Arbitration Agreements: many business people have heard of them, many businesses have signed one, and some businesses have even gone through arbitration.  Arbitration can be a good alternative in the right circumstance.  However, don’t assume arbitration is the best for you without doing sufficient homework.  Despite the familiarity or arbitration agreements, the agreements sometimes still require a basic question to be asked: when will courts compel arbitration?

This question was the central issue in the Court of Appeals case, Ellison v. Alexander.  Ellison filed suit alleging Ellison was induced into investing in Alexander’s company, “The Elevator Channel,” based on Alexander’s misrepresentations concerning his experience and education.  In response, Alexander filed a number of motions—one of which was to compel arbitration pursuant to an arbitration clause found in an agreement between them.

In this situation, the Court determined two questions must be asked: 1) Did the parties have a valid agreement to arbitrate; and 2) Does the dispute fall within the substantive scope of the agreement?  Here, the Court reasoned that 1) a valid arbitration clause existed; and 2) because the agreement discussed investing, Ellison’s claims fell within the scope of the agreement and should be arbitrated.

An important lesson from this case is carefully read each contract, purchase order or quote you receive before accepting it.  Otherwise, you may be agreeing to arbitrate your case even if you would rather submit it to mediation or Court.

Suppose your company contracts with another company for the supply of materials. The company you contracted with then contracts with an out of state company to add a “powder coating” to the materials you have just ordered. Then suppose this coating flakes off right after you use the materials. So, if letters, phone calls, emails and/or attempts at negotiations don’t work, looking for legal solutions might be an option. Looks like you have everything to file a law suit against the company who provided the “flakey coating”, right? Maybe…

The above scenario is exactly what happened in the NC Court of Appeals case, Smith Architectural Metals v. American Railing Systems. In this case, the Court of Appeals held that First Line, a Pennsylvania company that contracted with American Railing to provide a “powder coating” to materials sent to Smith, did not have sufficient minimum contacts to be hauled into North Carolina court.

The Court based its rationale on the fact that after discovering the flakey coating, First Line (powder coating company) contacted Smith via email and fax, as well as sent Smith checks to cover the damage. According to the Court, these actions marked First Line’s first contact into North Carolina—none of which indicated First Line purposely holding itself out to North Carolina to establishing personal jurisdiction. Instead, these activities signaled First Line’s attempt to resolve the situation early and avoid litigation in NC courts.

Some also say the Court reached this conclusion based in part on NC’s public policy in favor of settlement. The logic behind this policy is settlement saves both the parties and the courts time, energy, and economic resources.

Thus, the answer provided by the Court is that a company must hold itself out in some form or fashion to create sufficient personal jurisdiction before being sued.

If you have questions, please feel free to call us.