A state appellate court held that a resident of an assisted living facility could not be bound by an arbitration clause as a third party beneficiary of a Residency Agreement signed by her son, when the resident suffered from dementia and the son was not her guardian. The court explicitly rejected the holding of the Fifth Circuit as well as two other state appellate courts that had compelled arbitration on the basis that the resident is a third party beneficiary of the contract. Drury v. Assisted Living Concepts, Inc., No. 141068, 2011 WL 3835073 (Or. Ct. App. Aug. 31, 2011). The holding allows the personal representative to continue his lawsuit for the wrongful death of his mother.
When Dorothy Drury entered the assisted living facility, her mental functioning was severely impaired by dementia. Her son signed a Residency Agreement containing an arbitration clause. Approximately a year later, Dorothy died from injuries sustained in a fall at the facility. After the decedent’s son sued for wrongful death, the Defendants moved to compel arbitration based on the binding arbitration clause in the agreement. The trial court denied the Defendants’ motion on the basis of unconscionability. On appeal, the court addressed whether the decedent was a third party beneficiary of the agreement and was therefore bound by the arbitration clause in the agreement.
The court began its analysis by stating that indeed, the resident was a third party beneficiary of the Residency Agreement. But the court criticized three other decisions for permitting enforcement of an arbitration clause simply because the resident was a third party beneficiary, regardless of whether the third party assented to the contract. JP Morgan Chase & Co.v. Conegie ex rel. Lee, 492 F3d 596, 600 (5th Cir 2007); Forest Hill Nursing Center, Inc. v. McFarlan, 995 So.2d 775, 782–83 (Miss Ct App 2008); Alterra Healthcare Corp. v. Linton, 32 Fla L Weekly D574, 953 So.2d 574, 579 (Fla Dist Ct App 2007). The court rejected the analysis in all those cases, explaining that a court must address whether a third party manifested assent to be bound by the contract. The court stated that “[t]o hold otherwise is to allow contracting parties to alter the rights of a third party, based on whatever consideration the contracting parties intended to provide the third party . . . .”
Turning to the facts of the case, the court concluded that the decedent is not bound by the arbitration provision because, given her mental state at the time that her son signed the contract, she lacked the capacity to manifest assent to the contract. The court added that the decedent’s son did not later assent to the contract on her behalf by asserting rights under the agreement, since the lawsuit claims only wrongful death, not breach of contract.
Scott Herrig, University of California, Berkeley-School of Law 2012