Barrett v. McDonald Investments, Inc.

2005 ME 43, 870 A.2d 146, 2005 Me. LEXIS 43

• Court: Supreme Judicial Court of Maine
• Decided: March 29, 2005
• Status: Published

Opinions

Majority: SAUFLEY, C.J., and CLIFFORD, RUDMAN, DANA, ALEXANDER, CALKINS, and LEVY, JJ.

Concurrence: ALEXANDER, J.

SAUFLEY, C.J.

[¶ 1] McDonald Investments, Inc., and Kevin R. Sullivan, an advisor employed by McDonald, appeal from a decision of the Superior Court (Kennebec County, Mar-den, J.) denying their motion to stay and compel arbitration of tort claims brought by Laurence E. Barrett and Edna M. Barrett. McDonald and Sullivan contend that the language of their arbitration agreement with Laurence Barrett unambiguously mandates the arbitration of the Barretts’ claims of negligence, negligent misrepresentation, fraud, and punitive damages based on alleged misrepresentations about a retirement annuity purchased by the Barretts on Sullivan’s recommendation. Because we conclude that the arbitration agreement is ambiguous and must be construed against the drafter, McDonald, we affirm the denial of McDonald and Sullivan’s motion to stay and compel arbitration.

I. BACKGROUND

[¶ 2] Laurence Barrett and his wife, Edna, allege the following facts. In 1999, Laurence was in his thirty-second year of employment and approached Key Bank for retirement advice. Key Bank referred Laurence to McDonald Investments, Inc., for investment advice. Kevin Sullivan, an investment advisor at McDonald, suggested to Laurence that he retire earlier than he had planned or increase his spending during retirement. Laurence decided to retire at his then current age of fifty-five.

[¶ 3] In February 2000, before McDonald accepted the Barretts’ money for investment, Laurence Barrett and Sullivan executed an IRA Director Plan Agreement (the Agreement). Edna Barrett was listed as the sole beneficiary. The Agreement provided that Laurence would deposit funds with McDonald, which McDonald would invest in options selected by Laurence upon Laurence’s instructions and direction. The Agreement disclaimed any fiduciary relationship and did not in any way describe McDonald or Sullivan as having any advisory roles. The Agreement provided for the arbitration of certain disputes:

The Custodian [McDonald] and the Depositor [Laurence Barrett] agree that by the Custodian opening and carrying an account for the Depositor, all controversies which may arise between us concerning any transaction or the construction, performance or breach of this or any other agreement between us per-tabling to securities and any other property, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration.

The Agreement required that arbitration be conducted “before the New York Stock Exchange, Inc., the National Association of Securities Dealers, Inc., The Municipal Securities Rulemaking Board, or other self-regulatory organization of which [McDonald] is a member” pursuant to the Federal Arbitration Act, 9 U.S.C.A. §§ 1-16 (West 1999 & Supp.2004) applying Ohio law.

[¶ 4] Sullivan then advised the Barretts to invest $505,379.87, the amount of their life savings from Laurence’s 401k, in a Manulife individual retirement annuity contract with a Guaranteed Retirement Income Plan (GRIP) rider. Sullivan advised that the annuity with the GRIP rider would guarantee a minimum return of six percent on the initial investment regardless of the state of the stock market, minus the money the Barretts withdrew. Sullivan knew that there was a seven-year waiting period from the date of contract until annuitization, during which time the Barretts would have to withdraw funds annually to pay taxes and living expenses. Sullivan never advised the Barretts that there was a penalty for withdrawals or that the principal would be subject to market fluctuations. The Barretts followed Sullivan’s advice and invested in the Manu-life annuity.

[¶ 5] When the Barretts received the contract for the Manulife annuity in March 2000, it did not contain the GRIP rider. Nearly a year later, the Barretts also noticed that they did not receive any GRIP rider paperwork on the anniversary of their contract. They contacted Sullivan, who at that time discovered that Manulife had not issued the GRIP rider. Sullivan contacted Manulife, which agreed to allow the Barretts to elect the GRIP retroactive to the original contract date. The Bar-retts did not, however, receive a new contract and GRIP rider at that time.

[¶ 6] By November 2001, the account’s value had diminished to $272,511.65 as a result of a drop in the market. When the Barretts contacted Sullivan to make sure the GRIP was operating as he had explained to them, Sullivan in turn contacted Manulife and learned that the GRIP did not function as Sullivan had represented to the Barretts. Sullivan and his supervisor met with the Barretts and a Manulife representative in December 2001. The Manu-life representative explained that the GRIP rider did not guarantee six percent annual growth in the principal; rather, the principal was subject to variations in the stock market.

[¶ 7] In June 2003, the Barretts commenced the present action against McDonald, Sullivan, and Manulife.¹ The Barretts alleged claims of negligence, negligent misrepresentation, and fraud against McDonald and Sullivan. The Bar-retts also claimed they were entitled to punitive damages.

[¶ 8] In response, McDonald and Sullivan moved to stay and compel arbitration on the ground that the arbitration clause in their financial services contract with Laurence Barrett requires the submission of the present disputes to an arbitrator. See 14 M.R.S.A. § 5928 (2003). They attached the affidavit of McDonald’s branch manager, who referred to and attached a copy of the Agreement containing the arbitration clause.

[¶ 9] The Barretts objected to the motion to stay and compel arbitration. They argued that the dispute concerned the advice to purchase the Manulife policy, not conduct related to the Agreement by which the Barretts deposited them life savings into a custodial account with McDonald.

[¶ 10] After a hearing, the court denied the motion to stay and compel arbitration as to the tort claims against McDonald and Sullivan, reasoning that the language of the agreement does not communicate an express waiver of the Barretts’ right to bring tort claims. McDonald and Sullivan have timely appealed.

II. DISCUSSION

[¶ 11] McDonald and Sullivan contend that the arbitration clause unambiguously provides for the arbitration of all disputes concerning any transaction that pertains to securities or other property. According to them, “all controversies” must be read to include tort disputes. They contend that even if the Agreement is ambiguous, the arbitration clause should be applied because it is susceptible to an interpretation that covers tort disputes.

[¶ 12] The Barretts contend that their tort claims have no nexus with the custodial Agreement and are not subject to the arbitration clause. The Barretts argue that the Agreement governs the administration of a custodial account, not misrepresentations about the nature and operation of the Manulife annuity and GRIP rider.

A. Appellate Jurisdiction and Standard of Review

[¶ 13] Though the court’s order denying a motion to compel arbitration is interlocutory, we have jurisdiction to review it. 14 M.R.S.A. § 5945(1) (2003); Patrick v. Moran, 2001 ME 6, ¶ 4, 764 A.2d 256, 257.

[¶ 14] The initial determination of “whether the parties intended to submit this dispute to arbitration” must be resolved in court, not by an arbitrator. V.I.P., Inc. v. First Tree Dev. Ltd. Liab. Co., 2001 ME 73, ¶ 3, 770 A.2d 95, 96. The parties must have agreed to arbitrate in writing. Patrick, 2001 ME 6, ¶ 5, 764 A.2d at 257. We review the motion court’s determination of substantive arbitrability for errors of law, V.I.P., 2001 ME 73, ¶ 3, 770 A.2d at 96, and for facts not supported by substantial evidence in the record, Saga Communications of New Eng., Inc. v. Voornas, 2000 ME 156, ¶ 7, 756 A.2d 954, 958.

B. Interpretation of the Arbitration Clause

[¶ 15] The issue before us presents a clear conflict between two established principles of contract interpretation. On one hand, Maine has a broad presumption in favor of arbitration. Roosa v. Tillotson, 1997 ME 121, ¶ 3, 695 A.2d 1196, 1197. On the other, we have long recognized that ambiguities in a contract are to be interpreted against the drafter. See, e.g., Bar Harbor & Union River Power Co. v. Found. Co., 129 Me. 81, 85, 149 A. 801, 803 (1930). The tension between these doctrines is heightened when, as in this case, the parties to the contract are in unequal bargaining positions.

[¶ 16] The presumption in favor of substantive arbitrability advances the Maine Legislature’s “strong policy favoring arbitration.” Westbrook Sch. Comm. v. Westbrook Teachers Ass’n, 404 A.2d 204, 207-08 (Me.1979). We first recognized this policy in Lewiston Firefighters Ass’n v. City of Lewiston, 354 A.2d 154 (Me.1976), a case that involved the arbitration of public employees’ contract grievances. In that case, we found that the Legislature had determined that arbitration was the “ ‘desirable method’ ” for settling such contract disputes.² Id. at 165-66. Although the genesis of the strong presumption in favor of arbitration springs from labor law, the presumption has been expanded to disputes about private agreements outside the employment context. See, e.g., Roosa, 1997 ME 121, ¶ 1, 695 A.2d at 1197. Thus, we have said that when two parties have included a provision requiring arbitration in their contract, a subsequent dispute should be deemed arbitrable “unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage.” V.I.P., 2001 ME 73, ¶ 4, 770 A.2d at 96 (quotation marks omitted).

[¶ 17] In interpreting the language of an arbitration agreement to determine substantive arbitrability, however, we apply general principles of contract interpretation. Granger N., Inc. v. Cianchette, 572 A.2d 136, 138 (Me.1990). A bedrock rule of contract interpretation is that ambiguities in a document are construed against its drafter. 11 SAMUEL WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS § 32:12 at 471-72 (4th ed. 1999) (“Since the language is presumptively within the control of the party drafting the agreement, it is a generally accepted principle that any ambiguity in that language will be interpreted against the drafter.”). This rule has long been applied in Maine, for the reasons summarized in Monk v. Morton, 139 Me. 291, 30 A.2d 17 (1943):

The rule that an ambiguous contract will be construed more strongly against him who uses the words concerning which doubt arises, is more than an arbitrary rule. Its purpose is to give effect to the intention of the parties. To the maker of an instrument is available language with which to adequately set forth the terms thereof. It is presumed that he will not leave undeclared that which he would claim as his right under the agreement; and the absence of a requirement against the obligee is evidence that such requirement was not within the understanding of the parties. He who speaks should speak plainly, or the other party may explain to his own advantage.

Id. at 295-96, 30 A.2d at 19 (quotation marks omitted).

[¶ 18] The rationale for interpreting ambiguities against the drafter is particularly compelling in contracts where one party had little or no bargaining power.³ “[W]here a standard-form, printed contract is submitted to the other on a ‘take it or leave it’ basis, upon equitable principles the provisions of the contract are generally construed to meet the reasonable expectations of the party in the inferior bargaining position.... ” Dairy Farm Leasing Co. v. Hartley, 395 A.2d 1135, 1139-40 n. 3 (Me.1978). In such cases, the party drafting the “take it or leave it” contract enjoys all of the advantages, not only in choosing its words, but also in rejecting any changes to the language. See generally Richard M. Alderman, Pre-Dispute Mandatory Arbitration in Consumer Contracts: A Call for Reform, 38 HOUS. L. REV. 1237, 1246 — 49 (2001) (discussing the imbalance of bargaining power in consumer contracts containing mandatory arbitration provisions).

[¶ 19] The Agreement in the present case provides for the arbitration of “all controversies which may arise between [McDonald and Laurence Barrett] concerning any transaction or the construction, performance or breach of this or any other agreement between [them] pertaining to securities and any other property.” Notwithstanding the seemingly broad language of the arbitration clause, the Agreement within which this paragraph is contained characterizes McDonald as acting purely at the behest of Laurence Barrett and does not in any way address the giving of investment advice. Accordingly, in the context of this Agreement, where the parties expected McDonald to act in a purely custodial capacity, it is unclear whether the giving of investment advice constitutes a “transaction” within the meaning of the arbitration clause. It is also unclear from the Agreement whether the giving of investment advice constitutes “any other agreement” between the parties. These uncertainties create ambiguities in determining the reach of the agreement to arbitrate.

[¶ 20] Because the parties do not dispute that McDonald accepted the Barretts’ money conditioned on the execution of the Agreement, we must determine whether to follow our long-held principle that an ambiguity in a contract be construed against the drafter or to apply the principle that doubts should be resolved in favor of arbi-trability.

[¶ 21] In this context, where an individual with little leverage is entering into an agreement with a larger entity that offers its services on a “take it or leave it” basis, we conclude that the balance tips in favor of applying the equitable rule favoring the construction of the contract against the drafter. See Dairy Farm Leasing Co., 395 A.2d at 1139-40 n. 8. McDonald inserted this arbitration clause into a contract that governed McDonald’s custodial function in handling the Barretts’ money, rather than its advisory function in giving investment advice. We will not take a broad and expansive view of the arbitration clause in these circumstances to encompass claims that are unrelated to the substance of the Agreement. Because the arbitration agreement can be read to apply only to actions and transactions related to McDonald’s and Sullivan’s conduct as custodian, we conclude that it does not apply to the alleged wrongdoing related to professional advice given regarding the Manu-life account.⁴

[¶ 22] In this retreat from our previously broad presumption in favor of arbitration, we join other courts that have favored interpreting ambiguous arbitration clauses against the drafter. See, e.g., Seifert v. U.S. Home Corp., 750 So.2d 633, 641 (Fla.1999); Victoria v. Superior Court, 40 , 222 Cal.Rptr. 1, 710 P.2d 833, 838-39 (1985).⁵ This holding does not affect the presumption favoring arbitrability when such provisions are actually negotiated, or when parties of equal bargaining power are involved. We merely hold that when a party drafts an agreement requiring arbitration, and offers it to individuals on a take-it-or-leave-it basis, the drafter bears the risk if its chosen language is found to be ambiguous. .

[¶ 23] Accordingly, although we reach our conclusion on different grounds than did the motion court, we affirm the court’s denial of the motion to stay and compel arbitration of counts IV, V, VIII, and X.⁶

The entry is:

Judgment affirmed.

1 . Because Manulife is not a party to this appeal, this opinion does not address the claims against it.

2 . Arbitration offers its participants an expeditious method of resolving disputes, and often allocates decision-making to parties who are more informed and experienced with the issues at hand. See Lewiston Firefighters Ass’n v. City of Lewiston, 354 A.2d 154, 164-66 (Me.1976).

3 . These types of contracts are often referred to as "contracts of adhesion,” meaning “a contract entered without any meaningful negotiation by a party with inferior bargaining power.” 11 SAMUEL WILLISTON & RICHARD LORD, A TREATISE ON THE LAW OF CONTRACTS § 32:12 at 476-79 (4th ed.1999). See also Schroeder v. Rynel, Ltd., Inc., 1998 ME 259, ¶ 15, 720 A.2d 1164, 1167 (stating that "[a] contract of adhesion requires some element of ‘overreaching’ by a party who exploits a 'vastly unequal bargaining position' ”) (quoting Dairy Farm Leasing Co. v. Hartley, 395 A.2d 1135, 1139 n. 3 (Me.1978)).

4 . Our holding in the present case is unaffected by our recent opinion in Stenzel v. Dell, Inc., 2005 ME 37, 870 A.2d 133. There, we applied the law of Texas in determining that an arbitration clause contained in a purchase and sale agreement was not unconscionable. Id. ¶ 32, 870 A.2d at 144-45. In the present case, we determine whether to construe an ambiguity in an arbitration clause in favor of arbitration or against the drafter pursuant to Maine law.

5 . Faced with ambiguities in institutionally drafted arbitration agreements, courts of other jurisdictions differ on whether to construe contracts in favor of arbitration or against the drafter. Compare Roby v. Corp. of Lloyd’s, 996 F.2d 1353, 1361 (2d Cir.1993), cert. denied, 510 U.S. 945, 114 S.Ct. 385, 126 L.Ed.2d 333 (1993) (adopting policy in favor of arbitration to resolve ambiguity in arbitration agreement); Allen v. Pacheco, 71 P.3d 375, 380-81 (Colo.2003), cert. denied, 540 U.S. 1212, 124 S.Ct. 1406, 158 L.Ed.2d 140 (2004) (same); Freeman v. Minolta Bus. Sys., Inc., 699 So.2d 1182, 1187 (La.Ct.App.1997) (same); with Victoria v. Superior Court, 40 Cal.3d 734, 222 Cal.Rptr. 1, 710 P.2d 833, 838-39 (1985) (construing the arbitration clause against the drafter); Seifert v. U.S. Home Corp., 750 So.2d 633, 641 (Fla.1999) (same).

6 . Although it is not clear that the court addressed each count, we conclude that none of the claims against McDonald and Sullivan are required to be arbitrated.