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Delivery service was third-party beneficiary of arbitration clause so contractor’s drivers had to arbitrate wage claims

By Ronald Miller, J.D.

A delivery service was a third-party beneficiary of owner/operator agreements between commercial truck drivers and a contracting company, so that the drivers were required to arbitrate claims alleging that the delivery service violated Washington State wage and hour laws, ruled a federal district court in Washington. The court found the drivers’ performance under the agreements conferred a benefit on the contractor’s customers, including the delivery service. After concluding that it was for the court to determine whether the scope of the arbitration provision applied to the drivers’ claims, the court ruled that arbitration was the proper forum for all of the drivers’ claims (Ege v. Express Messenger Systems, Inc., January 10, 2017, Lasnik, R.).

Owner/operator agreements. The plaintiffs, commercial truck drivers, entered into owner/operator agreements with Subcontracting Concepts (SCI). The agreement outlined their obligations to SCI and its customers, and contained an arbitration provision. In reality, when the drivers began to perform under the agreement, they only delivered packages for Express Messenger. Express was not a signatory to the agreement. Although the drivers and SCI were the only signatories, the agreement defined the rights and responsibilities the drivers would have in their relationship with logistics companies like Express.

According to the drivers, Express exerted such control over their work that it and SCI acted as joint employers, and that they functioned as employees rather than independent contractors. The drivers alleged that the work conditions described in their complaint were a departure from the terms they accepted in their contract with SCI. They filed a class action suit for violations of Washington’s wage and hour laws, including minimum wage and overtime pay, and meal and rest break provisions. They also alleged that they were misclassified as independent contractors. In response, Express filed a motion to dismiss, or in the alternative, to stay proceedings and compel arbitration on that basis that it was a third-party beneficiary of the agreements.

Third-party beneficiary. At issue in this case was whether the arbitration provision applied to the drivers’ claims against Express, which did not sign the agreements. The drivers claimed Express intentionally misclassified them as independent contractors, rather than employees. In so doing, Express avoided paying them minimum wage and overtime, and it did not provide the drivers with the 10-minute rest breaks and 30-minute lunch periods owed to employees under Washington law.

According to Express, it was a third-party beneficiary to the agreements between the drivers and SCI, and therefore the arbitration provision in the agreement applied to their wage and employment claims.

Choice of law. Although the parties agreed that Washington state contract law applied, the court nevertheless examined whether a New York choice of law provision in the agreements was enforceable. “To effectively void a choice of law provision, a court must find that the chosen state has no substantial relationship to the parties or that the application of the chosen law would be contrary to a fundamental policy of Washington.” Further, Washington courts have also adopted the “‘significant relationship’ test…which gives great weight to the place where the parties’ relationship was centered.”

In this case, neither party appeared to have a substantial relationship to New York. The drivers were all residents of Washington, and Express was a Delaware corporation, doing business solely in the western states. Moreover, because the parties’ business dealings were conducted in Washington, the court determined that it would apply Washington law.

Contract creation. “Under Washington state law, ‘both contracting parties must intend that a third-party beneficiary contract be created.’” “If the terms of the contract necessarily require the promisor to confer a benefit upon a third person, then the contract, and hence the parties thereto, contemplate a benefit to the third person.”

Performance under the agreements required the drivers to confer a benefit on SCI’s customers, including Express. The drivers described their work for Express under the agreement as “an integral part of [Defendant]’s business.” And several provisions in the agreement contemplated specific promises to Express. Further, the court rejected the drivers’ contention that Express was merely an incidental beneficiary of the agreement, because reference in the agreement to logistics company customers was “generic” and “oblique.” Rather, the court noted that Express was a third-party beneficiary because performance under the agreements required the parties to confer a benefit upon Express.

Arbitrability. Having determined that Express was a third-party beneficiary, the court next considered whether the arbitration provision applied to this action. As an initial matter, the court had to address whether the arbitrability of the drivers’ claims against Express was a question reserved for arbitration. “Whether a dispute as to arbitrability should be resolved by the court or an arbitrator depends upon whether the parties agreed to delegate that power to the arbitrator.” Here, the arbitration clause was completely silent as to what entity was charged with deciding arbitrability. Therefore, it was for the court to determine whether the scope of the arbitration provision applied to the drivers’ claims.

Transaction involving commerce. Because the agreement was “‘a contract evidencing a transaction involving commerce,’ it is subject to the [Federal Arbitration Act].” The parties did not challenge the validity of the agreement; therefore, under the FAA, the court was restricted to deciding only whether the dispute fell within the agreement to arbitrate.

Although the complaint did not reference the agreement, the drivers’ allegations described an employment environment that would violate several of the agreement’s terms. Accordingly, the court concluded that Express was a third-party beneficiary, and the drivers’ claims came within the scope of the agreements. Finding that arbitration was the proper forum for all of the drivers’ claims, the court granted Express’ motions to dismiss in favor of arbitration.