A is for…Arbitration: Can A Non-Signatory To A Contract Enforce An Arbitration Provision In That Contract?
A corporate client is engaged in arbitration with a third party pursuant to an arbitration provision in the contract between the parties. An executive signed the contract “on behalf of” the company, but did not sign the contract individually. During the course of the matter, the third party brings claims in court against the executive in his individual capacity, and the executive wants to force those claims to arbitration. Can he?
The strongest argument to be made in favor of arbitration is that, at the time the activities at issue occurred, the executive was acting on behalf of, and as an agent for, the company. It is well-settled that agents are afforded “the benefits of arbitration agreements made by their principal.” Arnold v. Arnold Corp. – Printed Commc’ns For Business, 920 F.2d 1269, 1282 (6th Cir. 1990). Therefore, as an agent of the company, the executive could be entitled to the protections of the arbitration provision in the contract at issue if the claims against the company and the executive are based upon the same facts. Id.; accord Prograph Int’l Inc. v. Barhydt, 928 F. Supp. 983, 990 (N.D. Cal. 1996) (“[A] non-signatory officer, agent, or representative of one of the parties to an arbitration agreement may compel the other party to arbitrate claims against him or her arising from or in connection with that agreement.”); see also Patteson v. McAdams Tax Advisory Group, LLC, 2010 U.S. Dist. LEXIS 16992, *13 (W.D. Tenn. Feb. 14, 2010) (citing Creech v. Addington, 281 S.W.3d 363, 373 (Tenn. 2009)).
The fact that the executive did not sign the contract containing the arbitration provision in his individual capacity is not fatal to enforcement of the provision. In fact, non-signatories to an arbitration agreement may be bound by or enforce an arbitration agreement executed by other parties under theories arising out of common law principles of contract and agency law. Broaddus v. Rivergate Acquisitions, Inc., 2008 U.S. Dist. LEXIS 86737, at *2 (M.D. Tenn. Oct. 1, 2008) (citations omitted). “Where there is an agency relationship between a signatory and a non-signatory, the nonsignatory may compel arbitration.” Bowie v. Clear Your Debt, LLC, 523 Fed. Appx. 315, 317 (6th Cir. 2013); see also Crossville Medical Oncology, P.C. v. Glenwood Sys., LLC, 310 Fed. Appx. 858, 860 (6th Cir. Feb. 17, 2009) (“Nonsignatories may be bound to an arbitration agreement under ordinary contract and agency principles.”).
Apart from comporting with common law principles of agency, the enforcement of an arbitration provision by a non-signatory agent conforms with traditional notions of justice and fair play. See Wise v. Zwicker & Assocs., PC, 2013 U.S. Dist. LEXIS 41004, *25 (N.D. Ohio Mar. 22, 2013) (noting that “fairness concerns underpin non-signatory agency theory”). To the extent an executive is alleged to have committed wrongful acts in his capacity as an executive (and agent) of a company, and the claims against the company and the executive are based upon the same facts, arbitration provides a single forum within which all disputes arising under a single contract may be resolved. A contrary rule effectively would thwart the federal policy in favor of arbitration, because a party seeking to avoid its agreement to arbitrate could join a related non-signatory party to the dispute. See Arnold v. Arnold Corp., 920 F.2d 1269, 1281 (6th Cir. 1990) (holding that if a party “can avoid the practical consequences of an agreement to arbitrate by naming nonsignatory parties as defendants in his complaint, or signatory parties in their individual capacities only, the effect of the rule requiring arbitration would, in effect, be nullified.”) (quoting Arnold v. Arnold Corp., 668 F. Supp. 625, 629 (N.D. Ohio 1987)). “Such a maneuver should not be allowed to succeed.” IDS Life Ins. Co. v. SunAmerica, Inc., 103 F.3d 524, 530 (7th Cir. 1996).
For more information on arbitrations and the process and procedures governing arbitrations before the American Arbitration Association (“AAA”), go to the AAA’s website at https://www.adr.org.Lauren Patten