Do Arbitrators Exceed their Powers by Imposing Liability on Corporate Officers who were not Parties to the Arbitration Agreement?

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Arbitrators Exceed their Powers when they Violate Arbitration’s First Principle

What the U.S. Supreme Court sometimes calls the “first principle” of arbitration law is that “arbitration is a matter of consent, not coercion.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted); Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 295 & n.7, 294 n.6 (2010); AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 648 (1986). Ordinarily, one of  the strongest arguments against confirmation of an arbitration award under the  Federal Arbitration Act— and in support of vacating it—is that a party did not submit the dispute to arbitration or agree to submit it to arbitration. Under those circumstances, arbitrators exceed their powers under Section 10(a)(4) of the Federal Arbitration Act. See 9 U.S.C. § 10(a)(4) (2013) (award may be vacated “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”); Porzig v. Dresdner, Kleinwort, Benson, North Am., LLC, 497 F. 3d 133, 140-41 (2d Cir. 2007).

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Do Arbitrators Exceed their Powers by Deciding a Dispute Between Parties that did not Agree to Arbitrate with Each Other?

Given arbitration law’s first principle, wouldn’t arbitrators exceed their powers by purporting to hold a corporate officer liable for a corporation’s debts where the officer was not a party to the arbitration agreement? Surprising as it might seem, the answer is “it depends.”

Suppose party A and corporate party B enter into a contract under which B would pay A $X dollars for services A would provide B. The contract contains an arbitration agreement under which A and B agree to arbitrate all disputes between them arising out of or relating to their contract. B’s CEO is not a party to the agreement to arbitrate or to the agreement itself.

All is well for a period, that is, until B breaches the contract by not paying A all of its fees. The evidence shows that B’s CEO—who was not a party to the arbitration, but appeared as a witness and client representative for B—commingled corporate with personal funds and arguably engaged in activities that might  justify “piercing” the so-called “corporate veil,” that is provide legal grounds for holdingf a corporate officer personally liable for the corporation’s debts. The evidence also shows that B is quite likely insolvent.

A does not attempt to make the CEO a party to the arbitration or ask the arbitrator to impose liability on the CEO for B’s debts. The arbitrator—citing the “broad arbitration agreement,” the CEO’s presence at the arbitration hearings and the “strong federal policy in favor of arbitration”—decides to cut to the chase by making an award that declares that B breached the contract and that B and the CEO are jointly and severally liable for the full amount of the balance due under the contract between A and B.

A promptly makes an application to confirm the award, naming B and the CEO as parties. B and the CEO oppose confirmation of the award on the ground that the CEO did not agree to arbitrate, or to submit to arbitration, any claims A might have against the CEO, and, in any event, A never even attempted to submit to arbitration any claims against the CEO. Judgment for whom?

Well, under these facts, a court faithfully applying the consent not coercion principle of arbitration law would not confirm such an award. The officer never agreed to arbitrate and never submitted the dispute over his alleged personal liability to the arbitrator. Moreover, A never attempted to submit to arbitration a dispute it might have with B’s CEO. Under these circumstances, the arbitrator simply had no authority to make the CEO personally liable for its debts. See, e.g., Porzig, 497 F.3d at 140-41; Orion Shipping. & Trading Co. v. Eastern States Petroleum Corp., 312 F. 2d 299, 300-01 (2d Cir. 1963) (Kaufman, J.).

But, as we’ll see, our hypothetical is a straightforward one. If we change the facts just a bit, then the result would likely be very different, a point recently well-illustrated by a case decided by a judge of the U.S. District Court for the Southern District of New York.

More on that in our next post.  .  .  .


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