When can a company be compelled to arbitrate a dispute under a contract it hasn’t signed?
Arbitration, both international and domestic, is based on consent, not coercion. Nevertheless, litigants in American courts sometimes find themselves sent to arbitration—even when they have not signed a contract containing an arbitration clause. Courts employ various theories to extend contractual arbitration clauses to non-signatories.
American courts view arbitration as “a matter of contract between the parties.” Courts have found that state law governs the scope of arbitration agreements, including the question of who is bound by them. Multiple principles of state law have, in some instances, been held to permit enforcement of a contract by a non-signatory. Details may vary based on governing law. But there can be cases involving arbitration by non-signatories, both as claimants and respondents.
Four primary bases on which non-signatories have been forced to arbitrate disputes in the United States are: assignment, third-party beneficiaries, alter-ego/veil-piercing, and estoppel.
Assignment
If a signatory assigns the contract to a non-signatory, the non-signatory is considered substituted for the signatory in the arbitration clause as in the contract’s other clauses. For instance, a court has held that a bank to which an account was assigned could potentially compel arbitration with the debtor based on a credit-card agreement, even though the bank was not a signatory to that agreement. Conversely, some courts have held that the assignee of a contract can be bound by the arbitration clause when suing under the contract.
Third-party beneficiaries
Arbitration clauses might also be enforced by and against third-party beneficiaries. A third-party beneficiary is a non-signatory to a contract who was intended, by the signatories, to benefit from the contract. As with assignment, third-party beneficiary status derives from ordinary contract-law principles, not from a body of law specific to arbitration.
Alter ego and piercing the corporate veil
Just as courts sometimes “pierce the corporate veil” to impose liability on a corporation’s parent, courts sometimes compel arbitration against a parent, finding it to be its subsidiary’s “alter ego.” The alter-ego doctrine often requires both that the parent exercised complete control over the child and that the parent used that control to commit a fraud or wrong that injured the party seeking to pierce the veil. For instance, where an entity creates a corporation and takes steps to thwart creditors (e.g., grossly undercapitalizing it), the parent entity has been compelled to arbitrate a dispute against the corporation.
Estoppel
Estoppel has also been a basis on which an arbitration clause is enforced by or against non-signatories. For example, a party to a contract containing an arbitration clause has been found to face a potential estoppel issue where the party argued the contract valid for damages purposes but invalid with respect to the arbitration clause.
Similarly, courts have held an arbitration clause could apply against a non-signatory who sues a signatory when the underlying claims seek a “direct benefit” from the contract containing the arbitration clause or “arise from” the contract containing the arbitration clause. Thus, for example, a purchaser might sue a manufacturer under an agreement between the manufacturer and the distributor, to which the purchaser was not a party.
If that agreement contained an arbitration clause covering “any dispute arising out of” it, and if the purchaser’s “entire case hinges on its asserted rights” under the contract, courts have held that the purchaser might face an estoppel issue if trying to enforce the contract without honoring the arbitration clause.
Conclusion
Principles of contract law – which vary based on the governing law – can force a non-signatory to participate in arbitration. In addition to these discussed above, assumption and incorporation sometimes are applied. Thus, it is possible to be compelled to arbitrate without having signed an arbitration agreement.
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