What if you or your company are arbitrating a dispute and the need arises to join parties or individuals who are not parties to the contract that got you into arbitration in the first place or have downstream contracts without arbitration provisions or otherwise conflicting dispute resolution provisions? Texas courts have addressed exactly how to join a non-signatory to an arbitration, though the likelihood of success depends.

Generally, only the signatories to an arbitration agreement are bound by the agreement. A corporate relationship is generally not enough to bind a non-signatory to an arbitration agreement. Unlike a corporation and its employees, corporate affiliates are generally created to separate the businesses, liabilities, and contracts of each. Thus, a contract with one corporation—including a contract to arbitrate disputes—is generally not a contract with any other corporate affiliates.

The United States Supreme Court has repeatedly emphasized that arbitration is a matter of consent, not coercion. Under the Federal Arbitration Act (FAA), ordinary principles of state contract law determine whether there is a valid agreement to arbitrate and since arbitration is contractual in nature, the FAA does not require parties to arbitrate when they have not agreed to do so. The FAA’s (and its Texas counterpart, the Texas Arbitration Act) purpose is to make arbitration agreements as enforceable as other contracts, but not more so.

However, courts have recognized six theories, arising out of common principles of contract and agency law, that may bind non-signatories to arbitration agreements: (1) incorporation by reference; (2) assumption; (3) agency; (4) alter ego; (5) equitable estoppel, and (6) third-party beneficiary.

Incorporation by Reference

Documents, even unsigned documents, may be incorporated into a contract when the parties refer to the document in the contract. While no specific language is necessary to incorporate a document by reference, the contract must plainly refer to the other document or otherwise show that the parties intended for the other document to become part of or incorporated into the contract. When a document is incorporated into another by reference, both instruments must be read and construed together. For incorporation by reference to fly, the agreement to arbitrate will need to be specifically incorporated by reference into the operative contract of the party you are trying to join to the arbitration.

Assumption

Assumption is essentially an assignment of the contract and generally, a party cannot be held liable under another party’s contract without an express or implied assumption of the obligations of that contract. The assignor of a contract remains liable for the obligations he originally assumed, even after the contract is assigned. In contrast, the assignee of a contract is not responsible for the assignor’s obligations unless he expressly or impliedly assumes them. Again, the person joining the non-signatory will need clear evidence of an assignment of obligations, including that of arbitration.

Agency

Generally, Texas courts do not presume that an agency relationship exists; rather, if the existence of an agency relationship or the extent of the authority conferred is at issue, the party making the allegation has the burden of proving it. Here, the joiner would need to show the non-signatory was acting as an agent to a party in the arbitration during the formation and signing of the agreement containing the arbitration provision.

Alter Ego

The alter ego theory, which is an equitable doctrine and usually used to pierce the corporate veil, and is a basis for disregarding the corporate fiction, where a corporation is organized and operated as a mere tool or business conduit of another corporation.” Under this theory, the party seeking to join the non-signatory would have to essentially argue that a party that did sign the agreement and the non-signatory are alter egos of each other and because the one party can join the other into the arbitration through the operative contract, it can join the non-signatory as well.

Equitable Estoppel

There are two equitable estoppel bases  to compel non-signatories to arbitration: direct benefits estoppel and “alternative” or “intertwined claims” estoppel.  Intertwined claims estoppel exists when (1) the non-signatory has a close relationship with a signatory to a contract with an arbitration agreement, and (2) the non-signatory’s claims are “intimately founded in and intertwined with the underlying contract obligations.” For direct-benefits estoppel, a non-signatory plaintiff may be compelled to arbitrate if its claims are based on a contract containing an agreement to arbitrate.

For example in, In re FirstMerit Bank, N.A., 52 S.W.3d 749, 755 (Tex. 2001), the non-signatory plaintiffs sued the signatory defendant for, among other things, breach of contract, revocation of acceptance, and breach of warranty. Id. at 752–53, 755. By bringing the breach-of-contract and breach-of-warranty claims, the plaintiffs sought benefits that stemmed directly from the contract’s terms. Id. By seeking to enforce the contract, the non-signatory plaintiffs “subjected themselves to the contract’s terms, including the Arbitration Addendum.” Id. at 756.

Third-Party Beneficiary

A third party may recover on a contract made between other parties only if: (1) the other parties intended to secure some benefit for that third party; and (2) the contracting parties entered into the contract directly for the third party’s benefit. First Union Nat. Bank v. Richmont Capital Partners I, L.P., 168 S.W.3d 917, 928 (Tex. App.—Dallas 2005, no pet.). The non-signatory needs to be a third-party beneficiary to the operative contract containing the arbitration provision or the operative contract was entered into exactly for the non-signatories benefit.

The road to join non-signatories to an arbitration is difficult, but at least the courts have provided clear insight on how to get it done. If joining a non-signatory is unsuccessful, there are other avenues to share exposure or mitigate risk, such as the vouching-in doctrine, which must be saved for another day and another blog.

The attorneys in our Austin and Dallas office frequently address joinder of parties to arbitrations, including non-signatories to the  arbitration agreement. If you should have any questions, please contact us at info@gstexlaw.com.

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