The Court of Chancery determined that none of the exceptions applied in this case to the general rule that only a signatory is bound by the terms of a written agreement. Thus, the Court did not need to address the scope of the arbitration clause. [At first, this conclusion may appear unremarkable, but there are a fair number of decisions which find non-signatories bound by the terms of an agreement they did not sign. See, e.g., NAMA Holdings LLC v. Related World Market Center LLC, 2007 WL 1500027 at n.26 (Del. Ch. April 27, 2007), available here.]
Two prior opinions of the Court linked above provide copious background details. This latest decision in this matter involved the motion to compel arbitration of plaintiff. The sophisticated parties involved in this case formed investment vehicles to invest in Japanese companies. The remaining claims (after the prior decisions of the Court dismissed certain counts), included damages for breach of a limited liability agreement asserted by Plaintiff. The motion to compel arbitration related to counterclaims to enjoin the use of confidential information. The arguments of the plaintiff were that the counterclaims arose out of the “Consulting Agreement,” which contained a clause that required arbitration.
The defendants argued that none of the parties to this action were signatories to the Consulting Agreement. The plaintiff rebutted that there are many exceptions to the general rule and case law supports the position that sometimes non-parties to an agreement are bound by its terms. None of the parties to this case were signatories to the Consulting Agreement and none of them were parties to the Consulting Agreement.
Brief Discussion and Analysis
The Court began its analysis with basic principles such as the following: (1) The presumption in favor of arbitration will not trump basic principles of contract interpretation because a litigant cannot be required to submit to arbitration in a dispute which it has not agreed to so submit. (2) Before the issue about the scope of an arbitration clause can be addressed, the Court must first determine whether parties voluntarily consented to submit the applicable disputes to arbitration.
The Court observed the general rule that “only parties to a contract and intended third-party beneficiaries may enforce or be bound by that agreement’s provisions, whereas a nonparty to a contract has no legal right to enforce it.” See footnote 21.
However, the Court also acknowledged that under principles of contract, agency and common law, certain exceptions allow for a contract to be enforced against nonparties to that agreement. Specifically, “courts have recognized several theories under which a non-signatory to a contract may nonetheless be bound by an arbitration provision contained in the agreement, including: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil piercing/alter-ego; (5) third-party beneficiary; and (6) equitable estoppel. See footnote 22. The Court discussed each of the six foregoing exceptions to the general rule and explained why they did not apply in light of the circumstances of this matter.
The Court also noted the rule that an issue not raised in the opening brief is waived, but in this situation, based on the circumstances in this case the Court still allowed the arguments to be considered even though they were raised for the first time in a reply brief. See footnote 23. Compare recent contrary procedural ruling of the U.S. District Court for the District of Delaware that reached the opposite conclusion based on an application of that court’s local rule. Laboratory Skin Care v. Limited Brands, Inc., C.A. No. 06-601-LPS (Dec. 6, 2010), slip op. at 13 (available here).
Especially noteworthy in this opinion is a discussion that has far reaching application – – namely, that “an agent is not a party to the contract unless the agent and the third-party so agree.” See footnote 26. Compare footnote 28 (citing authority for those situations where an individual may be personally liable for torts he or she committed notwithstanding the fact that that person may have acted as an agent.)
In concluding its reasoning why arbitration would not be compelled, the Court distinguished this case from other cases where non-signatories were bound as follows: (1) This is not a case compelling a signatory to arbitrate with a non-signatory; (2) This is an issue of whether non-signatories can be compelled to arbitrate under an equitable estoppel theory where no parties to the litigation are parties to the agreement; (3) The Court emphasized that it was “aware of no case where this Court has required arbitration in similar circumstances.” (4) The claims at issue do not rely or depend on the terms of the agreement in which the arbitration clause is included. Thus, the Court determined that none of the parties were bound by the provisions in an agreement that neither of them signed; therefore, the arbitration provision in that agreement would not be enforced.