Marc J. Goldstein Arbitrator & Mediator NYC
October 30, 2018

When Is Arbitral Jurisdiction Over Non-Signatories Delegated To the Tribunal?

At a recent gathering of arbitration lawyers that I attended, the leader of a seminar concerning the arbitration rights and duties of non-signatories asked if anyone in the audience disagreed with the proposition that under US arbitration law it is for the courts not arbitrators to decide whether and when a non-signatory may or must arbitrate. Not being totally at ease with the stated categorical proposition, I ventured the comment that the delegation of arbitrability issues to arbitrators pursuant to the “First Options” case law may operate as an exception to that rule, and potentially a rather broad exception at that. Not having explored the question very recently, and being unsure if I had embarrassed myself (yet again) with an inaccurate remark, I decided to explore. The results are interesting, lend comfort to my fragile ego, and indicate that the US law version of compétence-compétence (especially “negative compétence-compétence,” i.e., the law of judicial restraint on judicially deciding arbitrability), at least in regard to “who may or must arbitrate” arbitrability questions, has been undergoing some subtle but important changes.

As a quick refresher on the relevant US law, here first is a simplistic and hopefully not very controversial foundation for what follows: The received learning from the First Options case (First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)) is that the question of whether the parties to an arbitration agreement agreed to arbitrate a particular matter is presumptively a question for determination by a court, and that presumption is overcome in favor of arbitral determination of “arbitrability” only if there is clear and unmistakable evidence that the parties intended to delegate the arbitrability issue to the arbitrators. In the decade after First Options, several US federal appellate courts accepted the position that where the agreement to arbitrate provides for arbitration under arbitral procedural rules that empower arbitrators to rule upon objections to their jurisdiction, that rules adoption operates as a delegation of arbitrability issues to the arbitrators and furnishes the requisite clear and unmistakable evidence needed to overcome the presumption in favor of judicial determinations of arbitrability issues. That position is accepted with near uniformity in the US federal courts. But a competing strain of judicial authority, equally well-entrenched, holds that whether any arbitration agreement ever came into existence cannot be regarded as a question of arbitrability subject to consensual delegation to the arbitrators, because the existence of a valid delegation of arbitrability issues to the arbitrators presumes a valid arbitration agreement in the first instance, and if a party disputes whether it ever entered into a valid arbitration agreement, that issue needs to be resolved judicially before the delegation clause, or any other aspect of the arbitration agreement, can spring into operation. Case law evolved in two strands for courts to address the threshold question of whether an existing arbitration clause in a written agreement could be enforced by, or against, a person or entity who did not sign it (or at least did not sign on his, her, or its own behalf).  One branch of that case law, culminating in a decision of the US Supreme Court in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009), established that in a domestic case it is ordinary the applicable state law of contracts that applies to determine if a non-signatory may be permitted or required to enforce an agreement to arbitrate. The other body of case law has particularized to the arbitration context the various state contract law grounds for contract enforcement by or against non-signatories – assignment, assumption, agency, alter ego, estoppel, etc.

At the intersection of these streams of arbitrability law is a question that has not received particularly careful attention from the courts: what happens when a court permits or requires a non-signatory to arbitrate under an arbitration agreement that validly delegates arbitrability to the arbitrators? Does the judicial determination that the non-signatory may or must arbitrate resolve the non-signatory arbitrability issue entirely, despite the delegation, or does the court’s decision trigger application of the delegation clause to the non-signatory such that arbitrability of the underlying dispute by or against the non-signatory is ultimately to be determined by the arbitrators?

The question has considerable practical significance for arbitrators. Suppose a non-signatory prevails in a motion to compel arbitration, the Court holding (as in Contec and Gerszberg cases discussed below), that the non-signatory has a “sufficient relationship” with a signatory to be permitted to arbitrate. When the non-signatory commences an arbitration, or seeks to be joined as a party, the signatory may object to jurisdiction, and the non-signatory may retort “Issue Preclusion!” “Collateral Estoppel!”  What is an arbitrator to do?

The arbitrator might legitimately consider that the signatory has a contractual right to an arbitral ruling on the question of jurisdiction over the non-signatory’s merits claims or defenses, and that the non-signatory, having established that it may enforce the arbitration agreement, should not be allowed to enforce it selectively by bypassing the contract’s delegation of arbitrability questions to the arbitrator. But if the arbitrator desires an arbitral reprise of the court’s arbitrability decision on this basis, how does the arbitrator make a principled distinction between what she is to decide and what the Court has already decided? I suggest the correct answer might be this: that where the arbitration agreement contains the requisite clear and unmistakable delegation of arbitrability issues to the arbitrator, the judicial motion to compel arbitration that resolves the rights or obligations of a non-signatory should be construed and treated as a motion to compel arbitration of that arbitrability issue only. As such, there is no collateral estoppel, because the issue before the arbitrator now, after the court grants the motion to compel arbitration, is not the arbitrability of arbitrability (the right or duty of the non-signatory to arbitrate arbitrability), but rather the arbitrability of the merits between the signatory and a non-signatory, the latter being an issue that was not decided and was not properly decidable by the court.

For a persuasive judicial illustration of this position, l recommend Gerszberg v. Li & Fung (Trading) Ltd., 215 F.Supp.3d 282 (S.D.N.Y. 2016). In Gerszberg, a non-signatory, claiming status as third-party beneficiary of a litigation settlement agreement that provided for arbitration to resolve claims of non-compliance, commenced such an arbitration. The signatory Respondent applied to the Court to enjoin the arbitration, and advanced the position that it was for the Court not the Arbitral Tribunal to resolve the “arbitrability” issue of Claimant’s alleged third-party beneficiary status.

The Court in Gerszberg did not resolve the third-party beneficiary status issue in this particular decision — this was an interim order providing a procedural framework to develop the evidentiary record. But the district court judge did state with precision the issue that was to be resolved by the Court rather than the Tribunal: not the arbitrability issue per se, but only “who decides the issue of arbitrability.” Said the Court: “[T]o determine who decides the issue of arbitrability, a court must first determine whether the parties have sufficient relationship to each other and to the rights created under the [arbitration] agreement. … In other words, the question of relational sufficiency is for the Court, not the arbitrator, to resolve.

Reiterating the point a few paragraphs later, the Court stated: “This case… presents the question of when an entity that claims to be a third-party beneficiary has a sufficient relationship to the parties and the rights created under the agreement containing the arbitration clause such that the issue of arbitrability must be decided by an arbitrator.” The Court called its eventual decision on relational sufficiency “a threshold determination,” and “a gating determination.” Thus the governing principle was stated to be that “a putative third-Party beneficiary cannot automatically force a signatory to arbitrate the question of arbitrability, without first making a showing to a court of relational sufficiency.

Readers seeking jurisprudential roots of this “relational sufficiency” principle are encouraged to read Contec Corp. v. Remote Solution Co., 398 F.3d 205 (2d Cir. 2005) and Ross v. American Express, 547 F.3d 137 (2d Cir. 2008). In Contec, a signatory to AAA Commercial Rules arbitration clause in an international contract was held to be required to arbitrate arbitrability with a non-signatory corporate successor to the other signatory.  The existence of such an obligation, the Contec Court stated, depends upon “whether the parties [and especially the non-signatory] have a sufficient relationship to each other and to the rights created under the agreement.” Thus “relational sufficiency” became the test — at least in the Second Circuit which accounts for a considerable percentage of the judicial output relating to international arbitration, but as noted below the Fifth Circuit, home to the US energy industry, has followed suit. This test was satisfied in Contec because “there was an undisputed relationship between each corporate form of Contec [non-signatory] and Remote Solution [signatory],” and “the parties apparently continued to conduct themselves as subject to the 1999 Agreement regardless of change in corporate form.Ross v. American Express, a domestic antitrust class action case, reaffirms the Contec relational sufficiency test but held that it was not satisfied on the facts: American Express, other than being an alleged antitrust co-conspirator with the credit card companies that had signed arbitration agreements with their customers, had no relevant relationship with those signatories that would entitle Amex to invoke those arbitration agreements against the plaintiffs.

Other recent cases have reached similar outcomes but with less analytical precision. Consider the US Fifth Circuit Court of Appeals decision in Brittania-U Ltd. v. Chevron USA, 866 F.3d 709 (5th Cir. 2017). Claimant’s grievance was that Chevron, in an auction of Nigerian oil exploration leases, defrauded Claimant with a big assist from a Chevron employee and a Chevron banker. Claimant and Chevron had an arbitration agreement for UNCITRAL Rules arbitration in London, embedded in a confidentiality agreement that was not signed by the putative collaborators. When Claimant sued all three in a Texas court, Defendants removed to a US District Court under the New York Convention/FAA Chapter 2 and jointly moved to compel arbitration. The District Court granted the motion and the 5th Circuit affirmed.

Claimant argued that even if adoption of the UNCITRAL Rules was a valid delegation of arbitrability issues to arbitrators by the signatories, still Claimant was entitled to have the court decide whether Claimant had to arbitrate the merits with the non-signatories, this being portrayed by Claimant as an issue of contract formation (i.e. the threshold question of whether any arbitration agreement existed with the non-signatories). The Fifth Circuit cited Contec in support of its holding that Claimant was required to arbitrate arbitrability with the non-signatories, but did not (at least expressly) perform the type of relational sufficiency analysis that the district court judge in Gerszberg had (rightly) read Contec to mandate. But putting aside these nuances, the outcome is what should impress us: compétence-compétence carried the day in the home courts of the US global energy industry with regard to an UNCITRAL international arbitration agreement drafted by one of its biggest players. And let us remind ourselves that this is the virulent American strain of compétence-compétence: this London-seated Tribunal’s award on jurisdiction over the claims against the non-signatories would be judicially revisitable in a US court only based on the New York Convention defenses to recognition and enforcement. [The Convention on its face appears not to offer a defense to enforcement in favor of a non-signatory, or in favor of a signatory against whom a non-signatory seeks to enforce an Award. Article V(1)(a) provides a defense to enforcement, based on the alleged invalidity of the arbitration agreement, to the “parties to the agreement referred to in Article II,” that is, the parties to the written agreement to arbitrate. But I have not examined for this Commentary whether under US or other national law Article V(1)(a) of the Convention has indeed been construed to offer no recourse against a Tribunal award on jurisdiction in regard to non-signatories. But of course a London-made award would be subject to judicial set aside in a UK court where, as will be recalled from the famous Dallah case of 2010, a Tribunal’s decision on arbitrability by a signatory against a non-signatory is subjected to de novo review.]

In another recent US Fifth Circuit Court of Appeals case, this one a domestic FAA case, the Court affirmed the ruling of a US District Court in Mississippi that when a non-signatory — here, an upstream assignee of residential mortgages in a securitization scheme — seeks to enforce against a signatory an arbitration agreement containing a valid delegation of arbitrability to the arbitrators (as the clause in this case did, by selecting the JAMS Comprehensive Rules then in force), the court’s role is only to evaluate contract formation under applicable state contract law, leaving all remaining arbitrability issues to the arbitrators.  (Green Tree Servicing, L.L.C. v. House, 890 F.3d 493 (5th Cir. 2018)). In the District Court opinion, the Court had quoted at length from another Fifth Circuit case (Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199, 201 (5th Cir. 2016)): “[I]f the party seeking arbitration points to a purported delegation clause, the court’s analysis is limited. It performs the first step — an analysis of contract formation — as it always does. But the only question, after finding that there is in fact a valid agreement, is whether the purported delegation clause is in fact a delegation clause — that is, if it evinces an intent to have the arbitrator decide whether a given claim must be arbitrated.  If there is a delegation clause, the motion to compel arbitration should be granted in almost all cases.”  While admitting as I must to a degree of confirmation bias – having adopted a thesis and set out to find cases that support it —  I see the Fifth Circuit approach of the Kubala and Green Tree cases as fitting nicely with my suggestion above that, for the arbitrator, the judicial motion to compel arbitration by or against a non-signatory, where a valid delegation clause appears in the arbitration agreement, is properly viewed by the arbitrator as granting the motion to compel arbitration only to the extent of compelling arbitration of arbitrability, leaving the arbitrability issues ultimately to be determined by the arbitrator and refuting the contention of the prevailing party in the judicial motion to compel arbitration that the adverse party is collaterally estopped from further contesting arbitrability before the Tribunal.

It is arguably a rather thin distinction to say that, where the arbitration clause delegates arbitrability to the arbitrators, a Court asked whether a non-signatory may or must arbitrate does not decide the non-signatory’s right or obligation to arbitrate the merits, but decides only the arbitrability of arbitrability. In practical terms, many litigants can be expected to accept a Court’s relational sufficiency “threshold” determination as decisive, discounting heavily the prospects of a different assessment by the Tribunal as to the arbitrability of the merits, and simply proceed to arbitrate the merits. But the (seemingly recalcitrant) party that does still insist on an arbitral determination of whether it may or must arbitrate the merits with a non-signatory is evidently entitled to that, and is not barred by issue preclusion principles – because the Court has decided only the arbitrability of arbitrability – and whether the facts, the language of the Agreement, and the governing law mandate a different outcome as to arbitrability of the merits is an issue Arbitral Tribunals cannot necessarily avoid.

Circling back to where this Commentary began – with my having questioned that seemingly evident proposition that it is for the courts to decide (if asked) whether non-signatories may or must arbitrate – I find that the case law on delegation clauses in the non-signatory context supports my reticence. The conclusion one may draw is that we should not over-simplify our understanding of the allocation of power under US law concerning the arbitration rights and obligations of non-signatories. It cannot be said without qualification that this question is reserved to the court if a party desires that a court resolve it. Nor can it be said categorically that an arbitrability delegation in the agreement is irrelevant because a non-signatory cannot be deemed to have delegated anything and a signatory can only be deemed to have delegated arbitrability issues as between signatories. It seems more accurate to understand that US arbitration law results in a power-sharing arrangement when, as will usually be the case, the arbitration clause makes what our law considers to be a clear and unmistakable delegation of arbitrability decision power to arbitrators. Courts (if asked) make a threshold determination of relational sufficiency — which in the details looks like a full-on determination of the non-signatory’s right or obligation to arbitrate. But if the threshold test is met, the non-signatory is to be treated as a party for purposes of arbitrability and the determination of whether the signatory may or must arbitrate the merits with a non-signatory is committed to arbitral determination, and if the arbitration is domestic or is an international case seated in the US, that determination is subject only to the same limited and deferential post-award judicial review in a US court as any other matter within the scope of the agreement to arbitrate.

One Response to “When Is Arbitral Jurisdiction Over Non-Signatories Delegated To the Tribunal?”

  1. If the logical question is whether the non-signatory ≡ (is equivalent to) a party to the arbitration provision, I would argue that to be a matter of fact rather than a legal technicality.

    The effect of the Kompetenz-kompetenz principle is that the persons in the room (i.e. within the private ‘bubble’ of the arbitration process) make a decision about the fact but that remains open to the power of the Court to accept or not as the Court sees fit.

    I think that the cited definition of Contec Corp. v. Remote Solution Co. is essentially a legal presentation of the same point.

    Arguably, an arbitrator or arbitral panel is not a part of the legal system. Like anyone within the jurisdiction, it has a duty not to commit an offence and to obey orders of the Court, but the Court cannot amend a person’s thought.

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