In a lawsuit between the buyer and seller of a business pursuant to an asset purchase agreement, a decision from the Court of Appeals shows how difficult it is to overturn an arbitrator’s decision.
The decision is instructive to small-business owners. If a business owner arbitrates a business dispute it’s important to remember that – unlike going through the courts – the arbitrator’s decision is nearly impossible to overturn. That’s the lesson one business owner recently learned in the case of Gribble v. Madcat Enterprises.
Arbitration of business disputes is common, and for good reason. Arbitration is a private proceeding conducted under rules that are often streamlined, and frequently is completed in a fraction of the time that a normal business lawsuit takes to wind its way through the court system. The Uniform Arbitration Act is the law giving the basic requirements for how arbitration is to be conducted.
This efficiency can come at a price that entrepreneurs, business owners, and franchisees should be aware of. That price is the inability, in almost all cases, to appeal the decision if the arbitrator rules against you.
The case at issue involved the purchase and sale of a business pursuant to an asset purchase agreement. The plaintiff sold his business to the defendant, and the defendant financed the purchase by signing a promissory note promising to make payments to the seller. The defendant later stopped making payments, so the plaintiff sued him. The case went to arbitration, rather than to court, pursuant to an agreement between the parties they signed when the plaintiff sold the business.
The defendant’s main argument was that the wrong party had sued him. The promissory note the defendant signed was only to the plaintiff-seller’s company, but the plaintiff had filed the lawsuit in his own name, in his individual capacity.
Legally, a person who owns a company is treated as a separate entity from the company itself. That is, the company and its owner are two separate people as far as their rights to sue and be sued, even if, for instance, there is only one owner of the business.
The arbitrator rejected the defendant’s argument and held that either the plaintiff individually or his company could sue the defendant. Accordingly, the arbitrator entered a judgment against the defendant for nearly $400,000.
Clearly unhappy with the outcome, the defendant filed an appeal of the arbitrator’s decision with the Court of Appeals. The defendant’s argument was basically the same as what he argued to the arbitrator – that is, that the plaintiff’s lawsuit should have been filed in the name of his company, not himself individually.
The Court of Appeals issued a wholesale rejection of this argument. The reasoning of the court is vital to understand for business owners contemplating bringing their business disputes in arbitration. Arbitrators are not bound by the same rules as judges, said the court. Arbitrators need not follow the substantive law, like the common law or statutes. Nor must arbitrators abide by the rules of evidence. Arbitrators may make decisions based on their own reasoning and intuition, even if it is different than what a judge or jury would have to use.
Furthermore, even if an arbitrator makes a mistake, the defendant can do nothing about it – it is simply, as the court said, “the misfortune of the party.” The court elaborated that “parties to arbitration enjoy limited appellate review, and have no recourse when an arbitrator makes a mistake.”
The grounds for a court overturning an arbitrator’s decision are stated in the North Carolina Uniform Arbitration Act. To overturn an arbitrator’s decision, one must that there was a corrupt arbitrator, that there was no agreement to arbitrate in the first place, or that the arbitrator conducted the hearing improperly. No such allegations were made by the defendant here. These are difficult allegations for anyone to prove.
In the court’s rejection of the defendant’s argument, it pointed out that even if the plaintiff were not the one on the promissory note, longstanding principles of contract law would have permitted him to file the collection lawsuit against the defendant/business purchaser. All the plaintiff needed to show was that he was a “direct beneficiary” of the agreement.
North Carolina law has long held that there need not be a signed contract between the parties to a breach-of-contract case so long as the person suing be able to establish “a derivative interest founded on, or growing out of, contract, connection, or bond of union between the parties.” Lee Cycle Center v. Wilson Cycle Center, 545 S.E. 745 (2001). North Carolina courts have held that if the owner of a company is the only shareholder, and if the obligations to the agreement are all being performed by the owner, an enforceable contract may be upheld.
In this case, the parties certainly received the benefits arbitration is supposed to supply – a speedy proceeding and a final decision. These are often good reasons to take a case to arbitration and avoid back-ups in the court system.
But small-business owners and franchisees should do this with their eyes open. They should be aware that if they go to arbitration, they will probably only get one bite at the apple, and thus they need to do it right the first time.
Dye Culik PC is a Charlotte, North Carolina business law firm representing small businesses, franchisees, and other entrepreneurs in matters from starting a business, to buying or selling a business, to disputes, arbitration, and litigation. If you have a question or an issue with your business, contact us at 980.999.3557 to see how we can help.