COMPELLING NON-SIGNATORIES TO ARBITRATE

By Rick Freeman

In a recent article herein, Karl and Rob discussed the recent opinion by the Texas Supreme Court – In re Weekley Homes, L.P. In that decision the Texas Supreme Court compelled a non-signatory to a contract to submit her personal injury claim to arbitration pursuant to the home purchase contract. Basically, the Court says that if you gain benefits from the contract, you are subject to the contract’s arbitration clause. To quote Justice Brister’s non-judicious pun “(a) non-party cannot both have his contract and defeat it too.”

Conversely, in a recent decision by Judge Harmon out of the U.S. District Court, S.D. Texas, non-signatories were allowed to compel arbitration of a claim.

Much like the tropical Atlantic and Gulf, storm after storm of litigation is spinning off in some way related to the Enron debacle. In In Re Enron, (MDL-1446, CIV.A H-01-3624) [.pdf link] decided on August 1, 2005, Judge Harmon ruled that non-signatories to a contract could compel arbitration of claims.

In a very short summary of a long and complicated set of facts, some outside Enron directors moved to compel arbitration with regard to the distribution of the proceeds of $200 million in excess D&O liability insurance coverage. The D&O proceeds had been interpleaded into the registry of the court.

Although the outside directors were not signatories to the insuring contracts, the Court held that they could compel arbitration since they were the intended third-party beneficiaries of the contracts.

The Court went on to say, like the Texas Supreme Court did in the Weekley case, that the ultimate question of whether the parties agreed to arbitrate is determined by state contract law and not federal law. Once there has been is a determination that state contract law compels arbitration under the FAA, the FAA has created its own body of federal substantive law applicable to any arbitration agreement within FAA coverage.

Another interesting aspect of Judge Harmon’s opinion is that, although the non-signatories could compel arbitration, the Court ultimately ruled that under Texas contract law the Court would not compel arbitration. (I will leave it to the interested reader to review the opinion for the Court’s reasoning.)