Court Opinion

ID: 28416
Source: CourtListenerOpinion
Date Created: 2010-04-25 09:23:24+00
Date Added: 2024-06-11T09:33:24.970196
License: Public Domain

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