding “even if” the arbitration clause at issue there had been a material alteration to the contract. 712 So. 2d at 335. Plaintiff-Appellees respectfully suggest that this Court clarify that arbitration clauses are material terms when added to a contract in the context of this case, despite this language in Rager. We make this suggestion for several reasons.
First, the question of materiality was not addressed in the briefs of either party in Rager. The plaintiffs’ Petition for Writ of Mandamus in Rager was 13 pages long, and none of these pages included any discussion of the materiality issue. The Petition cited to only five Alabama cases, none of which went to the question of whether an arbitration clause was material. Neither the petition nor the appellees’ briefs in Rager cited to Supak & Sons, Coastal Industries, Diskin, or any of the other cases cited in Part II-B-1 above. Accordingly, when Justice Hooper stated in dicta that arbitration clauses are not material terms, there is every possibility that he was not aware that this assertion was expressly counter to the law established by the U.S. Courts of Appeal for the First, Fourth, Fifth and Seventh Circuits, or to the conclusions of seven federal district courts, appellate courts in California, Illinois, Massachusetts, New York, North Carolina, Pennsylvania and Rhode Island, and respected scholarly treatises such as Williston on Contracts.
Second, because the issue of materiality was not briefed by the parties in Rager, this Court did not have the opportunity to address any of the authorities dealing with the right to jury trial or the nature of arbitration cited in Part III-B-2 above. Thus, the Court’s attention was not drawn to the apparent contradiction between the assertion about “materiality” and its decisions addressing the right to jury trial in cases such as Folson and Henderson.
Third, because findings relating to materiality often depend upon the circumstances of a case, the majority opinion in Rager’s language relating to materiality should be limited to the facts of that case. Where, as here, one party does not learn of the arbitration clause until after the underlying contract has been irrevocably made, the clause takes on even greater materiality.
Fourth, because the materiality issue was not briefed in Rager, this Court did not have the opportunity to consider the consent issue. As noted in Part II, supra, this Court has repeatedly stressed the importance of only enforcing arbitration clauses where both parties consented to submit to arbitration. If a party can unilaterally act to bind another party to an arbitration clause after the deal is irrevocably done, then this would completely undermine this Court’s insistence upon consent in case such as Stallings, Old Republic, Continental Grain, A.G. Edwards, and Allied-Bruce.
Accordingly, this Court should not decide this case based upon stray dicta from the very different Rager case, particularly where the legal issues and authorities before this Court in this case were not briefed by the parties in Rager.
As quoted above, McDougle also cites to the Seventh Circuit’s holding in Hill v. Gateway 2000. The Hill case is easily distinguished for the same reason that Rager is distinguishable: the customer in Hill had the option of returning the computer within 30 days if they did not like the arbitration clause. (This fact is of such significance that the 30 day figure is referenced at least four times in the Hill opinion.) As the Circuit Court here stressed, C. 351, however, the Silvernells did not have the opportunity of unraveling the land sale here at the time they received the arbitration clause. In Hill, the sending of the computer with the arbitration clause was the offer, and the keeping the computer was the acceptance. Hill, 105 F. 3d at 1150 (“By keeping the computer beyond 30 days, the Hills accepted Gateway’s offer, including the arbitration clause.”) In this case, as explained above, both offer and acceptance took place at the closing. McDougle asserts that Hill contradicts the Circuit Court’s ruling here, but this argument ignores both Judge Easterbrook’s language and most of the language in the two page order from which they appeal.
C. THE OTHER ARGUMENTS MADE IN MCDOUGLE’S BRIEF DO NOT ADDRESS OR RELATE TO THE ISSUES POSED BY THIS APPEAL.
As set forth above, the Circuit Court refused to compel arbitration in this case because the arbitration clause was not sent to the plaintiffs until well after the closing. With the exception of two sentences on the last page and the citations to the Rager and Hill cases distinguished above, McDougle’s brief does not address this issue, preferring to focus on minor side points and questions not at issue on this appeal.
Part I of McDougle’s brief argues, for example, that the arbitration clause at issue here is not ambiguous, and is similar to the arbitration clause that was approved by this Court in Fidelity National Title Insurance Co. of Tennessee v. Jericho Management, Inc., No. 1950828, 1998 WL 178783 (Ala. April 17, 1998). Brief at 7-9. These arguments put the cart before the horse, asking this Court to rule on the validity of an arbitration clause when the issue here is whether the parties ever agreed to arbitrate at all. It does not matter whether the arbitration clause is unambiguous, or whether the Federal Arbitration Act applies here, if the plaintiffs never agreed to the clause. “[T]he first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute.” Allied-Bruce v. Dobson, 685 So.2d 102, 107 (Ala. 1995) (citation omitted). See also Ryan Warranty Services, Inc. v. Welch, 694 So. 2d 1271, 1273 (Ala. 1997) (“the threshold question is whether the parties intended that the particular dispute be covered by the arbitration clause.”) As we have shown, the Silvernells never reached any agreement with McDougle to arbitrate their disputes with them.
McDougle’s Brief also veers well off point with it’s argument that the arbitration clause should be enforced because “the Silvernells cannot pick and choose to enforce certain provisions of the policy and not others.” Brief at 11. The Brief bases this argument on the faulty supposition that “it is undisputed that [the Silvernells] are suing for the benefits of the title insurance policy which they requested and obtained.” Id. McDougle’s Brief did not provide any citation to the record to support this “undisputed” fact, however, and the assertion is simply wrong. The complaint in this case, C. 9-30, does not include any claims for breach of the title insurance contract. There are counts for fraud, C. 11, 14, 17, 19, 22; wantonness, C. 25 and 26; negligence, C. 26, 27; and breach of fiduciary duty, C. 27. But the Silvernells make no claim under the policy itself, and thus cannot be faulted for “picking and choosing” among the policy’s provisions.
Finally, McDougle’s Brief requests relief that is wholly inappropriate at this time. The Brief asks this Court not only to rule in their favor on the question of whether the arbitration clause was a part of this contract, but also to rule on the ultimate question of whether arbitration should have been compelled in this case. This request is plainly premature in the posture of this case, however, as the trial court did not have occasion to reach several of the factual issues raised by the plaintiffs in opposition to the motion to compel arbitration. Even if this Court were to disagree with the authorities cited above and find that the arbitration clause was a part of this contract, the proper course would be to remand the case to the Circuit Court for further proceedings. As noted in Part II-B-2 above, many arbitrators have proven to have inappropriate financial or other ties to economically powerful defendants. In this case, the plaintiff directed carefully-drawn discovery inquiries to this question. See, e.g. C. 242-44 (interrogatories inquiring into the list of possible arbitrators; any prior communications or relationship between defendants and the arbitrators; etc.). Even if the plaintiffs had agreed to the arbitration clause here, these queries would plainly be appropriate, as any number of courts have declared unconscionable arbitration agreements where the grounds to suspect bias by the arbitrators. Defendants did not respond to these proper discovery inquiries, necessitating a motion to compel, C. 352-58, which defendants opposed. C. 368-70.
In light of the centrality of these inquiries, and defendants’ stonewalling
responses, arbitration cannot be compelled in this matter until the plaintiffs have
been given a full opportunity to conduct discovery into the fairness of the
contemplated arbitral scheme. See Berger v. Cantor Fitzgerald Securities, 942 F.
Supp. 963, 966 (S.D.N.Y. 1996) (“Discovery is needed before defendants’
motions may be decided, as it should help to clarify several disputed issues of fact
that may or may not give rise to special circumstances rendering the U-4
arbitration agreement unenforceable . . . .”); Wrightson v. ITT Financial Services,
617 So.2d 334, 336 (Fla. Dist. Ct. App. 1993) (“On remand, the trial court is
directed to afford the parties a reasonable opportunity to conduct discovery for the
limited purpose of determining the validity of the arbitration agreements under
state law.”); Hooters of America, Inc. v. Phillips. 1998 U.S. Dist. LEXIS 3962,
*15 (D.S.C. 1998) ([Plaintiff] “was entitled to limited discovery relative to the
circumstances surrounding the making of the alleged arbitration agreement. The
court authorized limited discovery in the form of interrogatories, requests to
produce and five depositions.”); Duffield v. Robertson Stephens & Co., __ F.3d
__, 1998 WL 227469 (9th Cir. May 8, 1998) (noting that the district court
“allow[ed] extensive discovery on the securities industry’s arbitration system.”);
Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 995 F. Supp. 190, 192
(D. Mass. 1998) (the court “ordered additional briefing and discovery on” issues
of whether the “agreement to arbitrate was revocable”).
III. MCDOUGLE CANNOT ENFORCE THE ARBITRATION CLAUSE AT ISSUE IN THIS CASE, AS THEY ARE NOT PARTIES TO THE CONTRACT CONTAINING THAT CLAUSE.
Even if this Court were to disagree with the foregoing discussion, and hold that the plaintiffs had agreed to the arbitration clause in the FATIC policy, this holding would still not benefit McDougle. This Court has repeatedly held that only those persons or entities who are parties to a contract containing an arbitration clause may act to enforce that clause. In Ex parte Jones, 686 So. 2d 1166, 1168 (Ala. 1996), this Court stated:
This Court has clearly held that one must be a signatory to a contract in order to be bound by the contract . . . Under this reasoning, the Joneses should not be compelled to arbitrate their claims against First Colonial, because First Colonial is not a party to the contract containing the arbitration provision. First Colonial has no standing to seek enforcement of the arbitration provision.
See also Ex parte Martin, 703 So. 2d 883, 887 (Ala. 1996) (“It is clear that only the Martins and Blue Ribbon Homes negotiated and signed the arbitration agreement at issue, and it is clear that the agreement refers only to the Martins and Blue Ribbon Homes . . . . Because Southern Energy Homes was not within the scope of the arbitration agreement, the Martins have a clear legal right to an order directing the trial court to set aside its order compelling arbitration of their claims against that defendant.”); Prudential Securities, Inc. v. Micro-Fab, Inc., 689 So. 2d 829, 832 (Ala. 1997) (“Micro-Fab is a corporate entity distinct and separate from Coleman, and it cannot be forced to arbitrate under an agreement entered into by Coleman in his individual capacity.”); Ex parte Stallings, 670 So. 2d 861, 862 (Ala. 1995) (“We note that [one of the parties on appeal] was not a party to the stock purchase agreement. Thus, [that party] has no standing to seek enforcement of the arbitration provision therein, and it would be error for the trial court to compel arbitration of claims against [it], under this arbitration provision.”) (quoting Ex parte Jones, 628 So. 2d 316, 317 (Ala. 1993)); Continental Grain Co., Inc. v. Beasley, 628 So. 2d at 322 (“it is undisputed that Beasley is not a party to any contract with Continental Grain . . . . Because Beasley did not agree in writing to submit to arbitration any dispute he might have with defendants, the trial court properly refused to compel arbitration of his fraud claim.”)
In this case, McDougle are attempting to enforce an arbitration clause alleged to be a part of a contract between the plaintiffs and FATIC. But McDougle are not parties to the contract between the plaintiffs and FATIC, and did not sign it in their own name. Accordingly, under the authorities cited above, McDougle has no standing to seek the enforcement of any clause of that contract.
McDougle argue that they fall within an exception to this line of cases on the grounds that they are agents of FATIC. Brief at 9-10. They cite a case, Ex Parte Gray, 686 So. 2d 250 (Ala. 1996), where the plaintiff sued the agent of a car dealer in connection with a car sales agreement. But the arbitration clause itself here makes no mention of FATIC’s “agents.” The clause indicates that “the Company or the insured may demand arbitration,” C. 208, and defines “the Company” as FATIC. C. 202. FATIC, who drafted the insurance policy (including the arbitration clause), could easily have defined “the Company” as itself and its agents. Similarly, FATIC could have provided that “the Company and its agents or the insured may demand arbitration.” Again, it did not. By its own terms, the policy limits the parties with the ability to invoke arbitration to FATIC itself and the plaintiffs. This Court should reject McDougle’s suggestion that the policy be rewritten to add the terms “and its agents,” and should not stray beyond the policy’s terms.
In addition, in Gray and other cases where courts have allowed agents of parties to contracts to take advantage of arbitration clauses in those contracts, the claims at issue revolved around or arose from the performance of those contracts. That is not the case here. The title insurance policy in this case neither creates nor imposes any duties upon McDougle, and none of the plaintiffs’ claims against McDougle are based upon any provision of the contract. In addition, each of the plaintiffs’ claims against McDougle are independent of any liability that may attach to FATIC – plaintiffs could have raised these claims even if they had no claims against FATIC whatsoever.
In this case, the arbitration clause was not sent to the plaintiffs until after they were irrevocably bound to the land deal. If the arbitration clause were to be enforced under those circumstances, it would make a mockery of this Court’s many pronouncements that arbitration is a matter of consent. The Circuit Court’s holding that the parties did not agree to arbitration under these circumstances is not clearly erroneous. In addition, McDougle were not parties to the contract supposedly containing the arbitration clause, and thus they have no standing to enforce it.
Respectfully submitted,
Deborah W. Hicks
(HICOIO)
1132 No. Eufaula Avenue
Eufaula, AL 36027
(334) 687-8369 Phone
(334) 687-7613 Fax
DWHF #1530-97-68
Of Counsel: F. Paul Bland, Jr.
Trial Lawyers for Public Justice
1717 Massachusetts Avenue, NW
Suite 800
Washington, DC 20036
Dated: November 11, 1998
"ORAL ARGUMENT REQUESTED" ARAP 34(a)
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the Brief of Appellees has been served upon the following by placing a copy of same in the United States mail, postage prepaid, on this the 11th day of November, 1998:
Mr. Joe Espy, III
Melton, Espy, Williams & Hayes, P.C.
Attorney for Appellants
P.O. Drawer 5130
Montgomery, AL 36103-5130
__________________
Deborah W. Hicks (HIC010)
Attorney for Plaintiffs/Appellees
1132 No. Eufaula Avenue
Eufaula, Alabama 36027
(334) 687-8369 Phone
(334) 687-7613 Fax