Commercial Division Blog

Posted: July 18, 2017 / Categories Commercial, Arbitation, Mediation and Other ADR

Corporate Officers Can Enforce Arbitration Provision in Corporation's Contract

On July 12, 2017, the Second Department issued a decision in Degraw Construction Group, Inc. v. McGowan Builders, Inc., 2017 NY Slip Op. 05580, holding that corporate officers could enforce an arbitration provision in one of the corporation's contract, explaining:

A written agreement to submit any controversy to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award. A party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration. If an issue claimed to be arbitrable is involved in an action pending in a court having jurisdiction to hear a motion to compel arbitration, the application shall be made by motion in that action. With limited exception not applicable here, where there is no substantial question whether a valid agreement was made or complied with, the court shall direct the parties to arbitrate.

Accordingly, on a motion to compel or stay arbitration, a court must determine, in the first instance whether parties have agreed to submit their disputes to arbitration and, if so, whether the disputes generally come within the scope of their arbitration agreement. When deciding whether the parties agreed to arbitrate a certain matter courts generally should apply ordinary state-law principles that govern the formation of contracts.

Here, there is no dispute that the agreement between the plaintiff and McGowan Builders contained a broad arbitration clause whereby McGowan Builders was entitled to demand binding arbitration with respect to all claims, disputes and other matters arising out of or relating to the agreement, or the breach thereof. The question raised on this appeal is whether the individual defendants, who were not signatories to the agreement, were entitled to enforce the arbitration provision so as to require the plaintiff to submit the tort causes of action to arbitration.

Arbitration is a matter of contract grounded in agreement of the parties. Inasmuch as an arbitration clause is a contractual right, the general rule is that only a party to an arbitration agreement is bound by or may enforce the agreement.

However, a nonsignatory to an arbitration clause may, in certain situations, compel a signatory to the clause to arbitrate the signatory's claims against the nonsignatory despite the fact that the signatory and nonsignatory lack an agreement to arbitrate. A non-party to an arbitration agreement may compel a party to arbitration if the relevant state contract law allows the non-party to enforce the arbitration agreement.

Here, the alleged misconduct attributed to the individual defendants in the complaint related to their behavior as employees and officers of McGowan Builders. Since a corporation can only act through its officers and employees, any breach of the agreement would necessarily have to occur as a result of some action or inaction attributable to an officer or employee of McGowan Builders. As the Court of Appeals has recognized under similar circumstances, a rule allowing corporate officers and employees to enforce arbitration agreements entered into by their corporation is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement. Under the circumstances of this case, the individual defendants were entitled to enforce the arbitration provision contained in the subcontract agreement between McGowan Builders and the plaintiff. Accordingly, the Supreme Court should have granted that branch of the motion of the moving defendants, including the individual defendants, which was to compel arbitration of the causes of action alleging conversion, unfair competition, and tortious interference insofar as asserted against them.

(Internal quotations and citations omitted).