Courts in New York favor arbitration as a means of resolving contractual disputes. See Harris v. Shearson Hayden Stone, Inc., 82 A.D.2d 87, 91-93 (1st Dept’), aff’d, 56 N.Y.2d 627 (1981). This preference is reflected in the Civil Practice Laws and Rules: CPLR 7503 states, “where there is no substantial question whether a valid [arbitration] agreement was made or complied with…the court shall direct the parties to arbitrate.” Arbitration is also favored under the Federal Arbitration Act.
CPLR 7503 is the statutory mechanism by which a party can move to compel another party to arbitrate or to stay an arbitration. Unless a condition precedent to arbitration has not been fulfilled, the courts will almost always enforce agreements to arbitrate. However, this becomes more complicated in the context of a non-signatory to an arbitration agreement who may be subject to it based on principals of agency or corporate veil-piercing.
In determining whether to compel arbitration pursuant to CPLR 7503, courts must balance the state’s public policy in favor of arbitration with the equally important policy of avoiding the unintentional waiver of access to the courts. See Matter of Smith Barney Shearson v. Scharaow, 91 N.Y.2d 39. While CPLR 7501 requires that an agreement to arbitrate be in writing, courts in New York have recognized the need to impute the intent to arbitrate to a non-signatory. See e.g. TNS Holdings, Inc. v. MIKI Securities Corp., 92 N.Y.2d 335 (N.Y. 1988).
A court can compel a party to arbitrate in limited circumstances even if they did not sign an arbitration agreement. New York recognizes five legal theories under which non-signatories may be bound by arbitration agreements entered into by others: 1) incorporation by reference, (2) assumption, (3) agency, (4) veil-piercing/alter ego, and (5) estoppel. Of these, the “agency” and “veil-piercing” theories pose particular risks.
I. An Agent’s Ability to Bind
New York law recognizes several theories under which an agent can have authority to bind a principal to a contract, including actual authority, implied authority, and apparent authority. Implied authority must be based on a statement or act of the principal that gave the agent the reasonable impression that he had authority to enter into a contract. Site Five Hous. Dev. Fund Corp. v. Estate of Bullock, 112 AD3d 479, 480 (1st Dept. 2013). Apparent authority must be based on words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction. Hallock v State of New York, 64 NY2d 224, 231 (N.Y. 1984). Implied authority arises from the agent’s understanding that they have authority to bind the principal, whereas apparent authority arises from such an understanding on the part of a third party.
Applying these principles to the arbitration context, it is not difficult to see how one could unknowingly waive their rights. In the commercial world, agents routinely execute contracts and sign various documents on behalf of a principal. This may forfeit a principal’s day in court, but it is consistent with longstanding principles of agency law. See Art Fin. Partners. LLC v. Christie’s Inc., 58 AD3d 469 471 (1st Dept. 2009). (“it is well settled that a principal-agent relationship may be established by evidence of the consent of one person to allow another to act on his or her behalf and subject to his or her consent, and consent by the other so to act”). Even silence on the part of the principal can be construed as consent. See Arnon Ltd. V. Beirerwaltes, 2017 NY Slip Op 31605(U) (N.Y. Sup. Ct. 2017).
II. Piercing the Corporate Veil
Piercing the corporate veil is a way to circumvent the general rule that a corporation is a separate legal entity from its owners. It allows courts to hold shareholders or officers personally liable for the debts and obligations of the business. New York courts have applied veil-piercing principals in determining whether a non-signatory to an arbitration agreement should be bound by it. See Matter of Sbarro Holding, 91 A.D.2d 613 (2nd Dept. 1982).
In practice, an individual may be an officer of multiple corporations or LLCs simultaneously. The same can be said of a business entity which operates as a parent company to several smaller entities. In both scenarios, the veil-piercing inquiry focuses on whether “the corporation is dominated as to the transaction attacked and that such domination was the instrument of fraud or otherwise resulted in wrongful or inequitable consequences.” Matter of Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135 (N.Y. 1993). An individual or parent company acting as president and sole shareholder of an entity can be strong evidence of domination but will not be sufficient to support veil-piercing unless entity is used to perpetrate a wrong against the plaintiff.
The proponent of veil-piercing has a heavy burden to overcome. It is imperative for individuals and companies to maintain “distinct personalities” between themselves and the entities they oversee. Maintaining separate bank accounts, refraining from comingling personal and company assets, filing separate tax returns, and keeping all required filings up to date are a few steps that can be taken to reduce the likelihood of veil-piercing. Failing this, an individual or parent company may be on the hook for the contractual obligations of what they consider a separate entity. It is typically within the discretion of the arbitrator whether to allow veil-piercing claims to be asserted against non-signatory, but the courts have the power to stay arbitration against non-signatories if arbitrators exceed their authority.
III. Conclusion
Arbitration is heavily favored by the courts of New York, and as a matter of federal policy, under the Federal Arbitration Act. One can be compelled to arbitrate even without having signed an arbitration agreement based on principles of agency or corporate veil-piercing. The principal-agent relationship and piercing of the corporate veil are frequent subjects of litigation and arbitration. Without clearly defined relationships, parties that did not sign arbitration agreements may find that their access to the courts has been forfeited.
About Author
Garrett Cusack graduated from the University of Maryland School of Law in 2019, where he served as an Editor of the Journal of Business & Technology Law. Read more.
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