Party That Benefited from Agreement With Arbitration Provision Bound by That Provision

On January 18, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Petrides & Co. LLC v. Yorktown Partners LLC, 2019 NY Slip Op. 30157(U), holding that a party that benefits from a contract iwth an arbitration provision was bound by that provision even though he did not sign the contract, explaining:

Under both the FAA and New York law, ordinarily, only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. There are, however, various exceptions to this rule. Only one exception applies here: the direct benefits theory of estoppel. Under this doctrine, a nonsignatory may be compelled to arbitrate where the nonsignatory knowingly exploits the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement. Where the benefits are merely indirect, a nonsignatory cannot be compelled to arbitrate a claim. A benefit is indirect where the nonsignatory exploits the contractual relation of the parties, but not the agreement itself.

. . .

On this record, Petrides demonstrated that Yorktown knowingly exploited the benefits of the Agreement, which contained the arbitration provision, and that it received the benefits of Petrides' work under the Agreement. Petrides showed that benefits intentionally inured to Yorktown directly from Petrides' performance under the Agreement and were not merely the byproduct of the relationship between Petrides and Yorktown. To be sure, while the Agreement indicates that Petrides and Yorktown had a broader business relationship, the undisputed facts show that the work perfonned by Petrides in connection with the Demick Dispute specifically benefited Yorktown and was done, as contemplated by paragraph 4(B)(l), specifically under the auspices of the Agreement. The court, therefore, finds that Yorktown received a direct benefit from the Agreement and, consequently, is subject to its arbitration clause.

(Internal quotations and citations omitted) (emphasis added).

Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.