FLORIDA ARBITRATION LAW: WHEN CAN THIRD PARTY BENEFICIARIES TO A CONTRACT BE COMPELLED TO ARBITRATE?

An important trend in business contracts today involves the use of arbitration provisions to resolve some or all contemplated disputes that may arise between parties to the contract and sometimes “third-party beneficiaries” of the contract. Contracts are often made for the benefit of a third-party who did not sign the agreements. A third-party beneficiary is a person or entity that the parties to the contract intended to benefit from the contract. The question sometimes arises: is a third-party, non-signatory to a contract legally obligated to submit itself to an arbitrator to decide the third-party’s rights/obligations in the business litigation? To answer this question, Florida courts analyze the issue in the following manner. Peter Mavrick is a Fort Lauderdale business litigation attorney who has successfully represented many Fort Lauderdale, Miami, and Palm Beach businesses in connection with arbitration proceedings.

Florida courts examine the following three factors when determining whether to compel arbitration: (1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived. Florida Power and Light Co. v. Road Rock, Inc., 920 So.2d 201 (Fla. 4th DCA 2006). The first factor requires the court to determine the validity of the arbitration provision. Ordinary contract principles determine who will be bound by such an agreement. Courts give arbitration clauses their broadest possible interpretation to accomplish the statutory purpose of resolving controversies out of the court. Royal Caribbean Cruises, Ltd. v. Universal Employment Agency, 664 So.2d 1107 (Fla. 3d DCA 1995). Doubts concerning the scope of an arbitration agreement should be resolved in favor of arbitration. Breckenridge v. Farber, 640 So. 2d 208 (Fla. 4th DCA 1994). While it is fundamental that a court may compel parties to a contract to arbitrate their disputes when the contract mandates arbitration, generally “[o]ne who has not agreed to be bound by an arbitration agreement cannot be compelled to arbitrate.” Liberty Communications, Inc. v. MCI Telecommunications Corp., 733 So.2d 571 (Fla. 5th DCA 1999). “Where the contract contains an arbitration clause which is legally enforceable, the general view is that the beneficiary is bound thereby to the same extent that the promisee is bound.” Zac Smith & Co., Inc. v. Moonspinner Condominium Ass’n, Inc., 472 So.2d 1324 (Fla. 1st DCA 1985) quoting 2 Williston on Contracts (3d ed.) § 364A (1959). A third-party beneficiary’s contractual rights, however, cannot rise higher than the rights of the contracting party through whom he claims. Crabtree v. Aetna Casualty & Surety Co., 438 So.2d 102, 105 (Fla. 1st DCA 1983).

For example, Florida’s First District Court of Appeal in Zac Smith & Co., Inc. held that an arbitration clause in a contract is binding on a third-party beneficiary and can compel the third-party to participate in arbitration. In Zac Smith & Co., a condominium association sued a contractor, based in part, on an alleged breach of a construction contract to which the condominium association was a third-party beneficiary. The defendant contractor moved to compel arbitration because that condominium association was required to abide by arbitration clause contained in contract. The condominium association was asserting its rights as a third-party beneficiary to the contract but disputed being bound to the arbitration clause. The trial court denied the motion and the contractor immediately appealed. The appellate court reversed the trial court’s decision and held that that the Florida Arbitration Code applies to third-party beneficiaries to a contract containing an arbitration clause.

By contrast, Sovereign Healthcare of Tampa, LLC v. Estate of Yarawsky, et al., 150 So.3d 873 (Fla. 2d DCA 2014), held that the court cannot lawfully compel a third-party beneficiary to a contract to participate in arbitration where the contracting parties did not clearly intend the third-party beneficiary to be bound by the arbitration covenant. Sovereign involved a contract with an arbitration clause that was not signed by anyone on behalf of the third-party beneficiary. The contract was intended to be entered by the nursing home, the prospective resident [Mr. Yarawsky] and a financially responsible party [Mrs. Yarawsky], however no one signed the contract for Mr. Yarawsky. The concept of third-party beneficiary requires that there be at least two parties to the contract, i.e., a promisor and a promisee. The court found that it was insufficient for the financially responsible party to sign, because she did so in her individual capacity and not on behalf of third-party beneficiary Mr. Yarawsky. The third-party beneficiary therefore could not be compelled to arbitrate. There is no requirement that the third-party have knowledge of or accept the contract, but a third-party beneficiary’s rights depend upon and are measured by the terms of the contract.

Peter Mavrick is a Fort Lauderdale business litigation lawyer who has successfully represented clients in arbitration proceedings. This article does not serve as a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Email: peter@mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.