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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: April 18, 2020

Party That Did Not Sign Agreement Containing Arbitration Provision Not Required to Arbitrate Dispute

On April 16, 2020, the First Department issued a decision in Matter of KPMG LLP v. Kirschner, 2020 NY Slip Op. 02286, holding that a party that did not sign an agreement containing an arbitration provision was not required to arbitrate a dispute arising from that agreement, explaining:

The parties agree that the issue of whether a party is bound by an arbitration provision in an agreement it did not execute is a threshold issue for the court, not the arbitrator, to decide. Accordingly, Supreme Court should have decided this issue. The parties, however, ask us to decide the issue of arbitrability instead of remanding. We do so in the interest of judicial economy.

The parties agree that the only theory under which respondent, as a nonsignatory to the engagement letter containing the arbitration clause, can be required to arbitrate is on the equitable estoppel/direct benefits grounds. We find that petitioner has not met its heavy burden.

The benefits that the investors whose interests respondent represents derived from the engagement letters between petitioner and nonparty Millennium were merely indirect. Here, in the California action, respondent pleaded solely common-law claims and did not invoke the engagement letter.

There is an additional reason why the benefits the investors received are indirect. Benefits are direct when specifically contemplated by the parties to the agreement containing the arbitration clause; and benefits are indirect when the parties would not have originally contemplated the non-signatory’s eventual benefit. Millennium and petitioner did not contemplate that the investors represented by respondent would benefit from the engagement letter. Indeed, the letter provided that only the hard copy report is to be relied upon as petitioner’s work product, and that if Millennium were to use the report petitioner would consider its consent to the inclusion of petitioner’s report and the terms thereof at that time.

Moreover, a nonsignatory may be compelled to arbitrate where it knowingly exploits the benefits of an agreement containing an arbitration clause. To satisfy the knowledge requirement, the case law requires that the non-signatory had actual knowledge of the contract containing the arbitration clause. To be sure, if an investor received a Millennium financial statement audited by petitioner, it would presumably have assumed that there was a contract between Millennium and petitioner. However, a nonsignatory must have specific knowledge of the relevant agreement. Here, there is no indication in the record that the investors whom respondent represents had actual knowledge of the engagement letters between petitioner and Millennium.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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