Arbitrating Against Non-Signatories

A non-signatory may be compelled to arbitrate against a signatory to an arbitration agreement when that non-signatory has executed a contract that incorporates by reference the existing arbitration agreement. The converse is also true ' a non-signatory in such circumstances can also compel arbitration against a signatory. In Import Export Steel v. Mississippi Valley Barge Line, 351 F.2d 503, 505-06 (2d Cir. 1965), for example, a charter party (i.e., an admiralty contract between a vessel owner and a shipper) contained the following arbitration clause:

Should any dispute arise between the Disponent Owners and the Charterers, the matter in dispute shall be referred to three persons in New York, one to be appointed by each of the parties hereto, and the third by the two so chosen, and their decision, or that of any two of them, shall be final, and, for purpose, of enforcing any award, this agreement may be made a rule of the Court. The arbitrators shall be commercial men.

Id. at 505.

When the vessel foundered off the coast of the Azores, its charterer, Nimpex, which was not a signatory to the charter party, sought to arbitrate liability for the lost cargo against one of the signatories. The Second Circuit affirmed the motion to compel, as Nimpex was the holder of bills of lading which unequivocally incorporated “[a]ll the terms, conditions, liberties and exceptions of the charter party.” Id . According to the Court of Appeals: “[T]he rule in this circuit is that a holder of a bill of lading which specifically refers to a charter party and in unmistakable language incorporates the charter party's arbitration section can compel a party to the charter party to arbitrate.” Id . at 506. In the case law, the same principle extends beyond admiralty to a variety of other kinds of contracts which also incorporate by reference. See also, e.g., JS & H Const. v. Richmond County Hospital Authority, 473 F.2d 212, 213-15 (5th Cir. 1973) (affirming stay of subcontractor suit in favor of pending arbitration where provision in subcontract incorporated by reference the “general conditions” of the prime construction contract, which in turn included an arbitration clause).

Assumption

A non-signatory may be compelled to arbitrate when its conduct evinces intent to be bound by the arbitration agreement. In Gvozdenovic v. United Air Lines, 933 F.2d 1100, 1105 (2d Cir. 1991), for example, 1,202 former PanAm flight attendants, whose division had been acquired by United Airlines, sought to vacate a labor-related arbitration award because they were not parties to the underlying collective bargaining agreement that contained the arbitration clause. The Second Circuit rejected their challenge, noting the flight attendants' “active and voluntary participation in the arbitration; for example, through [their union], they chose a committee to represent them in the arbitration, and, on their behalf, the committee withdrew funds from the bank account set up to cover its expenses, chose counsel to represent the transferring flight attendants in the arbitration and argued vigorously that they should receive full credit for their time of employment with Pan Am.” Id . at 1104. As the court explained: “It is hornbook law that parties by their conduct may agree to send issues outside an arbitration clause to arbitration,” (Id. at 1105 (citation omitted)) and the flight attendants' “conduct manifested a clear intent to arbitrate the dispute.” Id.; accord, e.g., Data-Stream AS/RS Techs. v. China Int'l Marine Containers, 2003 WL 22519456, at 3 (S.D.N.Y. Nov. 6, 2003) (“CIMC participated in the arbitration as CIMC-TianDa's parent and in the posture of a legitimate party. In fact, CIMC even offered claims of its own based on the contract for the EVA System. By participating in the arbitration, CIMC effectively waived its right to claim that it should not be a party to the arbitration.”).

Agency

Agency is “the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” Restatement (Second) of Agency, '1(1) (1958). Under traditional principles of agency law, a principle is bound by the acts of its agent, such as the agent's agreement to arbitrate, where such agreement is undertaken within the scope of the agent's duties. See, e.g., Alamira v. Telcor Int'l, 920 F. Supp. 658, 674 (D. Md. 1996) (compelling arbitration against non-signatory Oncor where, “[a]s an officer of Oncor, Switzer may have bound Oncor to the Alamria/Telcor Contract even though he signed the Contract as an officer of Telcor ' even absent [Oncor's] intention to be bound”). When agents are involved, arbitrability also works in the opposite direction, in that “employees or disclosed agents of an entity that is a party to an arbitration agreement are protected by that agreement.” Roby v. Corporation of Lloyd's, 996 F.2d 1353, 1360 (2d Cir. 1993).

In Hirschfeld Prods. v. Mirvish, 88 N.Y.2d 1054, 1055 (1996), for example, a joint venture agreement (JVA) to produce “Hair” at the Old Vic Theater in London contained the following clause:

Should a dispute arise from this agreement or from its interpretation then the Producers agree that such dispute shall be referred to an Arbitrator to be appointed in the absence of agreement between the disputing parties by the President for the time being of the Society of West End Theatre in accordance with U.K. Law.

Id.

The production flopped. The plaintiff, a party to the JVA, then sued the president and chairman, respectively, of the theatrical production company, which was the counterparty to the JVA. On appeal, the New York Court of Appeals affirmed the arbitrability of the dispute. Even though the defendants were not personally signatories to the JVA, and thus to the arbitration agreement, they were afforded “the benefit of arbitration agreements entered into by their principals to the extent that the alleged misconduct ' [is] in their capacities as agents of the corporation.” As the court explained: “The rule is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.” Id. (citations omitted).

Veil Piercing/Alter Ego

“[P]iercing the corporate veil between a signatory and nonsignatory party may bind the nonsignatory party to an arbitration agreement of its alter ego.” American Fuel v. Utah Energy Dev., 122 F.3d 130, 133 (2d Cir. 1997) (citing Thomson-CSF, at 773). A non-signatory will be deemed the alter ego of a signatory to an arbitration clause when: 1) the non-signatory exercises complete domination over the signatory; 2) the domination is used to commit a fraud or wrong; and 3) the fraud or wrong results in an unjust loss or injury to the counter-party. See, e.g., Freeman v. Complex Computing, 119 F.3d 1044, 1052 (2d Cir. 1997).

In Mobius Mgmt. Sys. v. Technologic Software Concepts, 2002 WL 31106409, at 2-3 (S.D.N.Y. Sept. 20, 2002), for example, a dispute arose between two parties to a Software Assets Purchase Agreement, Mobius and Technologic. After Technologic defaulted on its payment obligations, Mobius brought claims against both Technologic, which was a signatory to the arbitration agreement, and its president at the time, Tom Politowski, who was not. In the arbitration, it was shown that Politowski had caused the company to sell its assets to a third party, whereupon he kept a portion of the sale proceeds for himself, while the company defaulted. The arbitrator held Politowski to be Technologic's alter ego, and rendered an award against him. Judge Robert W. Sweet of the U.S. District Court for the Southern District of New York confirmed the award, rejecting Politowski's proffered case law: “[N]either of these cases stands for the proposition that an alter ego cannot be bound by an arbitration agreement which it did not sign. As set forth above [in Thomson-CSF, supra], the Court of Appeals has ruled otherwise.” Id. at 4.

Similarly, in Favara, Skahan, Tabaczyk v. Ewing, 1992 WL 80659, at 1 (S.D.N.Y. April 9, 1992), the respondent, Gene Ewing, signed a contract with the petitioner to advertise on behalf of “Gene Ewing.Bis,” an apparel manufacturer, and “The Gene Ewing Collection.” After the respondent obtained an arbitration award against her, Ewing moved to vacate, arguing that “an arbitrator may not bind a complete stranger to an arbitration.” Id. at 3. The district court agreed with the general principle, but held that: “Given the apparently close connection between Ms. Ewing and Gene Ewing.Bis, Ms. Ewing's assertion that she 'stands in the shoes of [a] stranger' to the arbitration is unpersuasive. ' For an arbitrator to conclude that Gene Ewing.Bis is an alter ego of Ms. Gene Ewing is not unreasonable in the absence of evidence to the contrary.” Id. at 3. The award was confirmed.

Estoppel

Under estoppel principles, “a non-signatory can be compelled to arbitrate a dispute where the contract had an arbitration provision, the non-signatory had knowledge of the contract, benefitted from the contract and did not object to the terms of the contract.” Petitions of Laitasalo, 196 B.R. 913, 924 (Bankr. S.D.N.Y. 1996).

In HRH Construction v. MTA, 33 A.D.3d 568, 569 (1st Dep't 2006), for example, a dispute arose over payments due under a Construction Management Agreement (CMA) between the Metropolitan Transit Authority (MTA) and HRH Construction Interiors (Interiors), whose assets were later acquired by HRH Construction (HRH). The CMA required arbitration of disputes. MTA moved to join HRH as a party to the arbitration, even though it was not a signatory to the CMA. In its decision affirming the motion to compel arbitration, the Appellate Division, First Department, held that: “[A] nonsignatory to an agreement containing an arbitration clause that has knowingly received direct benefits under the agreement will be equitably estopped from avoiding the agreement's obligation to arbitrate.” Id. Because “HRH ' undertook Interiors' CMA obligations and derived a direct benefit, receiving over $7,000,000,” the court held that HRH was “estopped from avoiding arbitration under the CMA.” Id.; see also, BP Air Conditioning v. Lasorsa, 2010 WL 4567832 (Trial Order) (N.Y. Sup. Ct. Nassau Cnty. Oct. 27, 2010) (“Petitioners BPAC, BP Mechanical, Losey and Barbera, by virtue of their efforts to benefit from the restrictive covenants in the 1999 Plan, which survived the 2005 Amendment, are bound by the arbitration agreement in the 1999 Plan, notwithstanding the fact that they are not signatories to that agreement.”).

Conclusion

Application of the common law principles of incorporation by reference, assumption, agency, veil-piercing/alter ego and estoppel is inherently “fact specific” and differs “with the circumstances of each case.” Thomson-CSF, at 778 (discussing alter ego) (citation omitted). The one guiding principle is that an arbitration agreement does not exist unto a world all its own. As with other kinds of contracts, the common law intrudes. The same principles of contract and agency law, for which litigators are already familiar, will ultimately govern questions of arbitrability.

John Dellaportas is a partner in Morgan, Lewis & Bockius' litigation practice. This article also appeared in the New York Law Journal, a sister publication of this newsletter.

Arbitration is a creature of contract, made between consenting parties. As such, it is generally thought that those who have not signed an arbitration agreement cannot be compelled to arbitrate. While that is often the case, like most legal rules, it has its exceptions. The U.S. Court of Appeals for the Second Circuit has recognized five of them: 1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel. See, Thomson-CSF, S.A. v. American Arbitration Assoc., 64 F.3d 773, 776 (2d Cir. 1995).

Courts have cited each of these common law principles as supporting arbitral jurisdiction over a non-signatory to an arbitration clause in a contract signed by other parties. (Thomson-CSF, although decided under non-state specific, “ordinary principles of contract and agency” (id. at 776), is broadly cited by New York state and federal courts, which will typically apply New York law to questions of arbitrability in New York-venued arbitrations. See, Gary Born, Enforcement and Interpretation of International Arbitration Agreements Basic Principles: in International Commercial Arbitration: Commentary and Materials, 2d Edition, at 111 (Kluwer Law International 2001) (“[M]any authorities apply to substantive law of the arbitral situs to arbitration agreements.”).)

Incorporation by Reference

A non-signatory may be compelled to arbitrate against a signatory to an arbitration agreement when that non-signatory has executed a contract that incorporates by reference the existing arbitration agreement. The converse is also true ' a non-signatory in such circumstances can also compel arbitration against a signatory. In Import Export Steel v. Mississippi Valley Barge Line, 351 F.2d 503, 505-06 (2d Cir. 1965), for example, a charter party (i.e., an admiralty contract between a vessel owner and a shipper) contained the following arbitration clause:

Should any dispute arise between the Disponent Owners and the Charterers, the matter in dispute shall be referred to three persons in New York, one to be appointed by each of the parties hereto, and the third by the two so chosen, and their decision, or that of any two of them, shall be final, and, for purpose, of enforcing any award, this agreement may be made a rule of the Court. The arbitrators shall be commercial men.

Id. at 505.

When the vessel foundered off the coast of the Azores, its charterer, Nimpex, which was not a signatory to the charter party, sought to arbitrate liability for the lost cargo against one of the signatories. The Second Circuit affirmed the motion to compel, as Nimpex was the holder of bills of lading which unequivocally incorporated “[a]ll the terms, conditions, liberties and exceptions of the charter party.” Id . According to the Court of Appeals: “[T]he rule in this circuit is that a holder of a bill of lading which specifically refers to a charter party and in unmistakable language incorporates the charter party's arbitration section can compel a party to the charter party to arbitrate.” Id . at 506. In the case law, the same principle extends beyond admiralty to a variety of other kinds of contracts which also incorporate by reference. See also, e.g., JS & H Const. v. Richmond County Hospital Authority, 473 F.2d 212, 213-15 (5th Cir. 1973) (affirming stay of subcontractor suit in favor of pending arbitration where provision in subcontract incorporated by reference the “general conditions” of the prime construction contract, which in turn included an arbitration clause).

Assumption

A non-signatory may be compelled to arbitrate when its conduct evinces intent to be bound by the arbitration agreement. In Gvozdenovic v. United Air Lines, 933 F.2d 1100, 1105 (2d Cir. 1991), for example, 1,202 former PanAm flight attendants, whose division had been acquired by United Airlines, sought to vacate a labor-related arbitration award because they were not parties to the underlying collective bargaining agreement that contained the arbitration clause. The Second Circuit rejected their challenge, noting the flight attendants' “active and voluntary participation in the arbitration; for example, through [their union], they chose a committee to represent them in the arbitration, and, on their behalf, the committee withdrew funds from the bank account set up to cover its expenses, chose counsel to represent the transferring flight attendants in the arbitration and argued vigorously that they should receive full credit for their time of employment with Pan Am.” Id . at 1104. As the court explained: “It is hornbook law that parties by their conduct may agree to send issues outside an arbitration clause to arbitration,” (Id. at 1105 (citation omitted)) and the flight attendants' “conduct manifested a clear intent to arbitrate the dispute.” Id.; accord, e.g., Data-Stream AS/RS Techs. v. China Int'l Marine Containers, 2003 WL 22519456, at 3 (S.D.N.Y. Nov. 6, 2003) (“CIMC participated in the arbitration as CIMC-TianDa's parent and in the posture of a legitimate party. In fact, CIMC even offered claims of its own based on the contract for the EVA System. By participating in the arbitration, CIMC effectively waived its right to claim that it should not be a party to the arbitration.”).

Agency

Agency is “the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” Restatement (Second) of Agency, '1(1) (1958). Under traditional principles of agency law, a principle is bound by the acts of its agent, such as the agent's agreement to arbitrate, where such agreement is undertaken within the scope of the agent's duties. See, e.g., Alamira v. Telcor Int'l, 920 F. Supp. 658, 674 (D. Md. 1996) (compelling arbitration against non-signatory Oncor where, “[a]s an officer of Oncor, Switzer may have bound Oncor to the Alamria/Telcor Contract even though he signed the Contract as an officer of Telcor ' even absent [Oncor's] intention to be bound”). When agents are involved, arbitrability also works in the opposite direction, in that “employees or disclosed agents of an entity that is a party to an arbitration agreement are protected by that agreement.” Roby v. Corporation of Lloyd's, 996 F.2d 1353, 1360 (2d Cir. 1993).

In Hirschfeld Prods. v. Mirvish, 88 N.Y.2d 1054, 1055 (1996), for example, a joint venture agreement (JVA) to produce “Hair” at the Old Vic Theater in London contained the following clause:

Should a dispute arise from this agreement or from its interpretation then the Producers agree that such dispute shall be referred to an Arbitrator to be appointed in the absence of agreement between the disputing parties by the President for the time being of the Society of West End Theatre in accordance with U.K. Law.

Id.

The production flopped. The plaintiff, a party to the JVA, then sued the president and chairman, respectively, of the theatrical production company, which was the counterparty to the JVA. On appeal, the New York Court of Appeals affirmed the arbitrability of the dispute. Even though the defendants were not personally signatories to the JVA, and thus to the arbitration agreement, they were afforded “the benefit of arbitration agreements entered into by their principals to the extent that the alleged misconduct ' [is] in their capacities as agents of the corporation.” As the court explained: “The rule is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.” Id. (citations omitted).

Veil Piercing/Alter Ego

“[P]iercing the corporate veil between a signatory and nonsignatory party may bind the nonsignatory party to an arbitration agreement of its alter ego.” American Fuel v. Utah Energy Dev., 122 F.3d 130, 133 (2d Cir. 1997) (citing Thomson-CSF, at 773). A non-signatory will be deemed the alter ego of a signatory to an arbitration clause when: 1) the non-signatory exercises complete domination over the signatory; 2) the domination is used to commit a fraud or wrong; and 3) the fraud or wrong results in an unjust loss or injury to the counter-party. See, e.g., Freeman v. Complex Computing, 119 F.3d 1044, 1052 (2d Cir. 1997).

In Mobius Mgmt. Sys. v. Technologic Software Concepts, 2002 WL 31106409, at 2-3 (S.D.N.Y. Sept. 20, 2002), for example, a dispute arose between two parties to a Software Assets Purchase Agreement, Mobius and Technologic. After Technologic defaulted on its payment obligations, Mobius brought claims against both Technologic, which was a signatory to the arbitration agreement, and its president at the time, Tom Politowski, who was not. In the arbitration, it was shown that Politowski had caused the company to sell its assets to a third party, whereupon he kept a portion of the sale proceeds for himself, while the company defaulted. The arbitrator held Politowski to be Technologic's alter ego, and rendered an award against him. Judge Robert W. Sweet of the U.S. District Court for the Southern District of New York confirmed the award, rejecting Politowski's proffered case law: “[N]either of these cases stands for the proposition that an alter ego cannot be bound by an arbitration agreement which it did not sign. As set forth above [in Thomson-CSF, supra], the Court of Appeals has ruled otherwise.” Id. at 4.

Similarly, in Favara, Skahan, Tabaczyk v. Ewing, 1992 WL 80659, at 1 (S.D.N.Y. April 9, 1992), the respondent, Gene Ewing, signed a contract with the petitioner to advertise on behalf of “Gene Ewing.Bis,” an apparel manufacturer, and “The Gene Ewing Collection.” After the respondent obtained an arbitration award against her, Ewing moved to vacate, arguing that “an arbitrator may not bind a complete stranger to an arbitration.” Id. at 3. The district court agreed with the general principle, but held that: “Given the apparently close connection between Ms. Ewing and Gene Ewing.Bis, Ms. Ewing's assertion that she 'stands in the shoes of [a] stranger' to the arbitration is unpersuasive. ' For an arbitrator to conclude that Gene Ewing.Bis is an alter ego of Ms. Gene Ewing is not unreasonable in the absence of evidence to the contrary.” Id. at 3. The award was confirmed.

Estoppel

Under estoppel principles, “a non-signatory can be compelled to arbitrate a dispute where the contract had an arbitration provision, the non-signatory had knowledge of the contract, benefitted from the contract and did not object to the terms of the contract.” Petitions of Laitasalo, 196 B.R. 913, 924 (Bankr. S.D.N.Y. 1996).

In HRH Construction v. MTA, 33 A.D.3d 568, 569 (1st Dep't 2006), for example, a dispute arose over payments due under a Construction Management Agreement (CMA) between the Metropolitan Transit Authority (MTA) and HRH Construction Interiors (Interiors), whose assets were later acquired by HRH Construction (HRH). The CMA required arbitration of disputes. MTA moved to join HRH as a party to the arbitration, even though it was not a signatory to the CMA. In its decision affirming the motion to compel arbitration, the Appellate Division, First Department, held that: “[A] nonsignatory to an agreement containing an arbitration clause that has knowingly received direct benefits under the agreement will be equitably estopped from avoiding the agreement's obligation to arbitrate.” Id. Because “HRH ' undertook Interiors' CMA obligations and derived a direct benefit, receiving over $7,000,000,” the court held that HRH was “estopped from avoiding arbitration under the CMA.” Id.; see also, BP Air Conditioning v. Lasorsa, 2010 WL 4567832 (Trial Order) (N.Y. Sup. Ct. Nassau Cnty. Oct. 27, 2010) (“Petitioners BPAC, BP Mechanical, Losey and Barbera, by virtue of their efforts to benefit from the restrictive covenants in the 1999 Plan, which survived the 2005 Amendment, are bound by the arbitration agreement in the 1999 Plan, notwithstanding the fact that they are not signatories to that agreement.”).

Conclusion

Application of the common law principles of incorporation by reference, assumption, agency, veil-piercing/alter ego and estoppel is inherently “fact specific” and differs “with the circumstances of each case.” Thomson-CSF, at 778 (discussing alter ego) (citation omitted). The one guiding principle is that an arbitration agreement does not exist unto a world all its own. As with other kinds of contracts, the common law intrudes. The same principles of contract and agency law, for which litigators are already familiar, will ultimately govern questions of arbitrability.

John Dellaportas is a partner in Morgan, Lewis & Bockius' litigation practice. This article also appeared in the New York Law Journal, a sister publication of this newsletter.