In two recent decisions, the Alabama Supreme Court made clear that if an arbitration clause specifies it only applies to disputes between the two parties who sign the clause, that will be strictly enforced.  No third party can enforce the arbitration agreement.

In Nissan N. Am. v. Scott, 2017 WL 3446129 (Ala. Aug. 11, 2017), a customer brought suit in court against Nissan and its dealership, after her car (a “Juke” in case you are curious) spontaneously caught fire. The purchase agreement between the customer and dealership stated, in part, that “all claims, demands, disputes . . . between them arising from…the sale” shall be settled by binding arbitration. The dealership moved to compel arbitration. The customer did not dispute her obligation to arbitrate with the dealership, but said she didn’t want to proceed in arbitration with the dealership and also in court against Nissan (a position she shifted on appeal). So, the trial court sent the whole thing to arbitration.

Unlike in the Toyota case a few years ago (a putative class action), Nissan objected to going to arbitration and appealed. The Alabama Supreme Court noted that “judicial economy . . . is not a proper basis for compelling arbitration against a nonsignatory.” Furthermore, it found the scope of the arbitration clause was limited to disputes between the dealership and the customer.

Curiously, the Alabama Supreme Court resolved a very similar case just a week before adjudicating the Juke. In Daphne Automotive, LLC v. Eastern Shore Neurology Clinic, Inc., 2017 WL 3446127 (Ala. Aug. 11, 2017), an employer sued a car dealership after the title to a car it purchased for use by an employee got bungled. In short, title was supposed to be in the employee’s name, but listing the employer as lienholder. The dealership neglected to list the employer as the lienholder.  The purchase agreement for the car was signed by the employee and provided for arbitration of disputes between the employee and the dealership.

No one would have even noticed that mistake if the employee had not gotten fired and refused to return the car. (And then the Sheriff’s office attempted to arrest the boss. Drama!) At that point, the truth came tumbling out and the employer sued the dealership. The dealership moved to compel arbitration and the trial court denied the motion. On appeal, the court found it did not need to address whether the employer was a third-party beneficiary (and therefore could enforce the arbitration clause) or even whether the doctrine of equitable estoppel applied to force arbitration. Instead, the court found the scope of the arbitration agreements themselves were “limited to disputes that arise ‘between them,’ i.e. the ‘buyer/lessor’ [employee] and the ‘dealer[ship]’”. “Stated differently, the language employed in the arbitration agreements is not broad enough to compass the plaintiffs who are nonsignatories to those agreements.”

This is an important drafting lesson.  If the arbitration clause is being placed in a consumer contract, and the consumer is likely to sue related parties, it is worth thinking about whether to broaden the scope of the arbitration clause to include those claims as well.