No Signature, No Problem: Enforcement of Arbitration Agreements By And Against Nonsignatories

Your company enters into a contract with another company that contains a clause agreeing to submit “any controversy or claim arising out of relating to [the] contract” to arbitration.  Years later, your company is sued by a subsidiary of the other company.  Is that dispute covered by the arbitration provision even though the subsidiary did not sign the agreement?  What if the lawsuit is brought by an agent of the subsidiary? Or a vendor of the other company?  Or what if the other company’s principal breaches a separate agreement that doesn’t contain an arbitration provision?

Businesses, operators, and investors routinely include arbitration provisions in their contracts to minimize the time, expense, and collateral damage associated with resolving commercial disputes.  However, failing to understand the scope of those arbitration provisions, both before and after disputes arise, can diminish or negate those benefits.  In particular, businesspeople, and even attorneys, often misunderstand or overlook the enforceability of arbitration provisions by and against parties who have not expressly agreed to those provisions.

Contractual arbitration is a process whereby parties voluntarily submit their disputes for resolution by one or more impartial third persons instead of by a court.  Contractual arbitration only comes into play when the parties to a dispute have agreed, either before or after the dispute arose, to submit their dispute to arbitration.  Under state and federal law, there is a recognized public policy favoring arbitration of disputes.

Although courts may only compel parties to participate in contractual arbitration where the parties have agreed to arbitrate their dispute, in certain situations, persons who did not sign the agreement to arbitrate may be entitled to enforce it and prosecute an arbitration in their own names against a party that signed the arbitration agreement.  Similarly, a party who signed an arbitration agreement may be able to enforce the agreement and compel arbitration against a party who did not sign the agreement.  Courts apply an ambiguous and evolving set of rules to determine when a party that has not signed an arbitration agreement may or must arbitrate a dispute. 

Contractual arbitration agreements may be enforced by or against nonsignatories under several legal theories, including (a) incorporation by reference, (b) assumption or assignment, (c) agency, (d) veil-piercing or alter ego, (e) estoppel, and (f) third-party beneficiary theories.  Recognizing the aforementioned public policy favoring arbitration of disputes, courts have applied these theories in broad and, sometimes, confounding ways.

Two recent California Court of Appeal decisions highlight the complexity and ambiguity of these rules.

In Vasquez v. San Miguel Produce, Inc., an employee hired by a staffing agency and “leased” to work at a produce packing company sued the produce packing company alleging wage and hour violations.[1]  The produce packing company cross-complained against the staffing company seeking indemnification.  The staffing company and the produce packing company moved to compel arbitration based on an arbitration provision in an agreement signed by the employee and the staffing agency only.  In opposition, the employee argued that the produce packing company could not invoke the arbitration provision because it was not a signatory to the agreement.  The trial court denied the motion to compel arbitration. 

In January 2019, the Second District Court of Appeal reversed.  In its analysis, the Court of Appeal first cited case law holding that an agency or similar relationship between a nonsignatory and one of the parties to an arbitration agreement allows enforcement by the nonsignatory.  The Court then cited law holding that coemployers have concurrent duties to their employees.  The Court also referenced its own recent decision in Castillo v. Glenair, Inc. in which it concluded that a worksite employer was an agent of a staffing agency as a matter of law due to the worksite employer’s role in collecting, review, and providing employee time records.  Applying this law to Vasquez, the Court held that the arbitration agreement between the employee and the staffing agency could be invoked by the nonsignatory produce packing company because the produce packing company was the staffing company’s agent.

Cohen v. TNP 2008 Participating Notes Program, LLC concerned a signatory to an arbitration agreement attempting to compel a nonsignatory to arbitrate.[2]  In that case, investors sought to arbitrate claims against two real estate companies they had invested in and the real estate companies’ parent company and principal.  The investors had arbitration agreements with the two real estate companies, but not the companies’ parent company or principal.  The trial court granted the investors’ petition for arbitration as to their dispute with the parent company and the principal on the grounds that those nonsignatories were “either agents or principals” of the signatory real estate companies.  After the arbitrator issued an award, the trial court denied a petition to vacate the arbitration award and the parent company and the principal appealed.

On appeal, the Second District Court of Appeal reiterated that a nonsignatory to an arbitration provision may be bound to arbitrate where it has an agency/principal relationship with a signatory.  However, the Court noted that “[n]ot every agency relationship” will suffice and separately addressed situations involving signatory principals binding nonsignatory agents to arbitrate versus signatory agents binding nonsignatory principals to arbitrate.  The Court held that an agency relationship between a signatory employer company (principal) and its nonsignatory employee (agent) “does not normally bind the [agent/employee]” unless the agent/employee “personally benefitted from the underlying contract.”  The Court noted that the opposite situation, where a nonsignatory principal is held to be bound by an arbitration agreement signed by its agent is “less commonly litigated.”  The Court’s analysis focused on specific factual situations involving a parent-subsidiary relationship.  The Court held that a nonsignatory parent company may be bound by a signatory subsidiary company where (a) the parent company controlled the subsidiary to such an extent that the subsidiary was a mere agent or instrumentality of the parent and (b) the claims against the parent arose out of the agency relationship.  Applying this analysis to the facts at hand, the Court held that the trial court erred in compelling the signatory real estate companies’ nonsignatory principal to arbitrate, but properly compelled the real estate companies’ nonsignatory parent company to arbitrate.

Vasquez and Cohen demonstrate the inherent subjectivity and ambiguity in courts’ analyses regarding enforcement of arbitration provisions by and against nonsignatories.  In both cases, the trial courts and the Courts of Appeal determined the enforceability of arbitration provisions by and against nonsignatories by combining subjective agency analyses with the broad public policy in favor of arbitration.  The trial courts and the Courts of Appeal relied on a subjective agency analyses and the public policy in favor of arbitration in determining the enforceability of arbitration provisions by and against nonsignatories.  Courts deciding whether to enforce arbitration agreements against nonsignatories routinely apply other theories, particularly alter ego, estoppel, and third-party beneficiary theories, more broadly than those theories are applied in other contexts.

Whether a dispute proceeds in court or in arbitration can have significant consequences for the positions of the parties and the outcome of the dispute.  It is incumbent upon businesses, investors, and their advisors to understand the scope and enforceability of all potentially applicable arbitration agreements they, their affiliates, and their associates enter into both before and after disputes arise. 

-Brian Lauter 

Brian Lauter is a Shareholder at Eanet, PC. Brian represents businesses, business operators, and investors in a variety of legal disputes.

[1] Vasquez v. San Miguel Produce, Inc. (2019) 31 Cal.App.5th 810.

[2] Cohen v. TNP 2008 Participating Notes Program, LLC (2019) 31 Cal.App.5th 840.