Never Signed an Arbitration Clause? Not a Problem
The general rule is that only a party to an arbitration agreement is bound by, or may enforce, the agreement. A recent appellate decision just highlighted an important exception to that rule and ordered a subcontractor to arbitrate its claim against five individuals who were not signatories to an arbitration clause.
In Degraw Construction Group, Inc. v. McGowan Builders, Inc., Degraw claimed it was owed money from McGowan and started a lawsuit to foreclose its mechanic’s lien. Lien foreclosure actions must be commenced in court. Degraw added claims against the five officers and employees of McGowan, individually, claiming various tort claims such as conversion, unfair competition, and tortious interference. Ordinarily, officers and employees of a corporation have protection against individual liability from actions of the corporation. However, if they commit a tort in their individual capacity, they could be liable individually.
The construction contract, signed by both Degraw and McGowan, contained an arbitration clause. But none of the individuals personally signed the contract or any other document containing an arbitration clause. Nevertheless, the five individuals and McGraw moved the court to stay the litigation and compel Degraw to pursue the tort claims against them in litigation. The lower court denied their motion as to the individuals, holding that since they were not signatories to the agreement, they were unable to enforce it against Degraw.
The Appellate Court reversed and ordered them to arbitration. While acknowledging the general rule, it held that even though the individuals were not signatories to the arbitration agreement, they could compel Degrew to arbitrate because: (a) Degrew was party to the arbitration clause; (b) the misconduct of the five individuals related to their behavior as employees and officers of McGowan which, as a corporation, can only act through such individuals; and (c) it would effectuate the intent of the signatory parties.
Given this rationale, it is unclear if Degrew could have compelled the individuals to arbitrate. But where Degrew itself had agreed to subject itself to arbitration, it could be forced into arbitration by non-signatories on matters related to the contract.
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Further information on arbitration can be found on our blog:
Mediation Before Litigation or Arbitration?
Arbitration Clause Not "Incorporated By Reference"