Benton v. Vanderbilt University

Decision Date28 June 2004
Docket NumberNo. M2002-00085-SC-R11-CV.,M2002-00085-SC-R11-CV.
Citation137 S.W.3d 614
PartiesLarry Eugene BENTON v. The VANDERBILT UNIVERSITY.
CourtTennessee Supreme Court

Earle J. Schwarz and Ashlee B. Ellis, Memphis, Tennessee, and Phillip L. Davidson, Nashville, Tennessee, for the Appellant, Larry Eugene Benton.

Robert J. Walker, John S. Bryant, and Clisby Hall Barrow, Nashville, Tennessee, for the Appellee, The Vanderbilt University.

OPINION

E. RILEY ANDERSON, J., delivered the opinion of the court, in which FRANK F. DROWOTA, III, C.J., and JANICE M. HOLDER, and WILLIAM M. BARKER, JJ., joined. ADOLPHO A. BIRCH, JR., J., filed a dissenting opinion.

We granted this appeal to determine whether a third-party beneficiary who seeks to enforce a contract between a hospital and an insurance carrier may be bound by an arbitration provision in the contract. The trial court denied the hospital's motion to compel arbitration, finding that the third-party beneficiary was not a party to the contract between the hospital and the insurance carrier. The Court of Appeals reversed, concluding that the arbitration provision could be enforced against the third-party beneficiary in this case. After reviewing the record and authority, we conclude that an arbitration provision in a contract is enforceable against a third-party beneficiary who has filed a cause of action seeking to enforce the contract.

Background

On December 13, 1998, the appellant, Larry Eugene Benton ("Benton"), was a passenger in a car driven by William Hays that was struck by a car driven by Zella Lynn ("Lynn") on Highway 55 in Coffee County, Tennessee. Benton was injured in the accident and was hospitalized for five days at The Vanderbilt University Medical Center ("Vanderbilt"). He was released from the hospital on December 18, 1998, after incurring hospital expenses of $31,504.84.

At the time of the accident, Benton was insured by Blue Cross and Blue Shield of Tennessee ("Blue Cross"), which had a contract with Vanderbilt. The contract provided, in part, that Vanderbilt would provide health care services to members of the Blue Cross health care plan at established discounted rates and that Vanderbilt would not bill any Blue Cross member for the difference between the actual medical expenses and the discounted rates. As stated in section 6.1 of the contract:

[Vanderbilt] shall be reimbursed for the provision of Covered Services provided to [Blue Cross] Members in accordance with the terms set forth in this Institution Agreement.... [Vanderbilt] agrees to accept ... [a] percent of covered charges as payment in full for services rendered to [Blue Cross] Members not covered through a Network product. Such reimbursement as is described in this section shall represent the maximum amount payable to [Vanderbilt] for Covered Services and [Vanderbilt] shall not bill any [Blue Cross] Member for any contractual difference between billed charges and such reimbursement.

(Emphasis added). Blue Cross paid Vanderbilt its full obligation under the contract, which covered all but $14,772.09 of the hospital expenses incurred by Benton.

Benton later filed a lawsuit against Lynn in the Circuit Court for Coffee County for the personal injuries he suffered in the accident. Vanderbilt then sought to recover $14,772.09, i.e., the amount of Benton's hospital expenses that had not been paid by Blue Cross.2 Vanderbilt had previously filed a statutory Notice of Hospital Lien with the Clerk of the Circuit Court for Davidson County against any monetary recovery Benton might receive from Lynn.

As a result of Vanderbilt's actions, Benton filed a complaint3 against Vanderbilt in the Circuit Court for Davidson County alleging an abuse of process, breach of contract, and a violation of the Tennessee Consumer Protection Act on the grounds that Vanderbilt had agreed to accept payment in full from Blue Cross pursuant to section 6.1 of the contract between them. In response, Vanderbilt filed a motion seeking to compel arbitration and to stay the legal action pending arbitration. The motion asserted that Benton was bound by an arbitration provision contained in the contract because he was a third-party beneficiary to the contract. The arbitration provision in section 8.2 stated, in part:

Arbitration. If a dispute ... arises between the parties of this Agreement involving a contention by either party that the other has failed to perform its obligations and responsibilities under this Agreement, then the party making such contention shall promptly give written notice to the other. Such notice shall set forth in detail the basis for the party's contention.... The other party shall within thirty (30) calendar days after receipt of the notice provide a written response seeking to satisfy the party that gave notice regarding the matter as to which notice was given. Following such response ... if the party that gave notice of dissatisfaction remains dissatisfied, then that party shall so notify the other party and the matter shall be promptly submitted to inexpensive and binding arbitration in accordance with the Tennessee Uniform Arbitration Act ....

(Emphasis added). Benton argued that he was not bound by the arbitration provision because he was not a "party" to the contract.

The trial court found that Benton was "not bound to the arbitration provision" and denied Vanderbilt's motion to compel arbitration. The Court of Appeals reversed the trial court's judgment,4 concluding that Benton was subject to the arbitration provision because he was a third-party beneficiary to the contract who was seeking to enforce rights under the contract.

We granted this appeal.

Analysis

Benton argues that the Court of Appeals erred in holding that he was bound by the arbitration provision contained in the contract between his medical insurer, Blue Cross, and Vanderbilt. He contends that the arbitration provision is not applicable because he was not a "party" to the contract and cannot be forced to waive his constitutional right to pursue judicial action. Vanderbilt argues that Benton was bound by the arbitration provision in the contract because he was a third-party beneficiary seeking to enforce rights under that contract.

To place these issues into the appropriate context, we begin our analysis by summarizing certain general principles governing arbitration contracts. In general, arbitration agreements in contracts are favored in Tennessee both by statute and existing case law. The Uniform Arbitration Act provides:

A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable save upon such grounds as exist at law or in equity for the revocation of any contract....

Tenn.Code Ann. § 29-5-302(a) (2000). As this Court has recognized,

[a]ttitudes towards arbitration changed as time passed. This change was reflected in the courts by judicial decisions praising arbitration and in society by the passage of statutes embracing arbitration as an alternative forum for dispute resolution. The effectiveness of modern arbitration statutes has been measured in terms of their inclusion of provisions making agreements to arbitrate irrevocable and initiating a time-saving procedure for compelling arbitration.... Moreover the [Uniform Arbitration Act] embodies a legislative policy favoring enforcement of agreements to arbitrate.

Buraczynski v. Eyring, 919 S.W.2d 314, 317 (Tenn.1996).

Having observed that arbitration contracts are favored in Tennessee, we next discuss the rights and obligations of third-party beneficiaries to a contract. As the Court pointed out in Owner-Operator Independent Drivers Association v. Concord EFS, Inc., 59 S.W.3d 63 (Tenn.2001), a third party is an intended third-party beneficiary of a contract, and thus entitled to enforce the terms of a contract, where (1) the parties to the contract have not otherwise agreed, (2) recognition of the third-party's right to performance is appropriate to effectuate the parties' intent, and (3) terms or circumstances indicate that performance of the promise is intended or will satisfy an obligation owed by the promisee to the third party. Id. at 70.

This Court has also said that a third-party's rights "depend upon and are measured by the terms of the contract." United States Fid. & Guar. Co. v. Elam, 198 Tenn. 194, 278 S.W.2d 693, 702 (1955). "Before the beneficiary may accept the benefits of the contract, he must accept all of its implied, as well as express, obligations." Id. As we have explained, "if the beneficiary accepts, he adopts the bad as well as the good, the burden as well as the benefit." Id.

With these principles in mind, we now turn to the critical issue in this case, i.e., whether an arbitration provision in a contract is binding against a third-party beneficiary who brings an action seeking to enforce the terms of that contract.

Although this is a question of first impression in Tennessee, numerous courts and legal commentators have held as a general rule that a third-party beneficiary who seeks to enforce rights under a contract is bound by an arbitration provision in that contract. See Ex parte Dyess, 709 So.2d 447, 451 (Ala.1997); Restatement (Second) of Contracts § 309 cmt. b (1981). As one leading commentator states, "where [a] contract contains an arbitration clause which is legally enforceable, the general rule is that the beneficiary is bound thereby to the same extent that the promisee is bound." Williston on Contracts § 364 A. (3d ed.1957).

For example, in District Moving & Storage Co. v. Gardiner & Gardiner, Inc., a Maryland appellate court relied on the rule stated in the Williston treatise in concluding that the lessee of a warehouse was bound by an arbitration provision when seeking to enforce the terms of a contract between a...

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