Client Alert - Litigation and Dispute Resolution Update
Federal Court Finds Party Is Bound by Arbitration Agreement It Did Not Sign
In a recent decision, a federal court in Illinois has found that a non-signatory is bound by an arbitration clause in a separate agreement between its counterpart and a third party. The decision underscores the importance of examining and understanding the effect of arbitration clauses, which are increasingly a part of many contracts.
The case of Southern Illinois Beverage, Inc. v. Hansen Beverage Co., 2007 WL 3046273 (S.D. Ill., Oct. 15) involved a sub-distributorship agreement between Southern Illinois Beverage, Inc. (SIB) and Folsum Distributing (Folsum). Folsum had acquired the right to distribute an energy drink manufactured by Hansen Beverage Co. (Hansen). After Folsum granted SIB the right to distribute the energy drink, Hansen terminated the sub-distributorship agreement and SIB sued. However, the agreement between Hansen and Folsum contained a broad arbitration clause. When Hansen demanded arbitration, SIB argued that it was not bound by the clause in the agreement that it never signed. The court disagreed.
Ordinarily, only parties to an arbitration agreement are bound by its provisions. However, there are exceptions for cases where there is: (1) assumption, (2) agency, (3) estoppel, (4) veil-piercing, or (5) incorporation by reference. The court relied on the estoppel exception in finding that "the [7th Circuit] has explained that a non-signatory party is estopped from avoiding arbitration if it knowingly seeks the benefits of the contract containing the arbitration clause." Therefore, in an arbitration context, a party cannot assert that an arbitration clause in a contract is inapplicable to it when it has claimed a direct benefit under that contract. As the court explained, "this estoppel doctrine exists to prevent a litigant from unfairly receiving the benefit of a contract while at the same time repudiating what it believes to be a disadvantage of the contract, namely the contractual arbitration provision." Because SIB had received the benefit of rights conferred by the agreement between Hansen and Folsum, it was found to also be bound by the arbitration clause.
This decision illustrates how contractual clauses can have far-reaching effects that may not be readily apparent, and the need to thoroughly and comprehensively review business agreements. If you have questions about this judicial decision, or would like counsel concerning the arbitration clauses in your agreements, please contact Mr. Gonzalez at 312-558-9779 or at egonzalez@elvisgonzalezltd.com.
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