Over the years, we've written more articles than I can count on the need to include an arbitration provision in your agreements with your customers. As Tom Hudson always says, an arbitration provision is a company's best and first line of defense against class action lawsuits.

But if you haven't been listening, you may think that if you are sued by a customer, you can latch on to an arbitration agreement that your customer signed with another party related to your transaction. That may work in limited situations, but it didn't work in a recent case.

Here's what happened when a dealership tried to borrow another arbitration agreement that its customer signed.

Daniel Sikorski bought a car from New Jersey Ventures Partners, LLC, doing business as Gateway Classic Cars of NJ. The purchase contract, which stated that it constituted the entire agreement between the parties, did not contain an arbitration provision. Two days after he signed the purchase contract, Sikorski obtained a loan from Medallion Bank to secure additional funds for the purchase. The Simple Interest Note and Security Agreement mistakenly listed Collector Car Lending, to which Sikorski submitted a finance application, not Gateway, as the seller and provided that the seller was Medallion's agent only for purposes of obtaining Sikorski's signature on the note and security agreement. The note and security agreement contained an arbitration provision that ran between Sikorski and Medallion.

After Sikorski paid for the car and had it delivered, an inspection revealed several problems that led him to think that someone had tampered with the car. Sikorski asked Gateway for a refund or a substitute car, but Gateway refused. Sikorski later learned that the car could catch fire and was dangerous to drive, and he filed a putative class action complaint against Gateway, alleging various state law claims.

Gateway moved to compel arbitration under the arbitration provision in Sikorski's note and security agreement with Medallion, claiming that it was a third-party beneficiary of that agreement. The trial court denied the motion, finding that the Medallion note and security agreement unambiguously provided that it applied only to Sikorski and Medallion, there was no language supporting Gateway's claim that it was an intended third-party beneficiary of the note and security agreement, and Gateway's own purchase contract with Sikorski could have, but did not, include any arbitration language. Gateway appealed, but the Superior Court of New Jersey, Appellate Division, affirmed.

The appellate court found that Gateway failed to prove that Sikorski assented to arbitration of claims between them. The appellate court noted that because Gateway's contract with Sikorski contained no arbitration language, Gateway was forced to rely on Medallion's note and security agreement. However, the appellate court recognized that the note and security agreement did not mention Gateway.

The appellate court went on to reject Gateway's argument that Sikorski must arbitrate his claims because the arbitration provision did not expressly exclude Gateway. The appellate court stated that Gateway's "argument turns our arbitration jurisprudence on its head—instead of proving actual assent to arbitrate, the party seeking to compel arbitration can simply rely on the absence of language refusing to arbitrate—and ignores the note agreement's language specifically limiting its application to plaintiff and Medallion." The appellate court, therefore, refused to expand the scope of the arbitration provision in the Medallion note and security agreement to include Gateway, noting that if it "were to accept Gateway's argument, plaintiff would be deprived of his rights of access to the courts and to a jury trial on his claims against the Gateway defendants when no contractual language—neither Gateway's purchase contract nor the Medallion note agreement—'clearly state[d that] purpose.'"

If you want to be able to arbitrate, rather than litigate, claims brought by your customers, then you need to work with your lawyer to include consistent arbitration language in all of your documents with your customers. Keeping your fingers crossed that you will be able to rely on someone else's arbitration agreement with your customers is expecting too much. 

Shelley B. Fowler is a Managing Editor at CounselorLibrary.com, LLC. 

 ©CounselorLibrary.com 2021, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only to Used Car News.