Nora A. Valenza-Frost from Carlton Fields had an interesting article on a recent Nebreska decision Applied Underwriters, Inc. v. Top’s Personnel, Inc., 8:15CV90 (USDC D. Neb. May 26, 2016), recommendation adopted (June 16, 2016) that held a non-signatory could not be compelled to arbitrate.

A signatory may bind a non-signatory to an arbitration agreement through principles of contract and agency law such as: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter-ego; and (5) estoppel. A Nebraska federal court held that none of the theories required Plaintiff to arbitrate its claims.

Defendant entered into a reinsurance participation agreement (“Agreement”) with Applied Underwriters Captive Risk Assurance Company (“AUCRA”) which contained an arbitration agreement. A schedule to the Agreement added an additional 22 parties. Plaintiff was not a party to the Agreement. Years later, the defendant executed a promissory note (“Note”) with plaintiff. The Note included the same additional 22 parties as in the “Agreement”. Defendant defaulted on the note, and litigation ensued. Although the complaint initially included a cause of action for breach of the Agreement, it was later amended to include a single cause of action for breach of the Note. The Defendant moved to dismiss or stay the action pending arbitration under the theory that Plaintiff was bound as a non-signatory to the arbitration agreement.

Under the theories of agency and veil-piercing, the Court stated “a corporate relationship is not enough to bind a non-signatory to an arbitration agreement.” It found defendant did not present any evidence AUCRA had actual, implied, or apparent authority to bind Plaintiff to the Agreement or the corporate relationship was sufficiently close or the formalities were disregarded so the corporate veil was pierced or the two entities acted as each other’s alter ego. In fact, Plaintiff was the indirect parent of AUCRA.

Defendant also argued the Agreement was incorporated by reference in the Note. “When determining whether an arbitration provision was incorporated … the new agreement must either incorporate by reference the entire previous contract, or must expressly incorporate the portion containing the arbitration provision.” Here, the Court found the Note neither directly referenced the Agreement, nor incorporated any of its terms – particularly its arbitration provision.


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