Texas Allows Non-Signatories to Enforce Arbitration Agreements

Many companies prefer to resolve their business disputes through arbitration, rather than litigation, because in many cases the arbitration process is faster, cheaper, and more effective due to arbitrators’ familiarity with the industry.  A recent decision by the Fourteenth Texas Court of Appeals reassures business owners that even if they have not signed an arbitration agreement, they might be able to enforce it as long as it was signed by their agent or affiliate.

In Satya, Inc. et al. v. Mehtaplaintiff Mehta entered into a limited partnership agreement that contained an arbitration provision. The agreement was signed by Mehta, on his own behalf, and by Bahtija, on behalf of the general partner of the limited partnership.  When Mehta discovered what he thought was self-dealing by Bahtija, he filed a suit for breach of fiduciary duties and violations of the Texas Securities Act against Bahtija, the limited partnership, two owners of the general partner, and a corporation that the two individuals also owned. Mehta alleged that all the defendants were agents for one another and were acting within the scope of their agency when committing the alleged torts.

The defendants moved to dismiss the case and compel arbitration pursuant to the arbitration provision contained in the limited partnership agreement. Mehta argued that only the limited partnership should be dismissed, but that the rest of the defendants had to litigate the claims because they never signed the arbitration agreement.

After determining that Mehta’s claims fell within the scope of the arbitration agreement, the Court of Appeals ruled that the defendants could enforce the arbitration provision found in the limited partnership agreement even though they never signed the agreement, because they were agents of the general partner, which was a signatory to the agreement.

The Court of Appeals‘ decision is consistent with the Texas Supreme Court‘s ruling in In Re Kaplan Higher Education Corp., where plaintiffs tried to avoid arbitration by suing only the non-signatory agents of the signatory to the arbitration agreement.  The Supreme Court explained that while the arbitration clauses do not automatically cover all corporate agents or affiliates, where an agent or an affiliate of a signatory was acting on behalf of the affiliate, the agent could enforce the arbitration agreement signed by the party on whose behalf it was acting.

PRACTICAL ADVICE: When attempting to determine who can enforce a particular arbitration agreement, look beyond the names on the signature lines.  In Texas, a party to a legal dispute may enforce an arbitration agreement it did not sign, if its agent signed it.  Also, an agent who did not sign an arbitration agreement, might be able to compel arbitration if his/her employer signed such an agreement, as long as the legal dispute arises out of the agent’s actions on behalf of his/her employer.

A business using an arbitration agreement, should also consider defining the parties to the arbitration agreement broadly to include individual partners, affiliates, officers, directors, employees, agents, and/or representatives of any party to the arbitration agreement.  See In re Joseph Charles Rubiola, et al., where the Texas Supreme Court held that such a broad provision expressly allowed non-signatories that fell into the definition of the “parties” to enforce the arbitration agreement in question.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

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