• The Ties That Bind: Second Circuit Clarifies When Non-signatory Can Compel Arbitration with a Signatory in "Intertwined" Disputes
  • October 19, 2008 | Author: Michael S. Davi
  • Law Firm: Vinson & Elkins LLP - New York Office
  • On September 18, 2008, the Second Circuit issued a decision in Sokol Holdings, Inc. v. BMB Munai, Inc., clarifying the circumstances under which a non-signatory to an arbitration agreement can compel a signatory to that agreement to arbitrate a dispute "intertwined" with that agreement. The court concluded that a non-signatory can compel arbitration pursuant to the arbitration agreement only when the signatory's promise to arbitrate can be reasonably extended to the non-signatory on the basis of the relationships among the parties.

    In Sokol Holdings, plaintiffs filed suit in the Southern District of New York alleging that the defendants had tortiously interfered with plaintiffs' agreement to purchase a controlling interest in a Kazak oil company. In their complaint, plaintiffs claimed that the defendants had induced the seller to breach the contract by selling his interest to the defendants instead. The defendants moved to stay or dismiss the action pending arbitration pursuant to the agreement between plaintiffs and the seller in which plaintiffs and seller agreed that any disputes arising under the contract would be arbitrated in Kazakhstan. Although the defendants conceded that they were not parties to that agreement, they nonetheless sought to estop plaintiffs from refusing to arbitrate pursuant to that agreement on the grounds that the dispute was "intertwined" with that agreement. Defendants argued that the dispute was "intertwined" with this agreement because resolution of plaintiffs' claims against defendants involved the question of whether the seller breached his agreement with plaintiffs.

    The Second Circuit categorically rejected defendants' argument, calling it "a mockery of the precedents on which it relies." The court explained that estoppel as requested by defendants requires more than an "intertwinement between the dispute and the agreement to arbitrate"; it also requires a pre-existing relationship between the parties that makes it fair to extend the agreement to arbitrate to the non-signatory. Reviewing its precedents, the court noted that in each instance where a signatory had been compelled to arbitrate with a non-signatory, the course of dealings between the non-signatory and the parties to the agreement made it fair to extend the agreement to arbitrate. Such instances included parties resisting arbitration with (1) the non-signatory parent of the contractual counterparty where the resisting party had negotiated the agreement with the non-signatory parent; (2) a surety where the suretyship agreement did not contain an agreement to arbitrate, but the construction contract secured by the surety and incorporated by reference in the suretyship agreement did; and (3) the non-signatory affiliates of the contractual counterparties who had previously assigned their interests in the contract to contractual counterparties. In each of these scenarios, the court observed that the course of dealing between the parties made it unfair or unjust to allow the signatory to avoid its commitment to arbitrate by claiming that the non-signatory was not a party to the agreement to arbitrate. The court explained that estoppel does not flow merely from a dispute that is intertwined with an agreement to arbitrate. Rather, it flows from the conclusion that the relationships among the parties have developed in a manner that makes it unfair for the signatory to claim that its agreement to arbitrate did not extend to the non-signatory. The court noted that an obligation to arbitrate can be based only on consent, and a party cannot be required to submit to arbitration any dispute which it has not agreed so to submit.

    In Sokol Holdings, plaintiffs did not agree to arbitrate with defendants, and the only "relationship" between the parties was defendants' alleged tortious interference with plaintiffs' contract. This relationship was not a sufficient basis to compel plaintiffs to arbitrate with parties with whom they had not agreed to arbitrate, regardless of whether the dispute was "intertwined" with the plaintiffs' agreement with seller.