Contributors

Arevik Sargsyan

Associate

A recent California Court of Appeal decision, Mahram v. Kroger Co., 104 Cal. App. 5th 303, 324 Cal. Rptr. 3d 575 (2024) underscores the importance of ensuring that arbitration agreements are as clear as practicable.

In Mahram v. The Kroger Co., Payam Mahram purchased groceries from The Kroger Co. d/b/a/ Ralphs Grocery Company (“Ralphs”) via Instacart, an online delivery service for groceries. Mahram agreed to arbitrate his claims when he signed up for Instacart online as part of Instacart’s terms of use. Mahram used Instacart to order groceries from Ralphs. Thereafter, he decided to sue Ralphs for false advertising and unfair competition. Ralphs moved to compel arbitration of Mahram’s lawsuit based on the arbitration agreement between Mahram and Instacart. Ralphs sought to enforce the arbitration agreement between Mahram and Instacart even though Ralphs was not a party to the agreement and did not sign it. Ralphs took the position that it was a retailer of Instacart and was therefore a third-party beneficiary of the arbitration agreement.

The Court of Appeals was confronted with two keys issues: (1) who decides the threshold issue of whether Ralphs is a third-party beneficiary of the contract between Mahram and Instacart, the court or the arbitrator, and (2) whether Ralphs is a third-party beneficiary of the contract between Mahram and Instacart.

With respect to the first issue, the Court of Appeals outlined the applicable test—courts cannot assume that the parties to a contract agreed to arbitrate arbitrability unless it is unmistakably clear that they did so. The Court of Appeals found that unmistakable clarity was missing in the contract because there was no evidence Mahram agreed to arbitrate anything with anyone but Instacart based on the language of the agreement between Instacart and Mahram. As such, it concluded that the courts and not arbitrators must engage the next issue of whether Ralphs is a third-party beneficiary entitled to enforce a contract it did not sign.

With respect to the second issue, the Court of Appeal found that Mahram signed an arbitration agreement solely with Instacart, not with Ralphs or any other party. Third-party beneficiaries to a contract can only enforce that contract if the contracting parties had a clear, “motivating purpose” to benefit the third party. Since the court determined that Ralphs was not a third-party beneficiary to the contract under that test, it concluded that Ralphs had no standing to compel Mahram to arbitration based on the Mahram-Instacart contract.

Takeaways

Ambiguities in arbitration clauses, including ambiguities with respect to delegation clauses and third-party beneficiaries may lead to unwanted litigation in court.

Mahram emphasizes the importance of drafting clear and specific delegation clauses. Employers should ensure that any language around arbitrability and third-party beneficiaries is explicit and leaves no room for ambiguity to avoid disputes in court or foregoing arbitration. Employers need to clearly identify in the arbitration agreement any third parties who might be intended beneficiaries. To the extent practicable, employers should include express language covering any affiliated entities or third parties who might need to enforce the arbitration provision. Alternatively, affiliated entities or third parties can avoid disputes by signing the arbitration agreement.