Commercial Division Blog
Third Party Not Bound by Arbitation Agreement of Which He Was Not a Direct Beneficiary
On October 17, 2013, the Court of Appeals issued a decision in Matter of Belzberg v. Verus Invs. Holdings Inc., 2013 NY Slip Op. 06729, addressing the extent to which a person who is not a party to an agreement to arbitrate can nonetheless be required to arbitrate.
The Court of Appeals started with the general proposition that "nonsignatories are generally not subject to arbitration agreements," but that courts have created an exception under the "direct benefits theory of estoppel," where "a nonsignatory may be compelled to arbitrate where the nonsignatory 'knowingly exploits' the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement."
In Matter of Belzberg, Belzberg, an investment advisor, opposed being brought into the arbitration because he was not a party to the contract containing the arbitration clause. The facts of the case show that Belzberg had benefited from the transaction to which the agreement related. Belzberg had directed a corporation owned by a trust he had established, and for which he served as an unpaid financial advisor, to transfer $5 million to Verus Investment Holdings, so that it could be invested. Verus invested that money, along with $1 million of its own funds, using Verus' account at Jefferies & Co., Inc. After the investment gained in value, Jefferies returned both Belzberg's original $5 million investment and the profits to Verus. Verus subsequently distributed those funds to a friend of Belzberg's, at his direction. When a dispute subsequently arose about whether Jefferies owed the Canadian government withholding tax on the profits, Jefferies sought to bring Belzberg into an arbitration brought pursuant to the arbitration clause in the agreement between Jefferies and Verus.
Notwithstanding the clear benefit to Belzberg and to parties with which he was associated, the Court of Appeals ruled that he was not bound by the arbitration clause in the agreement between Verus and Jefferies because "[t]he guiding principle is whether the benefit gained by the nonsignatory is one that can be traced directly to the agreement containing the arbitration clause" (emphasis added). Thus,
[t]he mere existence of an agreement with attendant circumstances that prove advantageous to the nonsignatory would not constitute the type of direct benefits justifying compelling arbitration by a nonparty to the underlying contract. Also, absent the nonsignatory's reliance on the agreement itself for the derived benefit, the theory would extend beyond those who gain something of value as a direct consequence of the agreement. (Emphasis added.)
This case illustrates how difficult it can be to bring a non-signatory to an agreement to arbitrate into an arbitration and suggests that litigants should, in the first instance, look for a forum into which all parties can be brought.