Westmoreland v. Sadoux ( 2002 )

Revised August 13, 2002
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 01-20793
JAMES H. WESTMORELAND,
Plaintiff-Appellant,
versus
ROLAND J. SADOUX, ET AL,
Defendants,
ROLAND J. SADOUX,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of Texas
July 18, 2002
Before HIGGINBOTHAM, WIENER, and BENAVIDES, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
James Westmoreland appeals the district court’s grant of
Roland Sadoux’s motion to compel arbitration and stay further
proceedings pending arbitration. Responding to the claim that
Sadoux and co-defendant Jan Hendrickx induced Westmoreland to sell
his minority shares in a company in which they controlled the
remaining 93 percent, Sadoux persuaded the district court to stay
the suit and compel arbitration, although defendants were not
parties to any agreement to arbitrate. Plaintiff and the two
entities who owned the 93 percent, which were in turn owned by
Sadoux and Hendrickx, were parties to a shareholder agreement
regarding the securities. We are persuaded that because this suit
does not seek to enforce any duty arising out of the shareholder
agreement and seeks no relief that would frustrate any right to
arbitration under it, Sadoux has no right to compel arbitration. We
lift the stay and vacate the order compelling arbitration and
remand for further proceedings.
I
Aston Holdings was incorporated under the laws of Aruba to own
and operate Dominicana Sanitary Services. Dominicana had a contract
with the city of Santo Domingo to collect and dispose of waste. On
the formation of Aston, James Westmoreland, Pentrade Limited,
T.D.C. Trade Development Company, and Angel Action executed a
shareholder’s agreement. After Action sold its shares to T.D.C. and
Pentrade, Westmoreland owned seven percent of Aston, while Pentrade
and TDC each owned 46.5 percent. Their shareholders’ agreement
included an arbitration clause providing for binding arbitration in
Paris, France. Sadoux is the sole owner of Pentrade and his co-
defendant Jan Hendrickx is the sole owner of TDC.
Westmoreland alleges that Sadoux and Hendrickx, who controlled
the day-to-day operations of Aston, lied to him about its success,
telling him that Aston was struggling and that the Dominican
government was planning to cancel the Santo Domingo garbage
contract; that relying upon these lies he sold his stock to them
2
for $245,000. Two months later Sadoux and Hendrickx sold Aston for
$14,000,000. This suit for fraud is against Sadoux and Hendrickx in
their individual capacity. We have appellate jurisdiction under 28
U.S.C. § 1292(b), pursuant to the district court’s certification of
its order for interlocutory appeal.
II
As a preliminary matter, Sadoux argues that Westmoreland did
not claim below that he was unable to enforce the arbitration
clause against Westmoreland, and has thus waived the argument.
Westmoreland, in his response to Sadoux’s motion to compel
arbitration, argued that “the parties have not agreed to
arbitrating this dispute.” The district court initially concluded
that Westmoreland conceded that Sadoux is able to enforce the
arbitration agreement against him. After a motion by Westmoreland,
the district court recognized his contention and entered a separate
order discussing the issue at length. It then certified its ruling
under Section 1292(b). In short, Westmoreland did not waive this
argument below.
Preliminary matters aside, we now turn to the question of
whether Sadoux could compel arbitration even though he was not
party to an arbitration agreement. We have frequently said that
arbitration clauses are to be broadly read to implement
Congressional policy expressed in the Federal Arbitration Act and
the Convention on the Recognition and Enforcement of Foreign
3
Arbitral Awards.1 This congressional policy is not intended to
discourage the use of American courts. And they facilitate private
dispute resolution by remaining open to enforce awards. Indeed, it
bears emphasis that the utility of private disputes here depends
heavily on access to the public courts for enforcement of the
arbitral award. The point is that this twining of private and
public fora facilitates the private choices of the market by
enforcing only the expectation of parties captured in their
contracts.2
It signifies that we will read the reach of an arbitration
agreement between parties broadly, but that is a different matter
from the question of who may invoke its protections. An agreement
to arbitrate is a waiver of valuable rights that are both personal
to the parties and important to the open character of our state and
federal judicial systems–an openness this country has been
committed to from its inception. It is then not surprising that to
be enforceable, an arbitration clause must be in writing and signed
by the party invoking it.3
1
See, e.g., Pennzoil Exploration and Production Co. v. Ramco
Energy Ltd., 139 F.3d 1061, 1068 (5th Cir. 1998).
2
See E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, 762 (2002)
(noting that the FAA “ensures the enforceability of private
agreements to arbitrate, but otherwise does not purport to place
any restriction on a nonparty's choice of a judicial forum.”).
3
Rojas v. TK Communications, Inc., 87 F.3d 745, 748 (5th Cir.
1996) (observing that the "FAA requires that the arbitration clause
being enforced be in writing.").
4
Categories of dispute that cannot exit the public court houses
aside, it is well and good if the parties to a private agreement
wish to choose an alternative dispute system, but we are wary of
choices imposed after the dispute has arisen and the bargain has
long since been struck. And hence we will allow a nonsignatory to
invoke an arbitration agreement only in rare circumstances.4
We have sustained orders compelling persons who have agreed to
arbitrate disputes when the party invoking the clause is a
nonsignatory, but only when the party ordered to arbitrate has
agreed to arbitrate disputes arising out of a contract and is suing
in reliance upon that contract.5 This flex in application of these
broadly stated principles rests upon our accepting the doctrine of
equitable estoppel as effective in preserving the distinctions
between broad readings of the reach of an arbitration clause and
our formal insistence upon confining the obligations to the parties
of the contract.6 Even then we have been cautious.
Sadoux says he can invoke the arbitration agreement between
4
See Hill v. G.E. Power Systems, Inc., 282 F.3d 343, 347-49
(5th Cir. 2002) (outlining the limited circumstances under which a
nonsignatory can invoke an arbitration agreement).
5
Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524,
531 (5th Cir. 2000) (upholding the use of equitable estoppel to
compel arbitration where the claims were “intertwined with, and
dependent upon” the agreement containing a broad arbitration
clause).
6
Id. at 528 (noting that “arbitration is a matter of
contract” and thus and cannot, in general, be required for a matter
involving an arbitration agreement non-signatory.”)
5
Westmoreland and Pentrade because he acted as an agent for
Pentrade, pointing to the Third Circuit’s decision in Pritzker v.
Merrill Lynch.7 The district court cited Pritzker in its order. It
held that agents of signatories to an arbitration clause can invoke
the clause because under “traditional agency theory, [the agent] is
subject to contractual provisions to which [the principal] is
bound."8 The Third Circuit concluded that this is enough to hold
that a signatory’s “agents, employees, and representatives are also
covered under the terms of such agreements."9
Pritzker is in tension with decisions of the First and Ninth
Circuits, which conclude that an agent or employee of a signatory
cannot invoke an arbitration clause unless the parties intended to
bring them into the arbitral tent. The First Circuit’s decision in
McCarthy v. Azure argued against a broad reading of Pritzker and
held that an “overt indication that the parties intended to commit
claims against” the agent “as an individual” is required in order
to permit a nonsignatory agent of a signatory to invoke an
arbitration clause.10 The First Circuit stressed that the
distinction between individual capacity and representative capacity
is “a meaningful legal difference” and called upon parties to act
7
7 F.3d 1110 (3d Cir. 1993).
8
Id. at 1111.
9
Id.
10
McCarthy v. Azure, 22 F.3d 351, 356 (1st Cir. 1994).
6
“before, rather than after, the fact” and rely on “skillful
drafting of contract documents” instead of “judicial juggling.”11
Similarly, the Ninth Circuit held, in Britton v. Co-Op Banking
Group,12 that a nonsignatory agent, officer, and employee of a
signatory could not compel arbitration.13 The key question, in the
Ninth Circuit's view, was whether the wrongdoing arose from a
provision or interpretation of the contract containing the
arbitration clause.14
The Fourth Circuit’s recent decision in Long v. Silver,15 which
Sadoux also relies upon, offers him little aid. Although Long
permitted an agent and shareholder to compel arbitration even
though they were nonsignatories, it did not adopt Pritzker’s
sweeping holding that agency is enough. Rather, the Fourth Circuit
relied on the fact that the plaintiff invoked other provisions of
the arbitral agreement in making his claims against the defendants.
It observed that a plaintiff cannot invoke an agreement and claim
the benefit of his status under it while attempting to escape its
consequences.16 This parallels our reasoning in Grigson v. Creative
11
Id. at 360.
12
4 F.3d 742 (9th Cir. 1993).
13
Id. at 748.
14
Id. at 747.
15
248 F.3d 309 (4th Cir. 2001).
16
Id. at 320-21.
7
Artists Agency, where we permitted a nonsignatory to compel
arbitration, on an equitable estoppel theory, when the signatory
relies upon the terms of the written agreement to state its
claims.17
In sum, we agree with the First and Ninth Circuits that a
nonsignatory cannot compel arbitration merely because he is an
agent of one of the signatories. An agent is not ordinarily liable
under the contract he executes on behalf of his principal, so long
as his agency is disclosed, but he is personally liable if his acts
breach an independent duty.18 If he seeks to compel arbitration, he
is subject to the same equitable estoppel framework left to other
nonsignatories. It is to this framework that we now turn.
There are two circumstances under which a nonsignatory can
compel arbitration.19 First, when the signatory to a written
agreement containing an arbitration clause must rely on the terms
of the written agreement in asserting its claims against the
nonsignatory. Second, when the signatory to the contract containing
a arbitration clause raises allegations of substantially
interdependent and concerted misconduct by both the nonsignatory
and one or more of the signatories to the contract.20
17
Grigson, 210 F.3d at 527.
18
See RESTATEMENT (SECOND) OF AGENCY § 320 (1958).
19
Hill, 282 F.3d at 348.
20
Id.
8
Westmoreland’s suit does not rely upon the terms of the
shareholder agreement or seek to enforce any duty created by the
agreement, and there is no allegation that Sadoux acted in concert
with anyone. Both Sadoux and Hendrickx elected to interpose
liability insulating entities between themselves and Westmoreland.
For reasons advantageous to themselves they were not parties to the
shareholder agreement. And they did not negotiate an arbitration
agreement regarding their personal claims and liabilities. This was
no small matter. It gave them access to the courts for any claim
they may have had against Westmoreland, subject to the limitation
that they would have had to confront the arbitration agreement if
they attempted to enforce the terms of that agreement.
These vital distinctions cannot be maintained by simply
deploying the standard that the reach of arbitration clauses is to
be read broadly, to the distinct problems of their applicability to
nonsignatories. Directly put, the courts must not offer contracts
to arbitrate to parties who failed to negotiate them before trouble
arrives. To do so frustrates the ability of persons to settle their
affairs against a predictable backdrop of legal rules–the cardinal
prerequisite to all dispute resolution.
VACATED AND REMANDED.
9