North Carolina Court Refuses to Compel Arbitration Where Claimant Was a Nonsignatory

In two decisions issued the same day, the North Carolina Court of Appeals refused to compel arbitration where the claimant was a nonsignatory.

In Harco National Insurance Co. v. BDO Seidman, LLP, No. COA05-1429, 2006 WL 1677869 (N.C. Ct. App. June 20, 2006), Harco and Capital entered in a Program Administrator Agreement (“the PAA”) whereby Harco agreed to administer Capital’s bonding program. The PAA included an arbitration clause.

BDO and Capital entered into a letter agreement (“the Agreement”) whereby BDO agreed to perform an audit of Capital’s financial statements. The Agreement included an arbitration clause. BDO’s audit stated that Capital was profitable and had substantial assets.

Harco later discovered that Capital was insolvent and thus unable to cover payments on forfeited bonds. Harco sued BDO for alleged negligence in conducting the audit. The trial court denied BDO’s motion to compel arbitration. On appeal, BDO relied on the doctrine of equitable estoppel in arguing that Harco’s claims were subject to arbitration.

The Court noted that equitable estoppel may require a nonsignatory to arbitrate claims if the nonsignatory seeks benefit from a contract containing an arbitration clause. Applying that rule, the Court found that Harco was not required to arbitrate because it was not seeking any “direct benefit” from either the PAA or the Agreement.

In Remington Arms Co., Inc. v. Heritage Graphics, LLC, No. COA05-1064, 2006 WL 1676892 (N.C. Ct. App. June 20, 2006), Remington bought fishing line from BBS pursuant to an agreement containing an arbitration clause. BBS and Heritage entered into a separate agreement whereby Heritage agreed to provide printed labels for the spooled fishing line that BBS was selling to Remington.

When BBS withheld payment for the labels, Heritage sent a letter to Remington demanding payment. Remington subsequently filed a declaratory judgment action against BBS and Heritage seeking a declaration that Remington was not liable for any amount due Heritage.