A luxury homebuilder recently filed a cert petition in the US Supreme Court to reverse a lower court ruling refusing to compel arbitration. See Toll Bros. v. Noohi, No. 13-55 (U.S. July 10, 2013). Click here to see a copy of the cert petition.
The case started when homebuyers filed a class action in federal court against the defendant homebuilder for failing to return a security deposit in connection with a million dollar home purchase. The defendant homebuilder responded by asking the court to enforce an arbitration agreement in the sales contract. However, the lower court refused to enforce the arbitration agreement because of a lack of mutuality. The agreement stated that the “Buyer . . . hereby agree[s] that any and all disputes with Seller . . . shall be resolved by binding arbitration.” The court construed this language as binding only the plaintiff homebuyer, not the defendant homebuilder, and Maryland’s highest court had previously held that arbitration agreements must be supported by mutual obligations to arbitrate. Here, because the homebuilder is not bound to arbitrate, the lower court held that the arbitration clause was not enforceable, and the Fourth Circuit affirmed.
The homebuilder filed a strong cert petition arguing that based on Concepcion’s preemption analysis, the FAA would preempt the Maryland mutuality rule because this Maryland rule singles out arbitration and derives its meaning from the fact that an arbitration agreement is at issue. According to the cert petition, no other case has applied the Maryland rule regarding mutuality outside of the arbitration context.
I think the homebuilder has the better of the argument here. Suppose that the buyer commences an arbitration regarding the dispute over security deposits, or mold in the house, or some other construction defect. The homebuilder would be bound by any ruling from such an arbitration, good or bad, and thus, I would tend to find that mutuality exists here. The lower courts seem to be looking at mutuality from a different angle: mutuality is lacking because potential claims brought by the seller are not covered by the arbitration agreement. It seems appropriate for sophisticated parties to agree to arbitrate only certain claims, not every possible claim between them. The FAA does not require that every possible dispute between parties must be covered by an arbitration agreement in order for the agreement to be enforceable. If the Supreme Court grants cert, I expect a majority of the Justices would find Concepcion’s preemption analysis controlling, and the Maryland arbitration mutuality rule will go the way of the floppy disk and Dodo bird.