Richard V Singleton
Blank Rome, New York
richard.singleton@blankrome.com

There is little doubt that parties who sign commercial contracts are obligated to perform under the contract. And, if that contract contains a valid arbitration clause requiring arbitration, there is also little doubt that the parties will be required to arbitrate disputes arising out of that performance. The foregoing also applies to contracts executed by agents on behalf of principals. None of this should be surprising, at least to lawyers practicing in common law jurisdictions.

The more interesting question is under what circumstances may a party be held liable for breach – and be obligated to arbitrate claims – under a contract that it did not sign. The following identifies some circumstances under US law where non-signatories may be bound by the terms of a contract and required to arbitrate claims under that contract.

Assumption

Non-signatories may be held liable for a breach of contract if their actions show that they are in privity of contract or that they assumed obligations under the contract. In ESI Inc v Coastal Corp (applying New York law),^[1] the plaintiff sought to hold a non-signatory, which was alleged to be in a joint venture with the signatories, liable to a written contract between the plaintiff and the signatories. Focusing on the allegations that the non-signatory had ‘attended meetings … and participated in the negotiations and drafting’ of the contract, the Court found that the plaintiff had stated a claim against the non-signatory for a breach of contract. The Court also noted that other documents besides the operative contract could show that the non-signatory accepted and assumed the obligations of the contract.

While ESI did not involve arbitration, the Court’s holdings that claim the non-signatories are bound to the terms of the contract logically suggest that the non-signatories would also be bound by any arbitration agreement in the contract.

Estoppel

A party may be ‘estopped from denying its obligation to arbitrate when it receives a “direct benefit” from a contract containing an arbitration clause’.^[2] Benefits are ‘direct—and therefore will lead to estoppel when knowingly exploited—when arising specifically from the unsigned contract containing the arbitration clause; and benefits are indirect and therefore will not lead to estoppel even if knowingly exploited—when merely incidental to the contract’s execution’.^[3] Furthermore, the Court in Life Techs Corp held that benefits are direct when specifically contemplated by the relevant parties; and benefits are indirect when the parties to the agreement with the arbitration clause would not have originally contemplated the non-signatory’s eventual benefit.

Accordingly, a non-signatory may be estopped from denying an obligation to arbitrate if it knowingly and directly benefits from a contract containing an arbitration clause. The battleground in these disputes, of course, centres on the facts indicating whether the non-signatory ‘knowingly’ received a ‘direct’ benefit under the contract and the extent of that benefit.

Veil piercing

Under certain circumstances, a non-signatory corporation may be liable for the contracts of its subsidiaries or affiliates and may be required to arbitrate disputes arising under those contracts. As a general matter, under New York law, it has long been established that a court may pierce the corporate veil where (1) ‘the owner exercised complete domination over the corporation with respect to the transaction at issue’; and (2) ‘such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil’.^[4] Determining whether to pierce the corporate veil is a ‘fact specific’ inquiry, and courts consider many factors, including:

• disregard of corporate formalities;
• inadequate capitalisation;
• intermingling of funds;
• overlap in ownership, officers, directors and personnel;
• common office space, address and telephone numbers of corporate entities;
• the degree of discretion shown by the allegedly dominated corporation;
• whether the dealings between the entities are at arm’s length;
• whether the corporations are treated as independent profit centres;
• payment or guarantee of the corporation’s debts by the dominating entity; and
• intermingling of property between the entities.

The consequence of successfully applying the veil piercing doctrine is that the corporation and those who have controlled it without regard to its separate entity are treated as but one entity, and at least in the area of contracts, the acts of one are the acts of all. So if the affiliate whose veil is pierced is required to arbitrate under a contract, the parent likewise will be required to arbitrate – even though it did not sign the contract.

Waiver

Finally, there is the concept of a waiver. An agreement to arbitrate may be implied from a party’s conduct in arbitration proceedings.^[5] These cases teach that a non-signatory who participates in arbitration proceedings without making a timely objection to the submission of the dispute to arbitrate may be found to have waived its right to object to the arbitration. The Court in Parrella reasoned that such a rule serves the twin goals of the Federal Arbitration Act, ie, settling disputes efficiently and avoiding protracted litigation by ensuring participants cannot have a second bite at the apple in court should they lose in arbitration.

A non-signatory that participates in arbitration without objecting or otherwise reserving its position that it is not a party to an arbitration agreement therefore does so at its peril. If it later realises it is not required to arbitrate or that arbitration may not be as beneficial as it thought, it could be too late. That party may be required to continue with the arbitration and will be bound by the arbitration award.

The determination of what level of participation is required for a waiver turns on the specific facts of each case. Courts usually are reluctant to find a waiver if the arbitration is in the early stages. However, the longer the non-signatory voluntarily and actively participates in arbitration without objection, the more preparation and disclosure that has occurred and the closer the proceedings are to a hearing, the more likely a court will find a waiver. This is especially true if the non-signatory has requested and received rulings from the arbitration tribunal on interim matters.

Conclusion

Parties therefore must be mindful in their contracting and commercial dealings to avoid inadvertently becoming a party to someone else’s contract. Simply claiming that a party is not a signatory to the contract is not an automatic defence to a breach of contract claim or arbitration demand.