Bound by an Arbitration Agreement You Never Made?

            Although it may seem contrary to common contractual practice, it is possible that non-signatory parties to an arbitration agreement may be compelled to arbitrate under the terms of an agreement.  

            In Barletto v. Heuschkel, 2011 Pa. Dist. LEXIS 318 (Feb. 7, 2011), Charles Barletto alleged, among other claims, that Mark Heuschkel engaged in corporate oppression of Barletto as a minority shareholder.  Barletto claimed that Heuschkel’s company Ferrotech avoided allocating profits to Barletto by funneling the profits to Ferrotech’s parent company Ferromet.  Barletto asserted that the court was the proper venue to resolve this dispute rather than arbitration because only Ferrotech signed the arbitration agreement.  

            Although three of the four named defendants in this case were non-signatory parties to the arbitration agreement, the court still upheld that arbitration was the proper venue for this matter.  The court derived its decision to bind non-signatories to the arbitration based on contract and agency law principles:  “1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) equitable estoppel.”  Furthermore, the court focused its decision on whether there existed an “obvious and close nexus between the non-signatories and the contract or contracting-parties.” Barletto at *16.

            Unfortunately for Barletto, the court in this case recognized the close nexus between the defendants: 

Ferrotech is a subsidiary of Ferromet, Ferrotech Reality is a sister-corporation to Ferrotech, and Heuschkel, who as president and owner of all three corporations, was the agent through which the corporate entities functioned.  The claims filed by Plaintiff Barletto all arise as a result of actions Heuschkel took on behalf of the corporate entities, and therefore the interests of the Defendants are indistinguishable.  Barletto at *26-27.

           Moreover, the court relied on the theory of equitable estoppel by reasoning that arbitration cannot merely be avoided because it does not work to Barletto’s advantage.

            Thus, minority shareholders should be aware that they may be compelled to resolve disputes in arbitration with parties who were not original signatories to the agreement where the disputes with the parties arise out of a close nexus with the contracting parties and where the theory of equitable estoppel compels arbitration.