Articles / Alternative Dispute Resolution
Compelling Non-Signatories to an Arbitration Agreement to Arbitrate
In National Union Fire Insurance Company of Pittsburg v Beelman Truck Company, et al,the plaintiff insurance company (“National Union”) sought to compel nine related companies to arbitrate an insurance dispute under the Federal Arbitration Act (“FAA”). One of the nine companies, Beelman Truck Company (“Beelman Truck”), did not dispute its obligation to arbitrate. The remaining 8 companies (the “Resistors”) are all affiliates of Beelman Truck and are all commonly controled by Beelman Truck’s principal, Frank Beelman.
The underlying dispute between National Union, Beelman Truck and the Resistors is described by the Court only as “an insurance dispute.” The relevant facts: National Union provided insurance coverage to Beelman Truck for a four year period pursuant to a “set of interlocking contracts including annual policies, schedules of policies and payments, and biennial payment agreements.” The payment agreements contained an arbitration clause which was signed by Beelman Truck but not by the Resistors. The Resistors are all affiliates of Beelman Truck and controlled by the same natural person who signed the arbitration agreement. National Union claimed that the Resistors should be deemed signatories of the arbitration agreement, hence compelled to arbitrate. The Resistors asserted that since they did not sign the arbitration agreement, they cannot be forcibly joined in the arbitration.
In addition to the Resistors, an additional entity was before the Court. Beelman Truck sought to join the insurance broker in the arbitration. The insurance broker, like the Resistors, had not signed the arbitration agreement. Unlike the Resistors, however, the insurance broker was neither an affiliate of Beelman Truck nor controlled by Beelman Truck’s principal.
As preface to the discussion of the substantive issues, the case highlights an important pleading technicality which it addresses in a footnote (footnote 4) – actions to compel or enforce arbitrations cannot be responded to via a motion to dismiss.
§6 of the FAA provides:
“Any application to the court hereunder shall be made and heard in the manner provided by law for the making and hearing of motions, except as otherwise herein expressly provided.”
Courts have read §6 narrowly, holding that the language “in the manner” means that applications to compel an arbitration or enforce an arbitration award are motions and not pleadings. See ISC Holding AG v. Nobel Biocare Fin. AG, 688 F.3d 98, 113 (2d Cir. 2012). In Beelman, the insurance company initiated the suit by filing a “Petition To Compel Arbitration.” The Resistors responded by filing a “Motion to Dismiss.” A motion to dismiss was therefore improper. Thus, the Court “construe[d] the motion to dismiss as the Resistors’ opposition to the petition.”
Since an opposition to a petition to compel arbitration is not a “motion,” the question arises: what is the standard of review? The Court in Beelman answers this:
“When evaluating a petition to compel, the Court ‘applies a standard similar to that applicable for a motion for summary judgment.’ [citation omitted]. The Court must grant the petition if there is no genuine issue of material fact regarding the requirements to compel arbitration. [citation omitted]
Regarding the substantive issues presented by the Beelman case, the Court separated the parties to be joined into two groups: The Resistors (who were all affiliates of Beelman Truck and controlled by its principal), and the insurance broker (an independent third party). The Court next set forth the applicable legal standard:
The FAA ‘requires courts to enforce privately negotiated agreements to arbitrate … in accordance with their terms.’ [citation omitted] The statute limits the Court’s role in adjudicating the petition to ‘determining two issues: i) whether a valid agreement or obligation to arbitrate exists, and ii) whether one party to the agreement has failed, neglected or refused to arbitrate.’ [citation omitted]. If the Court finds that these requirements are met, it must issue ‘an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.’ [citation omitted]
“[A]rbitration is a matter of contract, ’ [citation omitted] and ‘a party cannot be required to submit to arbitration any dispute which [it] has not agreed so to submit.’ [citation omitted] The issue of whether the parties are obliged to arbitrate their dispute therefore breaks down into two questions: ‘(l) whether the parties have entered into a valid agreement to arbitrate, and, if so, (2) whether the dispute at issue comes within the scope of the arbitration agreement.’ [citation omitted] The parties can delegate much of the threshold arbitrability inquiry to the arbitrator as long as the contract ‘clearly and unmistakably’ memorializes their intent to do so. [citation omitted] But the Court must always ascertain for itself whether the resisting party is subject to a valid arbitration agreement, because even the broadest arbitration clause cannot bind a party who never agreed to it. [citation omitted]
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[I]n evaluating whether the parties have entered into a valid arbitration agreement, the court must look to state law principles. [citation omitted]
Applying these principles to the Beelman case, the Court found that the undisputed facts were that the Resistors were both affiliates of Beelman Truck (the entity that signed the arbitration agreement) and “named insureds” under the policy. The Court further held that the Resistors, as a matter of law, “are signatories” to the relevant documents hence they may be compelled to join the arbitration.
The same was not the case with respect to the insurance broker, however. With respect to the insurance broker, the Court found that such party had neither signed the arbitration agreement nor other relevant documents, and could not be deemed to have done so.
The Second Circuit recognizes only five theories under which a non-signatory can be compelled to arbitrate: ‘1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel. [citations omitted] Beelman Truck invokes two of these theories: incorporation by reference, and estoppel.
After reviewing and applying the applicable facts, the Court found that neither applied to the insurance broker hence the insurance broker could not be compelled to join the arbitration.
The full opinion: National Union Fire Insurance Company of Pittsburg v Beelman Truck Company, et al, United Stated District Court for the Southern District of New York, Case 1:15-cv-08799-AJN Document 81 Filed 08/24/16
Vacating an Arbitrator Award – Arbitrators Exceeded Authority:
In Bankers Life & Casualty Insurance Co v. CBRE, Inc., the United States Court of Appeals for the Seventh Circuit reversed and remanded a district court’s decision rejecting a challenge to an arbitration award and affirming the award. The case involved a commercial real estate brokerage agreement and an arbitration administered by JAMS and which proceeded pursuant to JAMS rules. The Court of Appeals clearly believed the arbitration tribunal wrongly decided the case, and based upon the facts presented in the opinion most will likely agree.
Indeed, the case thus presents the uncomfortable circumstance wherein a court is asked to confirm an award that it believes was wrongly decided – not by just a little, but by a lot! The result: two of the three appellate judges (in the opinion of this reviewer) forced a square peg into a round hole in order to do justice and correct a legal wrong. The third appellate judge held firm to the strict legal standards of review and dissented, holding that the majority exceeded the limited scope of a court’s review of an arbitration award. The irony of the case: the majority held that the award should be rejected because the arbitration tribunal exceeded their authority.
I note as a preface to a description of the case that Bankers Life cuts no new legal ground. Indeed, from a purely legal perspective, it is not terribly interesting. Nonetheless, I present it because it is an example of how judges, on occasion, twist the law in order to avoid a result that they believe unjust. I also present it for the dissenting opinion, which sets forth the clear, sometimes painful, law that courts cannot overturn arbitral awards merely because they are wrongly – indeed grossly – decided.
The facts: Plaintiff was a tenant with a long term lease in a building occupied by a rapidly growing “dot-com” company. The defendant, a well regarded national real estate brokerage and advisory company, thus approached plaintiff and asked plaintiff whether it would sub-lease their space to the dot-com and relocate to new space which defendant would find for them. Plaintiff responded that they would do so if i) defendant identified acceptable alternative space, and ii) plaintiff would net $7 million from the transaction.
Plaintiff and defendant thereupon entered into a listing agreement (“Listing Agreement”) which provided that defendant “would ‘accept delivery of and present [plaintiff] all offers and counteroffers to buy, sell, or lease … property’ of [plaintiff ]; “would assist [plaintiff] in developing, communicating, negotiating, and presenting offers, counteroffers, and notices”; and would “answer [plaintiff’s] questions relating to the offers, counteroffers, notices, and contingencies.”
After reaching this agreement, defendant presented plaintiff with “a series of cost-benefit analyses (CBAs), comparing the costs of leasing new space with the benefits of subleasing the old space to [the dot-com].” One CBA delivered to plaintiff showed that plaintiff would generate $6.9 million, and plaintiff, relaying on the CBA, accepted the transaction, sub-leased its space to the dot-com, and moved to a new facility.
Unfortunately, the CBA presented by defendant and relied upon by plaintiff contained an error – a $3.1 million error!
“It omitted [a] promise [by plaintiff], as part of the deal with [the dot-com company], to give [the dot-com] a $3.1 million tenant improvement allowance to enable [the dot-com] to improve the space formerly occupied by [plaintiff]. The uncontradicted evidence is that had [plaintiff] known it would profit by only $3.8 million ($6.9 million – $3.1 million) from the deal package (lease plus sublease), it would have rejected the deal and thus not have relocated and defendant would not have obtained the $4.5 million in commissions that it received as compensation for having arranged the sublease to [the dot-com] and [plaintiff’s] relocation to [a new space].”
Plaintiff, bound by its agreement to sub-lease its space to the dot-com and relocate, honored its agreement with the dot-com company and thereupon commenced an arbitration proceeding against plaintiff to recover the $3.1 million and also to avoid having to pay the defendant a commission for the leasing of its new space.
An arbitration ensued and the arbitration panel issued three awards. The initial award held that “while [defendant] had indeed erred in greatly exaggerating the value of the sublease/lease deal that it had arranged for [plaintiff], it had not violated the Listing Agreement because the agreement did not explicitly require [defendant] to furnish [plaintiff] with a correct CBA, and [defendant] had not violated its obligations, set forth in the Listing Agreement, to assist [plaintiff] ‘in developing, communicating, negotiating and presenting offers, counteroffers and notices” and “to answer [plaintiff’s] questions relating to offers, counteroffers, notices, and contingencies.”
The Appellate Court found this reasoning “odd,” commenting:
[T]he panel said that ‘the mistake in [defendant’s] analysis on the summary pages of the CBAs is not a violation of its obligation to assist [plaintiff] ‘in developing, communicating, negotiating and presenting offers[,] counteroffers and notices’ nor a failure to ‘answer [plaintiff’s] questions relating to offers, counteroffers, notices, and contingencies.’ It’s hard to imagine what else the mistake might be.
Evidencing the Appellate Court’s disdain for the arbitration tribunal’s award, the Court continued:
“Evidently the panel had misgivings. For four months later (June 2014), in response to [plaintiff’s] unsurprising motion for reconsideration of the award, the panel changed course. It now acknowledged ‘that the Listing Agreement obligated [defendant] to answer questions accurately” and that “[defendant] [had] made a mistake and that mistake was material.” Yet the panel adhered to its earlier ruling in favor of defendant, on the ground that “as stated by [plaintiff], the required answers [to questions [plaintiff] had put to the brokerage firm concerning the sublease to [defendant] and the leasing of alternative premises for plaintff] “were the CBAs” (emphasis in original) and “the CBAs … included a disclaimer that provided that [defendant] was not guaranteeing that there were not any errors contained in the CBA. Here, there was an arithmetic error, or an error in aligning the columns of numbers. The disclaimer clearly provides that [defendant] was not responsible for errors.”
So much for the facts. Now to the law and the Appellate Court’s application of the law.
The case, while in Federal Court by reason of diversity jurisdiction, applied the Illinois Arbitration Act (“Illinois Act”) and not the Federal Arbitration Act (“FAA”). The distinction, however, is immaterial in that the Illinois Act and the FAA share the identical language and the same origin (see, the dissenting opinion of J. Sykes and citations therein).
The Illinois Act (and FAA) only permit a court to vacate an arbitration award if the arbitrators “exceeded their powers.” Thus, the Appellate Court needed to make such a finding. In Bankers Life, it did just that:
The panel exceeded its authority. It was authorized to interpret the contract. The contract did not include the cost benefit analyses. The panel’s reliance on the disclaimer in the CBAs was therefore unjustified.
Judge Sykes, dissenting from the majority opinion, found this conclusion less than compelling. While clearly agreeing that the arbitrators wrongly decided the case, J. Sykes relied upon Illinois Supreme Court precedent and similar Federal Court rulings construing the FAA which hold:
The fact that arbitrators have made an erroneous decision will not vitiate their award. If they have acted in good faith, the award is conclusive upon the parties; and neither party is permitted to avoid it by showing that the arbitrators erred in their judgment, either respecting the law or the facts of the case. [citation omitted]
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We’ve said much the same thing when describing the scope of judicial review under the FAA. Almost three decades ago we explained that a gross error in interpreting the parties’ contract will not suffice to vacate an arbitration award. . .
From a purely legal perspective and advocate of arbitration, I find the majority decision inBanker’s Life troubling. Its reasoning is tortured, and while on its face consistent with the near universal body of law described and documented by J. Sykes, it is in fact contrary to that body of law and thus potentially an invitation to other courts to twist a legal analysis into an unnatural form in order to achieve a desired result. As one who believes in justice and fairness, however, and that courts should never forget that their decisions affect real people and have real consequences, I applaud the decision as a courageous preservation of justice.
The full opinion: In Bankers Life & Casualty Insurance Co v. CBRE, Inc., No. 15-1471 (7th Cir. July 29,2016)