HARCO NATIONAL INSURANCE
COMPANY
v
.
Wake County
No. 05 CVS 2299
BDO SEIDMAN, LLP
Ragsdale Liggett, P.L.L.C., by Mary Hulett and Jessica C.
Tyndall, for plaintiff-appellee.
Parker, Poe, Adams & Bernstein L.L.P., by Irvin W. Hankins
III, Regina W. Swinea and Melanie Black Dubis, for defendant-
appellant.
STEELMAN, Judge.
Capital Bonding Corporation (Capital), which is not a party to
this action, sold bail bonds throughout the United States. Because
these bonds are a form of insurance, and because Capital was not a
licensed insurance company, Capital was required to affiliate with
licensed insurance companies (fronting companies) in order to
engage in this business.
Plaintiff is in the business of selling property and casualty
insurance, and in 2002 Capital solicited plaintiff to become a
fronting company for its bond program. Capital presented businessand financial documents to plaintiff in order to demonstrate the
financial viability of its bond program. Plaintiff and Capital
entered into a Program Administrator Agreement (PAA) effective 1
January 2003 which detailed the rights and obligations of the
parties. Under the PAA, Capital was required to maintain
sufficient assets to cover all forfeited bonds, and was further
required to provide plaintiff with yearly consolidated financial
statements prepared by an independent certified public accountant.
Breach of the agreement by Capital allowed immediate withdrawal
from the PAA by plaintiff. The PAA included an arbitration clause
stating that any dispute or difference between the parties which is
not resolved in non-binding mediation “shall be submitted to
binding arbitration....”
On 22 April 2003, Capital executed an engagement letter
(engagement agreement) with defendant, an independent certified
public accounting firm, whereby defendant agreed to perform an
audit of Capital's consolidated financial statements for the year
ending 31 December 2002. Defendant performed the audit, which
stated Capital was profitable and had substantial assets. The
engagement agreement also contained an arbitration clause. No
agreements were executed between plaintiff and defendant, including
agreements mandating arbitration of disputes.
Plaintiff was called upon to make substantial payments on
forfeited bonds in the Spring of 2004, but when they approached
Capital, they discovered that Capital was insolvent and unable tomeet its obligations. Plaintiff further determined that Capital
had been insolvent at the time defendant conducted its 2002 audit.
Plaintiff filed this action on 23 February 2005 alleging
negligence and negligent misrepresentation on the part of
defendant. In its complaint, plaintiff alleged defendant was
negligent in conducting its audit of Capital's 2002 financial
statements, and that had defendant performed its job in a
reasonable manner, plaintiff would have been appraised of Capital's
dire financial situation, and would have withdrawn from its
agreement with Capital prior to the Spring of 2004.
Defendant filed a motion to dismiss plaintiff's claim, and an
alternative motion to compel arbitration, on 21 April 2005. The
trial court denied both motions by order filed 24 August 2005.
Defendant does not appeal the denial of its motion to dismiss, but
does appeal the denial of its motion to compel arbitration.
In defendant's only argument, it contends that the trial court
erred in denying defendant's motion to compel arbitration because
plaintiff is estopped from avoiding the arbitration requirements of
the agreements that form the basis of its claims against defendant.
We disagree.
At the outset, we note that “an order denying
arbitration, although interlocutory, is
immediately appealable because it involves a
substantial right which might be lost if
appeal is delayed.” “The first task of a
court asked to compel arbitration of a dispute
is to determine whether the parties agreed to
arbitrate that dispute.”
Revels v. Miss Am. Org., 165 N.C. App. 181, 186, 599 S.E.2d 54, 57-
58, rev. denied 359 N.C. 191, 605 S.E.2d 153 (2004) (citations
omitted). “
'A dispute can only be settled by arbitration if a
valid arbitration agreement exists. The party seeking arbitration
must show that the parties mutually agreed to arbitrate their
disputes.'
”
Brown v. Centex Homes, __ N.C. App. __, __, 615 S.E.2d
86, 87 (2005)
(citations omitted).
In the instant case, no arbitration agreement was ever
executed between plaintiff and defendant. Defendant seeks to
compel arbitration based upon two agreements which contain
arbitration clauses, the PAA, executed by plaintiff and Capital,
and the engagement agreement between Capital and defendant.
Defendant contends plaintiff should be equitably estopped from
denying arbitration because plaintiff's claims against defendant
are ultimately based upon these agreements.
“'Equitable estoppel precludes a party from asserting rights
“he otherwise would have had against another” when his own conduct
renders assertion of those rights contrary to equity.'” Ellen v.
A.C. Schultes of Md., Inc., __ N.C. App. __, __, 615 S.E.2d 729,
732 (2005) (citations omitted).
In the arbitration context, the doctrine
recognizes that a party may be estopped from
asserting that the lack of his signature on a
written contract precludes enforcement of the
contract's arbitration clause when he has
consistently maintained that other provisions
of the same contract should be enforced to
benefit him. “To allow [a plaintiff] to claim
the benefit of the contract and simultaneously
avoid its burdens would both disregard equity
and contravene the purposes underlying
enactment of the Arbitration Act.”
Id.(citations omitted).
When a plaintiff has executed a contract with a third party,
then attempts to rely upon provisions of that contract in its
claims against a defendant, plaintiff may be estopped from denying
enforcement of an arbitration clause in that contract. Id. In
Ellen, plaintiffs were shareholders in a construction company that
entered into agreements with defendant for the construction of
sewer and water projects. All of these agreements included clauses
mandating arbitration of disputes. Plaintiffs alleged that
defendant conspired to damage their business and reputations.
Defendant attempted to compel arbitration based upon the agreements
executed by defendant and plaintiffs' construction company.
Because the agreements were executed on behalf of plaintiffs'
company, and not plaintiffs individually, the trial court ruled
that no binding arbitration agreement existed between plaintiffs
and defendant, and denied defendant's motion to compel arbitration.
This Court affirmed the trial court, even though the contracts
including the arbitration clauses between plaintiffs' company and
defendant constituted part of the “factual basis” of plaintiff's
complaint against defendant. This court held that plaintiffs were
not seeking any direct benefit from any provisions in the contracts
in their suit against defendant, and none of plaintiffs' claims
against defendant depended upon the contract. For these reasons,
the Ellen Court held “that the doctrine of equitable estoppel
cannot be used to force plaintiffs to arbitrate their individual
claims.” Id. at __, 615 S.E.2d at 733. In the instant case, though the contracts including the
arbitration clauses form part of the factual basis of plaintiff's
complaint, plaintiff does not seek any direct benefit from any
provisions of these contracts in its suit against defendant.
Plaintiff's complaint only includes claims for negligence and
negligent misrepresentation, and does not include any contract
claims. Therefore, “defendants' liability will be determined by
its duties under North Carolina statutory and common law, not by
its duties under the contracts . . . .” Id. These facts do not
support any basis to equitably estop plaintiff from denying the
existence of a binding arbitration agreement, and we hold that no
such agreement exists between the parties. Because we hold that no
arbitration agreement exists between the parties, we further hold
that the trial court did not err in dismissing defendant's motion
to compel arbitration. This argument is without merit.
AFFIRMED.
Judges McCULLOUGH and CALABRIA concur.
Report per Rule 30(e).
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