Academic journal article Vanderbilt Law Review

Equitable Estoppel and the Compulsion of Arbitration

Academic journal article Vanderbilt Law Review

Equitable Estoppel and the Compulsion of Arbitration

Article excerpt


Freedom of contract is a longstanding principle deeply rooted in American jurisprudence, protected by the Contract Clause and by the Due Process Clauses of the Fifth and Fourteenth Amendments.1 Because of the legal system's high regard for freedom of contract, parties are free to negotiate virtually all issues, thus creating rights and limiting duties and obligations to one another.

In exercising this freedom to contract, parties often negotiate an arbitration clause. These clauses, also referred to as "predispute arbitration agreements," are contractual provisions agreed to in advance of any dispute that require a party to submit any and all future disputes to arbitration.2 The American Arbitration Association's standard arbitration clause, for example, places the following obligations on the signatories:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its [applicable] rules and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.3

Despite the promise to arbitrate, oftentimes one party will circumvent an arbitration agreement and turn to the traditional dispute resolution mechanism: litigation. In these situations, the defendant typically brings the arbitration clause to the court's attention, asking the court to compel the plaintiff to arbitrate.

Upon being asked to enforce an arbitration agreement, the court decides whether it is valid to compel the parties to arbitrate. First, the court must determine whether there is an agreement to arbitrate. The court must undertake this task first because "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit."4 The gateway question of arbitrability (whether there is a valid arbitration agreement) is "undeniably an issue for judicial determination."5 Courts, not arbitrators, therefore scrutinize arbitration clauses to determine whether the parties intended to agree to arbitration, which can be evidenced by signature to the contract. Though a signed arbitration agreement is "the customary implementation of an agreement to arbitrate,"6 courts recognize that there are situations in which "a party may be bound by an agreement to arbitrate even in the absence of a signature."7 In certain disputes arising between a signatory to a contract and a nonsignatory, a court may rule that the arbitration clause binds even the nonsignatory to arbitrate the dispute. In determining whether the nonsignatory manifested the requisite intent to arbitrate, courts are "limited only by generally operative principles of contract law."8

The particular situations in which a court could compel a nonsignatory to arbitrate were first synthesized and articulated in Fisser v. International Bank.9 In Fisser, the Second Circuit listed five principles on which courts had traditionally bound the nonsignatory to the arbitration clause: (1) assignment of the contract; (2) exercising an option creating a mutually binding contract to arbitrate; (3) addition of a party through novation; (4) agency considerations in which the nonsignatory is "merely the instrumentality of a party bound by the arbitration clause;" and (5) enforcement by a corporate beneficiary of an arbitration provision while it was inchoate.10 In addition to these five categories, the court articulated a new, sixth category, which formed the basis for its judgment: the alter ego theory.11 Under this theory, if the nonsignatory is merely the signatory's alter ego, it is "a proper case to pierce the corporate veil . . . and to hold those controlling it as one with it."12 This alter ego nonsignatory would be obligated to specifically perform the signatory's other contractual obligations, including arbitration.13

Over the years, courts have grouped these concepts into the following five categories: (1) incorporation by reference, (2) assumption, (3) agency, (4) veil-piercing/alter ego, and (5) equitable estoppel. …

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