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The Pennsylvania Superior Court has ruled that defendants in a suit alleging breaches of two condominium agreements cannot rely on an arbitration clause in one contract to knock claims out of court alleging breaches of a separate contract that does not contain an arbitration clause.

In Franklin Towne Charter High School v. Arsenal Associates, according to the Superior Court's unpublished March 11 opinion, the plaintiff high school, which owns several units in a condominium, sued Arsenal Associates—a limited partnership that was the developer of the condominium and is still the owner of the majority of its units—along with the president of the general partner of the limited partnership, Mark Hankin, and the Arsenal Condominium Association, which is controlled by the limited partnership.

The high school alleged a breach of the real estate purchase agreement (RESPA) for Unit 215, which it had purchased from the limited partnership, and a breach of fiduciary duty for failing to provide enough power for the unit to be used as a gymnasium and for additional classroom space for an elementary school.

The high school also brought claims for injunctive relief and breach of fiduciary duty against the defendants for allegedly refusing to execute a proposed amendment to the declaration of condominium regarding the high school's responsibility to maintain the storm water management system.

The defendants sought to send all of the claims to arbitration, based on the arbitration clause contained in the declaration, but a Philadelphia trial judge ruled that any claims arising from the RESPA were not arbitrable.

The defendants appealed, arguing that, under Pennsylvania case law, “non-signatories to an arbitration agreement can enforce the agreement when there is an 'obvious and close nexus' between the non-signatories … and the contracting parties.”

But the Superior Court panel, led by Judge Carolyn Nichols, upheld the trial judge's ruling.

“Here, the condo association and its members are bound by the declaration's provisions, which include an arbitration agreement,” said Nichols, joined by Judges John Bender and Correale Stevens. “Appellee high school is a member of the condo association and must arbitrate disputes arising under the declaration. However, the condo association is not a party to the RESPA, whose parties include only the limited partnership and appellee high school. Accordingly, the condo association cannot enforce the provisions of the RESPA against appellees, as it is not a party to the RESPA.”

“Furthermore,” Nichols continued, “the RESPA does not include an arbitration provision, nor does it adopt the terms of the declaration's arbitration clause. At most, the RESPA mentions that the declaration exists, but it does not incorporate any of its provisions as terms of the RESPA. Therefore, any of appellees' contract claims in the complaint that are predicated solely on the RESPA and against the limited partnership are not subject to any arbitration provision. These claims cannot be compelled into arbitration since no contract requires them to be arbitrated.”

Nichols rejected the defendants' “close nexus” argument.

“As to whether the limited partnership and Mr. Hankin can enforce the arbitration provision in the declaration because of a 'close nexus' with the condo association, we initially note that appellants have named only the limited partnership in its claims under the RESPA,” Nichols said. “These claims do not implicate the condo association at all, since the condo association is not a party to the RESPA and is not being sued in the counts of the complaint devoted to breach of the RESPA.”

Nichols also noted that each of the cases the defendants cited to support that argument involved a single contract, making them distinguishable from the Franklin Towne case.

“Here, two contracts are at play, each with a different scope,” Nichols said. “The RESPA includes a merger clause stating that the RESPA 'embodies the entire agreement between [the limited partnership and high school] and shall not be modified, changed or altered in any respect, except in writing, executed in the same manner as this agreement by the parties hereto.' The limited partnership cannot use an arbitration clause from the declaration, a separate contract, to defend itself against litigation of breach of contract claims under the RESPA.”

The high school was represented by Gaetan Alfano and Joseph Gordon of Pietragallo Gordon Alfano Bosick & Raspanti in Philadelphia.

Alfano said the ruling “sets an outer boundary on a court's application of the 'obvious and close nexus' theory in enforcing arbitration agreements.”

Counsel for the defendants, David Braverman of Braverman Kaskey in Philadelphia, could not be reached for comment.