Mass. Permits Enforcement of Arbitration Agreements By Third Parties

Last month, the SJC reaffirmed an aspect of Massachusetts arbitration law that permits a party to enforce an arbitration agreement against a party that signed the agreement, even though the enforcing party was not a party to the agreement. In Machado et al. v. System4, the SJC upheld the right of System4 to compel the plaintiffs to arbitrate their claims, based on an arbitration provision in franchise agreements the plaintiffs had with another entity, NECCS, which plaintiffs alleged existed solely to do the business of and was the agent of System4. 

The SJC ruled that because the plaintiffs’ claims arose out of the franchise agreements (specifically, the plaintiffs alleged that under the franchise agreements, System4 and NECCS misclassified them as independent contractors. The SJC held that the plaintiffs could not fairly attempt to seek relief relating to the franchise agreements, yet at the same time deny and attempt to avoid the arbitration clause in the same franchise agreements, given especially that the plaintiffs had in their allegations lumped together both System4 and NECCS, the other party to the franchise agreements.

It would be interesting to see how Massachusetts courts would apply this precedent in cases where there is not such a close link between the non-party defendant attempting to enforce arbitration and the actual party to the arbitration agreement. Most states and federal law in the realm of arbitration holds that arbitration is favored, but can only be enforced where the parties have agreed to arbitrate. Could plaintiffs be compelled to arbitrate if they argue that they never agreed to arbitrate against the defendant, even if the plaintiffs’ claims arise out of an agreement with an arbitration provision, but the defendant has a more tenuous link with the other party to agreement than existed between System4 and NECCS?

Further reading: http://hr.cch.com/ELD/MachadoSystem4041415.pdf

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