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

Arbitrators Exceed their Authority Post

Licensed from: Sergey Nivens /

Do Arbitrators Exceed their Powers By Making an Award Against a Nonsignatory Officer who Participates in the Arbitration in His Individual Capacity Without Objection?

Part I discussed how under circumstances like those in our hypothetical arbitrators exceed their powers when they decide disputes  between a party to a pre-dispute arbitration agreement and a non-party to  that agreement. In our hypothetical:

  1. Party A and Corporate Party B were parties to the arbitration agreement;
  2. Party A demanded arbitration against Party B only;
  3. Party A did not demand arbitration against the CEO, request that the CEO voluntarily join the arbitration or otherwise argue that the CEO should be joined or treated as a party;
  4. The CEO appeared at the arbitration only in his capacities as a witness and party representative of Party B, never purported to appear in his own behalf and did not request the arbitrator to award him any relief in his individual capacity (i.e., on behalf of himself).

But suppose instead that: (a) Party A demands arbitration not only against B, but also against the CEO, and B; (b) the CEO does not  object to arbitration on the ground he was not a party to  the pre-dispute arbitration agreement; (c) B and the CEO assert only that “the claims against [the CEO] should be dismissed because corporate officers are not individually liable for their company’s breach of contract[;]” and (d) the CEO participated in the arbitration and asked the arbitrator to award him relief in his individual capacity (that is, in his own right, not simply as an agent for the corporation). Judgment for whom?

In Stone v. Theatrical Investment Corp., No. 14 Civ. 6494 (PAE), slip op. at 1, 8-9 (S.D.N.Y. Dec. 2, 2014), U.S. District Judge Paul A. Engelmayer, who sits on the United States District Court for the Southern District of New York,  ruled that A prevails. According to the opinion, the corporate officer “waived his right to object to the arbitrator’s jurisdiction over him” by: (a) not objecting during the arbitration on the ground he was not bound by the arbitration agreement; and (b) by requesting relief in his individual capacity. See slip op. at 8-9.

Under the Federal Arbitration Act a person not a party to a pre-dispute arbitration agreement can be bound by it where, in response to a demand for arbitration, or a request to arbitrate, the person participates in the arbitration without objection.  See, e..g., Opals on Ice Lingerie v. Body Lines, Inc., 320 F.3d 362, 368-69 (2d Cir. 2003); Gvozdenovic v. United Air Lines, Inc., 933 F.2d 1100, 1105 (2d Cir. 1991).  While “a party is bound by an arbitral award only where it has agreed to arbitrate,” such “an agreement may be implied from the party’s  conduct.” Gvozdenovic, 993 F.2d at 1105.

In both of  our hypothetical scenarios, and in Stone, the  pre-dispute arbitration agreement was between Party A and Party B. The CEO was not a party to that agreement.

In our first hypothetical, Party A never demanded or requested arbitration against the CEO or otherwise argued that the CEO should be bound by the result of the arbitration.  The CEO’s participation in the arbitration was not as a party but as a witness and a party representative.

In the second, and in Stone, A demanded that the CEO arbitrate the dispute. The CEO then participated in the arbitration without objecting to the arbitrator’s authority to decide the dispute A demanded the CEO to submit to arbitration. That in and of itself is typically enough for a court to hold that a party to an arbitration agreed to arbitrate the dispute. See, e.g., Opals, 320 F.3d at 368-69.  But not only did A demand arbitration against the CEO, but the CEO requested the panel to order it relief in its individual capacity.

In the first hypothetical the arbitrator exceeded her authority because the CEO did not expressly or implicitly consent to arbitration. But in Stone (and in our second hypothetical) there was no dispute that the CEO, by his conduct, at least implicitly consented to arbitrate disputes with A:  A’s demand that the CEO arbitrate the veil-piercing claim was an offer to arbitrate, and the CEO accepted that offer by participating in the arbitration as a party without reserving its rights, and by affirmatively requesting relief in his individual capacity.

Next time, we’ll look at how the CEO might have reserved his right to litigate in court A’s veil-piercing claim, assuming that was what he would have preferred.