Arbitration: Mississippi's Top Court, Reversing Two Lower Courts (Web)

The Mississippi Supreme Court, in a 6-2 en banc opinion, reversed both an appellate court and a trial-level chancery court, which had denied a motion to compel arbitration under a real estate contract by a nonparty. Remanding the decision to the chancery court, the Supreme Court directed it to compel arbitration.

A strong dissent stated, “This does not make legal sense, and it does not make sense from a policy standpoint. . . . [W]hy are we so hostile to the constitutional rights of Mississippians?”

The questions before the Court were (1) whether the trial court erred in denying a motion to compel arbitration when it found two real estate contract paragraphs ambiguous, thereby rendering the mandatory arbitration clause ineffective; and (2) whether the trial court erred in finding that a nonsignatory realtor and her employer were prevented from benefitting from the mandatory arbitration clause found in the real estate contract.

Mississippi’s top court held that where a purchase agreement provides

--for a vendor and a purchaser to file suit against one another in court for damages of breach of contract,
--that the dual real estate agent's commission would be protected, and also
--for arbitrating disputes between vendors or purchasers and agent or real estate agency,

the agreement isn’t ambiguous with regard to arbitration. The Supreme Court also held that an agent or agency can enforce an arbitration clause despite not being signatories to the purchase agreement, because they were mentioned in the contract, and one of the parties agreed to the arbitration clause.

In Fradella v. Seaberry, No. 2005-CT-00404-SCT, 2007 WL 852097 (Miss. March 22, 2007)(available at www.mssc.state.ms.us/Images/Opinions/CO39258.pdf), the vendors, Sammy and Joy Germany listed their Pearl River County, Miss., home in February 2004, with Michelle Fradella, an agent associated with Prudential Gardner Realtors.

The Germanys and appellant Michelle Fradella set a $319,000 sales price for the property, described as an 18-acre lot. The appellees, purchasers James and Rosella Seaberry, had entered into a written contract agreeing that Fradella and Prudential Gardner would serve as dual agents for both the vendor and purchaser.

On Feb. 29, 2004, the Seaberrys agreed to purchase the described 18-acre lot for $300,000, contingent upon the selling of their New Orleans home. Fradella signed the agreement.

Two days later, the Germanys counteroffered at $317,000. The next day, the Seaberrys accepted and signed the written counteroffer.

But at that time, the 18-acre lot description was decreased to “16.68 Acres, +/-.”

The Seaberrys subsequently received a faxed counteroffer by Fradella, with the property appraised at $350,000, and only 13.52 acres. On April 19, 2004, the Germanys and the Seaberrys executed the contract for an agreed purchase price of $346,500. Neither Fradella nor anyone at Prudential Gardner Realtors signed, and no acreage amount was indicated.

Fradella did not tell the Seaberrys that the description submitted to the title insurance company described the property of being only 12.70 acres, less acreage than both the amounts mentioned in the counteroffer and in the appraisal.

After having sold the New Orleans home and closed on the deal, the Seaberrys received a copy of the appraisal, from Fradella, describing the property as 13.52 acres. The Seaberrys hired a surveyor and learned that the property’s deed description was only 12.70 acres.

The Seaberrys filed suit on Sept. 28, 2004. As the “First Defense,” according to the Supreme Court opinion, both Fradella and Prudential Gardner Realtors asserted that the case should be dismissed and submitted to arbitration based on the contract terms. Fradella filed a separate motion to compel arbitration, and Prudential Gardner filed a written joinder, joining Fradella's motion.

The chancery court denied the motion to compel based on the fact that both Fradella and Prudential Gardner were not signatories to the final real estate contract. The court cited Parkerson v. Smith, 817 So.2d 529 (Miss. 2002), in which the Mississippi Supreme Court stated “that one who was not a signatory to a contract could not take advantage of an arbitration clause within that contract,” according to the Fradella opinion.

Additionally, the trial court also found that because the real estate contract allowed for litigation of vendor-purchaser disputes, and arbitration of disputes between the vendor and the agent/agency or purchaser and the agent/agency, the contract was ambiguous as to whether the purchasers agreed to arbitrate their claims against anyone. Therefore, the chancery court found the arbitration clause to be ineffective to the extent that the Seaberrys could not be forced to arbitrate.

The Court of Appeals affirmed the chancery court--but on a different issue not raised by the parties on appeal. The plurality opinion reasoned that the contract’s arbitration clause was a separate contract, and additional consideration was required by Fradella in order for the clause to be effective.

Since neither Fradella nor Prudential Gardner were signatories to the contract and did not offer anything in exchange to the Seaberrys or Germanys, there was no consideration.

Both Fradella and Prudential Gardner filed post-decision motions for rehearing, which were denied. The state Supreme Court granted their cert petition.

The Court, in an opinion by Justice George C. Carlson Jr., notes that the appeals court decided the case on an issue not properly before it, so it clarified the issues it would consider: whether the two real estate contract clauses created ambiguity which led the arbitration clause to be ineffective, and whether a nonsignatory to a contract can enforce an arbitration clause.

The Court reviewed the first issue with IP Timberlands Operating Co. v. Denmiss Corp., 726 So.2d 96 (Miss.1998), in which the Court stated that “[w]here a contract is clear and unambiguous, its meaning and effect are matters of law which must be determined by the court.” In Fradella, the Court, agreeing with a dissent in the appellate court decision, found that the parties’ intent when framing the litigation and arbitration clause was unambiguous. The litigation clause, the opinion states, confers upon the vendor and purchaser rights and remedies to a breach of contract. Even though the provision entitles the agent/agency a portion of the earnest money deposit, a full commission, or court-ordered damages, the litigation clause pertains only to the vendor and purchaser.

On the other hand, the Court states, the arbitration clause applies to the relationship between vendor/purchaser and their agent/agency. The Seaberrys and Germanys contracted with each other in a way to resolve their disputes before court, and both sides contracted with Fradella to resolve their disputes through arbitration.

Therefore, the Supreme Court found that the chancery court erred in denying a motion to compel arbitration on the basis of an ambiguity between the two paragraphs.

On the nonsignatory issue, the opinion notes that the lower court relied heavily on Parkerson where the Court held that “one who is not a signatory to the document containing an arbitration clause cannot take advantage of the arbitration clause to compel arbitration.” The purpose of the judgment is to prevent a third party who was not a signatory and who did not play a significant role in the contract from asserting rights found within the contract.

In this case, the agent/agency was a part of the contract during its formation, the Court found. The basic language revolves around the relationship of the vendor, purchaser and agent/agency.

Moreover, from the beginning of the agreement’s formation, certain rights and responsibilities were created for Fradella and Prudential Gardner. In the April 19, 2004, real estate contract, the Seaberrys not only expressly designated Fradella as their real estate agent, but also conferred upon her rights and responsibilities to complete the transaction between them and the Germanys.

The Court held that Fradella and Prudential Gardner not signing the contract was immaterial. Therefore, they are not prevented from compelling arbitration.

 The Court held that the chancery court erred in finding that neither Fradella nor Prudential Gardner are signatories to the real estate contract, and therefore prevented from benefitting from the mandatory arbitration clause in the real estate contract.

            Justice Oliver E. Diaz, in a dissent joined by Justice James E. Graves Jr., wrote,

This case is not a difficult one. We are asked one question: may a non-party, nonsignatory to a contract, who has provided no consideration to the contract, take advantage of a clause in that contract? Centuries of law say “no,” and indeed the majority cites no cases for their proposition that a non-signatory to a contract who has provided no consideration to the contract may find refuge within the contract to which it is a stranger.

Sharply questioning the majority’s ability to protect the constitutional rights of Mississippi residents, he concludes:

. . . [A]rbitration as a concept is wholly valid—if parties wish to settle disputes outside of the legal system, they should be able to contract for such a result. It is so much more than a choice of forum, because it affects multiple constitutional rights. It is my deepest belief that all Mississippians have a fundamental constitutional right to both a jury of their peers and access to the court system.

Presiding Justice Kay B. Cobb didn’t participate in the case.

–Julie John, CPR Intern