Chapter 7 - § 7.3 • IS THE AGREEMENT TO ARBITRATE BINDING UPON THE PARTIES TO THE DISPUTE?
| Jurisdiction | Colorado |
Generally, contracts are binding only upon the parties to the contract. However, the law of contracts holds that in certain instances, a contract may be enforced against23 or by a non-party. This common law of contracts applies to arbitration contracts.
§ 7.3.1—Non-signatories
Whether a non-signatory is bound by or entitled to enforce an arbitration agreement is determined under state contract law, so long as that law does not discriminate against arbitration agreements.24
Generally, the courts have found non-signatories bound by or entitled to enforce arbitration agreements on multiple theories in various factual circumstances:
• The signatory entered into a contract with a non-signatory, incorporating another contract with the arbitration agreement, e.g., a surety whose performance bond incorporated by reference the subcontract that incorporated by reference the general contract that contained an arbitration clause.25
• The non-signatory is the principal of an agent signatory or the agent of the principal signatory.26
• The non-signatory is the alter ego (piercing the corporate veil) of a party.27
• The non-signatory is estopped to deny that it is bound by the arbitration agreement. The non-signatory expressly or impliedly by conduct assumed the obligation to arbitrate.28
• The non-signatory is the employee or principal of a signatory.29
• The non-signatory is a third-party beneficiary.30 Similarly, a third-party beneficiary can both enforce an arbitration clause in an agreement and be compelled to arbitrate under an arbitration provision.31 Such a beneficiary can only accept all of the benefits and burdens of the contract or none.
• The party is the successor in interest to a signatory.32
• The non-signatory is an assignee of a signatory.33
• The non-signatory is a member of a signatory group.34
• The parent signs for a minor child.35
• The parent company is bound by a subsidiary's arbitration agreement.36
• The party is an heir to a signatory.37
• The non-signatory is estopped to deny being bound.38
• The signatory is estopped to deny the non-signatories' right to arbitration — equitable estoppel to enable a non-signatory to compel a signatory to arbitrate.39
These theories are carefully defined and explained in a decision by the Second Circuit, to which the reader is referred.40 In general, non-signatories are bound by and may enforce arbitration agreements for the same reasons as any other agreements.
For example, heirs and personal representatives were held bound by an arbitration provision in an agreement between a member and a health-care organization, the court saying:
[W]e construe an arbitration provision expressly purporting to bind not only the signatory, but also certain non-parties who are in privity with the signatory, namely an "heir or personal representative or . . . a person claiming that a duty to him or her arises from a Member's relationship with [the other party]."41
The extreme may be evidenced by the Fifth Circuit in Sherer v. Green Tree Servicing LLC,42 wherein a loan servicer successfully required a borrower to arbitrate his claims under the Fair Debt Collection Practices Act (15 U.S.C. § 1692) and the Fair Credit Reporting Act (15 U.S.C. § 1681). The borrower's agreement with the lender called for arbitration of any claims arising from "the relationships which result from this Agreement." That clause seemed to define the scope of disputes between the signatories that were subject to arbitration and not to make the servicer a third-party beneficiary.
A similar issue arose in the Second Circuit. Holders of MasterCard, Visa, and Diners Club credit cards sued American Express on various conspiracy claims. American Express attempted unsuccessfully to compel the cardholders to arbitrate based upon their arbitration agreements with their card issuers.43
On the other hand, there are sharp limits to extending the arbitration clause to third parties. For example, a party accused of interference with contract was held to be not bound by the arbitration clause in that contract.44
A condominium association that asserts claims on behalf of its members who are signatories to arbitration agreements with the condominium developer is estopped to deny it is not bound by the arbitration agreements.45 The claims the association was asserting were based upon members' contracts with the developer, and therefore the association should be bound by the arbitration clauses therein.
The health-care cases involve special issues as to whether the patient is bound by an agreement with the facility to arbitrate disputes that are executed by someone on the patient's behalf, often because the patient is incapacitated.46
If a party wishes limited discovery so as to present evidence to the court as to whether a non-signatory is bound by the arbitration agreement (e.g., the extent to which a non-signatory accepted benefits pursuant to the agreement with the arbitration clause), if it is an American Arbitration Association (AAA) arbitration, the matter of such discovery is for the arbitrator under AAA Rules R-21 (Preliminary Hearing) and R-22 (Pre-Hearing Exchange and Production of Information).47
In Pikes Peak Nephrology Associates, P.C. v. Total Renal Care, Inc.48 Judge Arguello of the U.S. District Court for the District of Colorado considered whether a non-signatory to the arbitration agreement was nevertheless bound by it. She noted that the "'court must first determine whether the parties have a sufficient relationship to each other and to the rights created under the agreement.'"49 The party seeking arbitration requested leave to conduct limited discovery on the issue of the extent to which the non-signatory party accepted benefits pursuant to the agreements containing the arbitration clause, or was otherwise bound under principles of third-party beneficiaries, promissory estoppel, or detrimental reliance. Noting then-current AAA Commercial Rules 20 (Preliminary Hearing) and 21 (Exchange of Information) were applicable, Judge Arguello denied the discovery request, stating that "the matter of additional discovery is properly within the arbitrator's purview."50
The Tenth Circuit, in Lenox MacLaren Surgical Corp. v. Medtronic, Inc.,51 noted that the Colorado Supreme Court has not addressed whether equitable estoppel might compel arbitration between a non-signatory and a signatory of the arbitration agreement. However, it noted that the Colorado Court of Appeals applied equitable estoppel in Smith v. Multi-Financial Securities Corp.,52 holding that plaintiffs were "estopped from avoiding the arbitration agreements whose benefits they seek to enforce."53
Where a claimant obtained an award against a corporation, the court has jurisdiction over the claimant's action to pierce the corporate veil and enforce the judgment against the principals.54 The court rejected that the issue should be determined in arbitration under a theory that the principals were non-signatories bound by the arbitration agreement under the piercing the corporate veil theory. This decision is contrary to other courts. See supra, this section.
So to, an arbitration award may be enforced against a non-signatory — generally on the same type of grounds as piercing the corporate veil and a non-signatory being a party.55
See § 5.2.7.
• Annot., Application of Equitable Estoppel Against Non signatory to Compel Arbitration Under Federal Law, 43 A.L.R. Fed.2d 75.
• Annot., Application of Equitable Estoppel to Compel Arbitration by or Against Nonsignatory-State Cases, 22 A.L.R.6th 387.
• Annot., Application of Equitable Estoppel by Nonsignatory to Compel Arbitration - Federal Cases, 39 A.L.R. Fed.2d 17.
• Annot., Enforcement of Arbitration Agreement Contained in Const. Contract by or Against Nonsignatory, 100 A.L.R.5th 481.
• Annot., Enforcement of Arbitration Agreement Contained in Real Estate Contract by or Against Nonsignatory under State Law, 10 A.L.R.6th 669.
§ 7.3.2—Subcontractors...
To continue reading
Request your trial