Wednesday, November 22, 2017
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Non-Party Signing Arbitration Agreement Not Bound by It—Appeals Court
Panel Rejects Contention That Sole Managing Agent of Company, Who Personally Guranteed Its Payment of Law Firm’s Fees, Is Obliged to Participate in Alternate Dispute Resolution
By a MetNews Staff Writer
The Fourth District Court of Appeal has affirmed an order denying arbitration of a law firm’s action for more than $7 million against an Orange County cardiologist and entrepeneur.
Justice Richard D. Fybel of Div. Three wrote the unpublished opinion, explaining that although defendant Anil V. Shah signed the attorney-client agreement, he did so as sole managing agent of the client, Orange County Physician Investment Network, LLC (“OCPIN”). The mandatory arbitration clause did not apply to an action against him, individually, as guarantor of payment to the law firm of Hari S. Lal, Fybel declared.
The opinion, filed Monday, affirming an order by Orange Superior Court Judge Deborah C. Servino, says:
“It is well established that, with some exceptions inapplicable here, a party cannot be compelled to arbitrate a dispute that he or she has not agreed to resolve by arbitration. The trial court did not err in concluding that Shah never agreed to resolve the claims alleged against him in his individual capacity through binding arbitration. No potential exception to that rule, such as the existence of third party beneficiary status or a preexisting relationship, applies here.”
Lal and his firm, the co-plaintiffs, argued that Shah was a third party beneficiary based on his dual status as sole manager of OCPIN and guarantor of its obligation to pay the law firm’s bills. Fyber rejected the contention, saying:
“That Shah was sole acting manager of OCPIN and executed the professional services agreement in that capacity does not render him a third party beneficiary of the professional services agreement. Otherwise, any individual signing an arbitration agreement as an agent on behalf of an entity automatically would be personally subject to the arbitration agreement.”
The jurist said case law establishes that an agent who signs a contract containing an arbitration agreement is not personally affected by the clause “absent exceptional circumstances.”
The provisio that Shah would personally remunerate the law firm for its services if OCPIN failed to pay the firm’s bills, Fybel continued, “imposes a personal obligation upon Shah,” but it was unexplained by plaintiffs “how this provision confers an individual benefit on Shah sufficient to impose the arbitration provision against him as a third party beneficiary.”
‘Pre-Existing Relationship’
The plaintiffs also argued that under case law, a “pre-existing relationship” between a party to an agreement and a nonsignatory can confer upon the party a power to bind the nonsignatory to terms of the agreement. Shaw, they asserted, was Lal’s “best of family friend” for 20 years.
Fybel pointed to a 2008 Court of Appeal that says:
“Examples of the preexisting relationship include agency; spousal relationship; parent-child relationship; and the relationship of a general partner to a limited partnership.”
He pointed out that the plaintiffs were not arguing Shah’s relationship with OCPIN caused him to be bound by OCPIN’s duty to arbitrate, but that his relationoship with Lah gave rise to such a duty. Fybel wrote:
“Plaintiffs misapprehend the nature of the preexisting relationship exception. Their argument suggests that plaintiffs’ preexisting relationship (long-term friendship and professional relationship) with Shah is of the type that would confer authority upon plaintiffs to bind Shah to binding arbitration of claims they have against him. Neither the factual circumstances of this case nor the law supports the determination that plaintiffs could unilaterally bind Shah to such an arbitration agreement.”
The case is Lal v. Shah, G053190.
Richard I. Rydstrom of Newport Beach joined Lal in seeking reversal. Frank C. Rothrock, Marc P. Miles and Kristy A. Schlesinger of the Irvine office of Shook, Hardy & Bacon represented Shah.
Prior Litigation
A May 4, 2015 U.S. Tax Court decision sheds light on Shah’s involvement with OCPIN. It recites that in 2004, Tenant Healthcare, which owned the hospital where Shah worked, decided to sell that facility and four others that were nearby.
Shah orchestrated a $57 million purchase by physicians, with him becoming executive chairman of the acquisition and management company, a compensated position. Capital was raised through OCPIN, of which he was manager.
The doctor was involved in various other related enterprises.
A May 18, 2015 article in Forbes describes the Tax Court case as “a tax geek’s dream covering complicated issues combined in a convoluted manner.” The upshot was that Shah’s testimony as to the hours he spent overseeing real estate matters was disbelieved and deficiency assessments and penalties against him, his wife and his business of nearly $800,000 were affirmed.
An April 2, 2009 article in the Orange County Register relates that disputes over ownership of the hospitals erupted in 2007, and were resolved when the holding company agreed to pay $2.7 million to OCPIN.
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