Res judicata—Latin for a “matter” or “thing” “decided”—is the legal principle under which a final judgment in one action bars the same parties from relitigating in another, successive action matters that were or could have been asserted in that first action. Also known as “claim preclusion”, it is designed to promote finality and judicial economy, and to protect persons from vexatious litigation. See, generally, Taylor v. Sturgell, 553 U.S. 880, 891 (2008).
But can an unconfirmed arbitration award preclude a party from maintaining a court action to resolve a matter that it did not submit or agree to submit to arbitration? Suppose:
- A has an arbitration agreement with B (the “AB Agreement”);
- B has an arbitration agreement with C (the “BC Agreement”);
- A and C did not agree to arbitrate any disputes between them;
- The AB Agreement contemplates the parties arbitrating their claims against each other in a consolidated arbitration that may involve factually-related disputes that B has agreed to arbitrate with C or other third parties, provided those third parties consent to consolidated arbitration;
- The AB Agreement does not purport to require A or B to arbitrate any disputes between (a) A or B or both; and (b) C or any other non-party;
- The BC Agreement does not purport to require B or C to arbitrate any disputes between (a) B or C or both; and (b) A or any other third party;
- A dispute arises between A and B, and A demands arbitration against B;
- B, in turn, demands arbitration against C, seeking indemnity from C for any liability B may have to A;
- The AB and BC arbitrations are consolidated over A’s objection;
- A knows it has a legal and factual basis for asserting a tort claim against C arising out of the same transactions and occurrences at issue in the consolidated arbitration, but does not submit (or attempt to submit) that claim to arbitration;
- The arbitration proceeds, and the arbitrator issues a final award finding that B is liable to A for $X in damages and that C is not obligated to indemnify B;
- Nobody seeks to confirm, vacate, modify or correct the award; and
- A subsequently brings an action in court against C, which seeks damages from C allegedly caused by C’s negligent conduct with respect to the same transactions and occurrences that were the subject of the consolidated arbitration.
Is A’s lawsuit barred by res judicata?
On August 28, 2014, in O’Neil v. Shepley, No. 13-2320, slip op. (6th Cir. Aug. 28, 2014), the U.S. Court of Appeals for the Sixth Circuit, in a 2-1 decision, said the answer was “no,” and that the answer would have been the same had the AB/BC award been confirmed. See slip op. at 10-11.
The two-judge majority opinion—authored by Chief Circuit Court Judge R. Guy Cole, and joined by Circuit (and former Chief) Judge Danny Julian Boggs—minced no words when it said that to bar A’s lawsuit based on res judicata would be to endorse a “contagion theory of arbitration” that “has no basis in law or the relevant contracts[:]”
Simply put: the premise of arbitration is consent and [A] did not consent to arbitrate the present claims [against C]. Our judicial doctrines do not force it to do so now.
Slip op. at 10-11.
Circuit Court Judge David William McKeague dissented, arguing that the “court does not need to infect [A] with a ‘contagion theory of arbitration’ to bar his claims with res judicata. It merely needs to hold him to the basic terms of his contract. Any infection that [A] O’Neil has acquired is its own doing.” That was so, claimed the dissent, because:
[The AB arbitration was] eventually expanded to include [C]. Moreover, in [subcontractor A’s] contract with [construction manager B], [A] agreed to arbitrate his grievances with [B] and further agreed in a standard ‘flowthrough’ provision to be ‘bound by the procedures, decision and determinations resulting from any dispute resolution process’ in the contract between [B] and [the owner]. The contract between [B] and the [owner] required all disputes, among all contractors, to be submitted to binding arbitration.
Slip op. at 13 (emphasis in original) (McKeague, J., dissenting).
All three judges appeared to agree that res judicata does not turn on whether the first proceeding would have barred the second had the first been a plenary court proceeding. The difference of opinion between the majority and dissent was that the dissent was prepared to find A’s agreement to consolidated arbitration was the functional equivalent of an agreement arbitrate its claims against any person who might consent to join such a consolidated arbitration, even if A had no contractual relationship with that person, let alone a written agreement to arbitrate.
We think the majority’s read of the relevant contractual provisions gave effect to the parties expressed intent, whereas the dissent’s view of what the parties agreed did not. But to appreciate why, you’ll need to take a closer look at the Sheply facts, which in substance are much like (but not identical to) those in our hypothetical. Continue Reading »