I. Facts and procedural history

This action stems from a May 2022 agreement between defendant StrongArm Ventures, LLC (StrongArm), of which defendant Michael Cave was the owner (collectively, the StrongArm defendants),^[FN1] and plaintiffs, Elizabeth Zinna and Jared Zinna, for StrongArm to construct a new house on property in Ridge, New York, of which plaintiffs were the contract vendees. As pertinent here, the contract contained the following language:

27. DISPUTE RESOLUTION: Buyer and Seller agree to mediate any dispute or claim arising out of this Agreement, or in any resulting transaction, before resorting to arbitration or court action.

a. Mediation- If a dispute arises, between or among the Parties, and it is not resolved prior to or after recording, the Parties shall first proceed in good faith to submit the matter to mediation . . . . Unless otherwise agreed in mediation, the Parties retain their rights to proceed to arbitration or litigation.

b. Arbitration- The Parties agree that any dispute or claim in law or equity arising between them out of this Agreement or any resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration . . . . Under [*2]arbitration, the Parties shall have the right to discovery in accordance with State law. Judgment upon the award of the arbitrator(s) may be entered into any court having jurisdiction. Enforcement of this Agreement to arbitrate shall be governed by the Federal Arbitration Act.

According to the complaint, defendant Portridge Construction Corp. (Portridge), with which defendants William Dollard and Brian Dollard (collectively, the Portridge defendants) were associated, was the entity that actually built the house. Plaintiffs claim, inter alia, that the house was not built within the agreed-upon timeframe; that defendants eventually abandoned the project; that certain work that was supposed to be performed was missing or incomplete; that other work was performed deficiently; and that Portridge and Brian Dollard filed a false mechanic's lien. Plaintiffs interposed claims labeled in the complaint as injury to property (based on the allegedly false mechanic's lien), abuse of process, forgery, breach of the covenant of good faith and fair dealing, fraud and fraud in the inducement, disgorgement (based on defendants' unlicensed status), breach of the warranty of fitness for a particular purpose and the statutory new home warranty (General Business Law article 36-B), and breach of contract.

Defendants now move, by order to show cause signed on June 6, 2024, to "compel[] mediation and/or arbitration and stay[] this action." Plaintiffs oppose the motion and move ^[FN2] to vacate the temporary restraining order contained in the order to show cause, and for sanctions.

A. Arbitration

CPLR 7503 permits a party to move to compel arbitration and stay an action. The party seeking to do so has the burden of proving that a valid agreement to arbitrate exists (Donnelly v Teachers Fed. Credit Union, 228 AD3d 831; DiGregorio v Long Is. Univ., 221 AD3d 780). In determining whether the parties agreed to arbitration, ordinary state-law contract principles apply (Revis v Schwartz, 192 AD3d 127, affd 38 NY3d 939; Yeled V'Yalda Early Childhood Ctr., Inc. v Attentive Behavior Mental Health Counseling, P.C., 208 AD3d 1209; see also Wu v Uber Tech., Inc., — NY3d —, 2024 NY Slip Op 05869). A valid arbitration agreement "must be clear, explicit, and unequivocal[,] and must not depend upon implication or subtlety" (Ferraro v East Coast Dormer, Inc., 209 AD3d 717, 718 [quotation marks and citations omitted]; see Giffone v Berlerro Group, LLC, 163 AD3d 780).

General Business Law (GBL) § 399-c (2) (a) states that "[n]o written contract for the sale or purchase of consumer goods . . . to which a consumer is a party, shall contain a mandatory arbitration clause." Section 399-c (2) (b) states that "[t]he provisions of a mandatory arbitration clause shall be null and void." Section 399-c (1) defines "consumer goods" as "goods, wares, paid merchandise or services purchased or paid for by a consumer, the intended use or benefit of which is intended for the personal, family or household purposes of such consumer." The statute also defines "mandatory arbitration clause" as

a term or provision contained in a written contract for the sale or purchase of consumer goods which requires the parties to such contract to submit any controversy thereafter arising under such contract to arbitration prior to the commencement of any legal action [*3]to enforce the provisions of such contract and which also further provides language to the effect that the decision of the arbitrator or panel of arbitrators in its application to the consumer party shall be final and not subject to court review.

Defendants have not met their burden of showing that there exists a valid agreement to arbitrate because the contract's arbitration provision is barred by section 399-c. The arbitration provision requires binding arbitration beyond any court review. Moreover, the contract for the construction of a new house is a contract for a consumer good under the statute (Byrnes v Castaldi, 72 AD3d 718 [holding that GBL § 399-c rendered unenforceable an arbitration provision in "plaintiffs' contract for the construction of their single-family residence"]; Ragucci v Professional Constr. Servs., 25 AD3d 43 [explaining why "consumer goods," as defined in section 399-c, is broader than "that phrase is commonly understood," and the statute rendered unenforceable an arbitration provision in a contract between homeowners and an architect "to design and supervise the construction of their new home"], lv denied 9 NY3d 817; see also Smith v Nobiletti Builders, Inc., 177 AD3d 807 [section 399-c barred an arbitration provision in a contract "with respect to the renovation of the plaintiff's residence"]).

Defendants do not argue that the Federal Arbitration Act (FAA) (9 USC § 1 et seq.) requires enforcement of the arbitration provision, even though the arbitration provision specifically invokes the FAA. Accordingly, the Court need not address this issue (see P.S. Fin., LLC v Eureka Woodworks, Inc., 214 AD3d 1 ["neither PSF nor the attorney defendants contend that the issue of waiver should be analyzed under the FAA. Accordingly, we analyze the waiver issue under New York State law."]).

In any event, the FAA is inapplicable here. The FAA states that

[a] written provision in any maritime transaction or contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract or as otherwise provided in chapter 4.

(9 USC § 2). "Commerce" is defined as "commerce among the several States or with foreign nations, or in any Territory of the United States or in the District of Columbia, or between any such Territory and another, or between any such Territory and any State or foreign nation, or between the District of Columbia and any State or Territory or foreign nation" (id. § 1). The FAA's limitation to "contract[s] evidencing a transaction involving commerce" is expansive. It implicates "the broadest permissible exercise of Congress' Commerce Clause power" (Citizens Bank v Alafabco, Inc., 539 US 52, 56). Indeed, under the FAA, "it is not necessary for the individual transaction to have a substantial effect on interstate commerce, so long as the type of activity at issue has the requisite substantial effect" (Cusimano v Schnurr, 26 NY3d 391, 399; see Citizens Bank, 539 US 52). If the FAA applies, then it pre-empts any contrary state law (e.g. Nitro-Life Technologies, L.L.C. v Howard, 568 US 17).

Although the FAA's reach is broad, it is not unlimited. Defendants, who have the burden of demonstrating that there is a valid arbitration provision, have not shown that the contract here involves interstate commerce such that the FAA requires its enforcement. The contract is between two New York residents and a New York limited liability company to construct a single one-family house in New York. Defendants do not contend that construction of the house [*4]involved labor, equipment, materials, subcontractors, or supplies procured from outside of New York (cf. 8 Bruner & O'Connor Construction Law § 21:19, and cases cited therein).^[FN3] On this record, applying the FAA to this contract would expand Congress' ability to regulate interstate commerce beyond its already generous contours (see Smith, 177 AD3d 807 [explaining why defendants, who sought to enforce an arbitration provision in a contract to renovate a house, failed to show that the contract had "an effect on interstate commerce" so as to bring it within the FAA's purview]).

Because defendants have not shown that the FAA applies, it does not pre-empt GBL § 399-c. Accordingly, defendants may not rely on the arbitration provision in the contract, and any attempt to contract around the confines of section 399-c, including by incorporating the inapplicable FAA, are void as against public policy.

B. Mediation

Nothing in GBL § 399-c prohibits nonbinding mediation. As noted above, the contract also requires that the parties attempt to resolve their differences at mediation. Plaintiffs correctly contend, though, that their contract was only with StrongArm, and not any other defendant. Because an alternative dispute resolution (ADR) clause is contractual in nature, the general rule is that contractual nonparties may not rely on such a clause (Matter of Kent Waterfront Assoc., LLC v National Union Fire Ins. Co. of Pittsburgh, Pa., 216 AD3d 785; Yeled V'Yalda Early Childhood Ctr., Inc., 208 AD3d 1209). Nonetheless, a nonparty may be bound to an ADR clause if required by ordinary principles of contract or agency (Matter of Kent Waterfront Assoc., LLC, 216 AD3d 785; Matter of Northeast & Cent. Contrs., Inc. v Quanto Capital, LLC, 203 AD3d 925).

Cave, as StrongArm's owner, may also enforce the mediation provision in the contract (see T&M Trusteeship & Mgt. Servs. SA v BDO USA, LLP, 192 AD3d 493; Mozzachio v Schanzer, 188 AD3d 873; Degraw Constr. Group, Inc. v McGowan Bldrs., Inc., 152 AD3d 567). Based on the contract, it appears that defendant Northfork Gateway Group, LLC (Northfork), is a d/b/a of StrongArm; indeed, the complaint lacks any description of this defendant or allegations against it. Thus, it too may rely on the mediation provision. In opposition, plaintiffs failed to raise a material issue of fact as to the mediation provision's enforceability. Although plaintiffs claim that it was fraudulent for StrongArm to subcontract out the construction to Portridge, nothing in the contract prevented StrongArm from doing so.

However, the Portridge defendants were nonparties to the contract between plaintiffs and StrongArm. It appears that Portridge was StrongArm's subcontractor and, therefore, may not invoke the mediation provision in the contract (see Matter of East Coast Servs. [Silverite Constr. Co.], 164 Misc 2d 226 [Sup Ct, Queens County 1995]; see generally Tutor Perini Bldg. Corp. v Port Auth. of NY & N.J., 191 AD3d 569).

Although not well developed, the Portridge defendants appear to argue in reply that they may invoke the mediation provision under the direct benefits theory of estoppel. Under that doctrine, "a nonsignatory may be compelled to arbitrate where the nonsignatory knowingly exploits the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement" (Matter of Belzberg v Verus Invs. Holdings Inc., 21 NY3d 626, 631 [quotation marks and citations omitted]; see Gilat v Sutton, 220 AD3d 569). That is not the situation before the Court. This is not an instance of a signatory trying to compel a nonsignatory to use ADR based on estoppel; here, rather, nonsignatories are trying to estop themselves.

In any event, for the direct benefits theory of estoppel to apply, "[t]he benefits must be direct" (Arboleda v White Glove Enter. Corp., 179 AD3d 632, 633 [quotation marks and citations omitted]; see Revis v Schwartz, 192 AD3d 127; Matter of Long Is. Power Auth. Hurricane Sandy Litig., 165 AD3d 1138). "A benefit is indirect where the nonsignatory exploits the contractual relation of the parties, but not the agreement itself" (Matter of Belzberg, 21 NY3d at 631). As the Belzberg court explained,

[t]he guiding principle is whether the benefit gained by the nonsignatory is one that can be traced directly to the agreement containing the arbitration clause. The mere existence of an agreement with attendant circumstances that prove advantageous to the nonsignatory would not constitute the type of direct benefits justifying compelling arbitration by a nonparty to the underlying contract. Also, absent the nonsignatory's reliance on the agreement itself for the derived benefit, the theory would extend beyond those who gain something of value as a direct consequence of the agreement

(id. at 633). Any benefits flowing to the Portridge defendants from the contract between plaintiffs and StrongArm were indirect (see Matter of KPMG LLP v Kirschner, 182 AD3d 484, lv denied 35 NY3d 915; see also Katsoris v WME IMG, LLC, 237 F Supp 3d 92 [SD NY 2017]). Indeed, the contract does not provide any benefit to Portridge, nor do the Portridge defendants invoke the contract to obtain a benefit (see Trina Solar US, Inc. v Jasmin Solar Pty Ltd, 954 F3d 567 [2d Cir 2020]). As conceded by defendants (Defs' Reply Affirm, at ¶ 9), Portridge was simply a subcontractor. Any direct benefits derived by Portridge came from the agreement between StrongArm and Portridge, not the contract at issue here. The Portridge defendants rely on the contractual relationship between plaintiffs and StrongArm that, solely by StrongArm's decision to subcontract the work to Portridge, proved advantageous to Portridge. That is precisely the type of reliance that the Court of Appeals in Matter of Belzberg contemplated as indirect. Thus, this argument lacks force.

Accordingly, defendants' motion is granted to the extent of temporarily staying the claims against the StrongArm defendants and Northfork until the completion of nonbinding mediation, and is otherwise denied. Nonbinding mediation shall proceed posthaste. In the event that the nonbinding mediation is unsuccessful, plaintiffs may resume prosecuting this action against the StrongArm defendants and Northfork.

C. Plaintiffs' motion

So much of plaintiffs' motion as seeks sanctions is denied. So much of plaintiffs' motion as seeks to vacate the temporary restraining order in the order to show cause is denied as moot, as that temporary relief is no longer in effect as of the determination of this motion. Thus, plaintiffs' motion is denied in its entirety.

Defendants' motion is granted to the extent of temporarily staying the claims against the StrongArm defendants and Northfork until the completion of nonbinding mediation, and is otherwise denied. Plaintiffs' motion is denied. The claims against the StrongArm defendants and Northfork are hereby severed from the claims against the other defendants, which claims shall proceed without delay.

This shall constitute the decision and order of the Court.