The Franchise Memorandum

The California Court of Appeals for the Second District, creating a split of authority among California’s appellate courts, held that Ford Motor Co. did not have the right to enforce an arbitration provision in a sales contract between its dealership and a downstream purchaser. Montemayor v. Ford Motor Co., 92 Cal. App. 5th 958 (2023). The Montemayors purchased a new Ford Edge from a dealership and entered a sales contract that included an arbitration clause granting either party the right to compel arbitration of any disputes between them. The Montemayors filed a complaint against the dealership and Ford, asserting violations of the Song-Beverly Act, Magnuson Moss-Warranty Act, breach of express and implied warranties, and fraudulent omission. Ford moved to compel arbitration, arguing it could rely on the arbitration provision in the Montemayors’ sales contract. The trial court denied Ford’s motion to compel arbitration except with respect to the Montemayors’ cause of action for breach of the implied warranty of merchantability.

The appellate court affirmed, holding that Ford could not enforce an arbitration provision in a sales contract between the Montemayors and the dealership under the doctrine of equitable estoppel or as a third-party beneficiary of the contract. It rejected Ford’s equitable-estoppel argument because the Montemayors’ claims against Ford were not dependent on or inextricably intertwined with the obligations imposed by the sales contract. In doing so, the court parted ways with a decision of the Third District in Felisilda v. FCA US LLC, 53 Cal. App. 5th 486 (2020), which applied equitable estoppel to enable a nonsignatory manufacturer to enforce an arbitration provision in a similar sales contract. Ford could not enforce the arbitration, the court reasoned, because Monetemayor’s claims against it were founded on Ford’s express warranty for the vehicle, not on any obligation imposed by the sales contract. The court also rejected Ford’s third-party beneficiary argument because the sales contract was drafted with the primary purpose of benefiting the contracting parties, and in no way was the sales contract “made expressly for the benefit of a third person.”