Construction transactions are characterized by many contracts involving multiple parties. While the terms of the parties’ individual contracts generally govern their relationships, parties should be aware that, intentionally or not, other parties may be in a position to enforce dispute resolution clauses in other agreements. For example, the Utah Court of Appeals recently demonstrated that the court’s strong policies favoring arbitration may allow third parties to enforce arbitration clauses. Parties may be forced into arbitration or mediation to resolve disputes even though there is no such agreement between the parties.
In that recent case, purchasers of real property sued a title company for allegedly participating in a fraudulent real estate scheme. That title company, who was not a party to the purchase and sales agreements (“PSAs”) at issue, filed a motion to compel arbitration, arguing that it was entitled to invoke the arbitration clause of the PSAs because it was a third-party beneficiary of the contract. In opposition, the purchasers argued that the title company had not established entitlement to invoke the arbitration clauses. The trial court agreed with the purchasers on all fronts and the title company appealed.
The Utah Court of Appeals first examined the choice of law. To determine which states’ laws, apply, the law of the forum state governs. Under Utah law, courts first look to whether there was an effective choice of law by the parties. Here, the PSAs provided that the contracts would be governed by the laws of the State of Colorado. Ironically, the Utah Court of Appeals explained that while there was no Colorado case law on point, a Colorado court would likely look to Utah’s jurisprudence in this instance for guidance. The Utah Supreme Court held in Orlando Millenia, LC v. United Title Services of Utah, Inc., 2015 UT 55, that the lender was “expressly named in special escrow instructions” and that the escrow agreement required “specific actions” from the lender before the escrow agent could disburse the funds to the seller. Therefore, the court concluded that the lender was “no mere incidental beneficiary” of the escrow agreement, but that the lender was “for all practical purposes a party” to the escrow agreement. A third-party beneficiary can enforce a contract when the contract intended to confer a benefit on the third party. Here, the PSAs contain a provision under which “the balance of the purchase price shall be wired, or otherwise transferred to the title company within twenty-four hours of closing.” The PSA did not just contemplate the use of an escrow agent; it required the parties to use that specific title company. The Court of Appeals found that there was nothing “incidental” about that title company’s involvement in the transaction, but that instead, the contracts placed that title company in a key role in the transactions.
Like the lender in Orlando, the title company was expressly named in the contract, and those contracts had specific actions for that title company to take before the transactions could be completed. Colorado’s strong preference that ambiguities be resolved in favor of arbitration factored into the Utah Court of Appeals’ ruling to allow the title company to invoke the arbitration clauses of the PSAs.
Because many agreements in a construction transaction include “flow-down” and “incorporation” provisions by and between them, parties with disputes who did not insist upon an ADR provision in their own contracts may, in certain circumstances, be able to latch on to a mandatory arbitration or mediation clause in another agreement in the chain. This may be bad or good news, depending on your perspective on resolving disputes outside of a traditional court filing, but it’s certainly an option on the table in Utah.