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If a contract allows a party to assign its rights under the contract,
the party’s assignee may be able to enforce an arbitration
clause in the contract even though language in the arbitration
clause prohibits the participation of non–contractual
parties in the arbitration. This point is illustrated in the case
of Stromberg Sheet Metal Works, Inc. v. Washington Gas
Energy Systems, 2006 U.S. Dist. LEXIS 59036 (D.C. 2006).
Here, the federal government awarded a contract to a general
contractor to design and build a heating and chilling facility.
The general contractor subcontracted with one subcontractor
to design the project and a second subcontractor to serve as
the project manager. The project management subcontractor
subcontracted with a sub-subcontractor for construction and
manufacturing services.
The sub-subcontractor filed suit against the general contractor
and the project management subcontractor claiming that
the sub-subcontractor had not been paid for additional work
required because of the design subcontractor’s design defects.
The general contractor filed a third-party complaint
against the design subcontractor due to alleged design defects.
In addition, the general contractor filed a motion to
compel arbitration based on the arbitration clause contained
in the subcontract between the general contractor and the
design subcontractor. The general contractor then assigned
its claim against the design subcontractor to the sub-subcontractor,
and on behalf of the sub-subcontractor, the
general contractor requested that the court grant the motion
to compel arbitration.
The general contractor argued that the sub-subcontractor
could enforce the arbitration clause on behalf of the general
contractor because the general contractor had assigned its
own rights under the general contractor-design subcontractor
subcontract to the sub-subcontractor. The design subcontractor
argued that the general contractor’s assignment to the
sub-subcontractor invalidated the arbitration provision.
The design subcontractor believed that an arbitration arising
out of the agreement could not include any person or entity
who was not party to the agreement by consolidation, joinder
or any other manner. The general contractor disagreed and stated
that the sub-subcontractor’s status as a non-party to
the agreement was irrelevant to the enforceability of the arbitration
clause; the general contractor had assigned its rights
to the sub-subcontractor.
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The court found that the subcontract between the general
contractor and the design subcontractor allowed the general
contractor to assign the general contractor’s rights under the
subcontract. While the arbitration clause did contain language
which limited the obligation of the contractual parties
to arbitrate with non-parties, the court noted that it was well-settled
principle of contract law that an assignee of a contract
stands in the shoes of the assignor and acquires the same
rights and liabilities as if it had been an original party to the
contract. Accordingly, the court ruled that the sub-subcontractor,
as an assignee of the general contractor-design
subcontractor subcontract, had the same rights as the
general contractor and could enforce the arbitration clause
against the design subcontractor.
As a result of this case, parties should be aware that an arbitration
clause in a contract may be enforced by an assignee
of the contract, despite language in the arbitration clause
which limits a contractual party’s obligation to arbitrate
with non-parties to the contract.
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