Agents for a Partially-Disclosed Principal Bound by Agreement's Arbitration Provision

On May 27, 2021, Justice Platkin of the Albany County Commercial Division issued a decision in Narravula v. Perosphere Tech., Inc., 2021 NY Slip Op. 50510(U), holding that agents for a partially-disclosed principal were bound by an agreement's arbitration provision, explaining:

Finally, respondents argue that petitioners are bound to the SPA in their personal capacity based upon their failure to disclose the identity of the investor group that they purported to represent as the 'Nominee' for the Buyer. Because Petitioners failed to adequately disclose their principal, they are responsible for their undertakings in the SPA, including to arbitrate disputes such as this one.

It is well settled that an individual who signs a contract as an agent for an entity will be held personally liable on the contract if the agency relationship is not disclosed.

A principal is considered to be disclosed if, at the time of a transaction conducted by an agent, the other party to the contract had notice that the agent was acting for the principal and of the principal's identity. In contrast, a principal is considered partially disclosed if the agency relationship was known, but the identity of the principal remained undisclosed.

An agent for an undisclosed or partially disclosed principal will be liable even if the third party is aware that an agency relationship exists, so long as the agent fails to disclose the principal's identity. And where the agent of an undisclosed or partially disclosed principal is sued on a contract that includes an arbitration clause, the agent will be compelled to arbitrate.

Contrary to petitioners' contentions, the Court concludes that the identity of the principal they purported to represent, the Nominee "investor group," was not adequately disclosed to respondents. While petitioners argue that a general description of the principal, not specific names, is sufficient to find notice, the cases they cite involve contracting parties who allegedly possessed knowledge of the agent's principal.

Here, petitioners offer no evidence that respondents had knowledge or notice of the identity of the individuals and/or entities comprising the "investor group" on whose behalf they purported to act. Indeed, petitioners assert in their verified Petition that it was understood that their role would be to identify investors who would fund Perosphere Corporation's acquisition of Perosphere Technologies stock and] the COVID-19 pandemic made it difficult to assemble the investor group within the time frame prescribed for closing the stock purchase. Thus, the Petition itself calls into question whether petitioners' alleged principal, the investor group, even existed when petitioners executed the SPA as its purported agents.

Petitioners further argue that the duty to consummate the contemplated share purchase transaction was that of the fully disclosed Buyer, Perosphere Corp., and not the "investor group." But the issue before the Court is not whether the liability that petitioners may bear for acting as an agent of an undisclosed "investor group" extends to the specific breach of the SPA alleged in the Notice or Draft Demand. Rather, the only question before the Court is arbitrability, and the Court's focus must be on whether petitioners became bound to the Nominee's obligation to arbitrate any dispute arising out of or related to the SPA under the principles of agency law relied upon by respondents.

The Court therefore concludes that respondents have sufficiently established that petitioners became bound under general principles of agency law for the undertakings of their principal, the "investor group," including the obligation to arbitrate any disputes arising out of, or relating to, the SPA.

Finally, a party who agrees to arbitration in its capacity as an agent cannot have a claim brought against it under the arbitration provision if the claim is not related to the scope of the agency. The Court concludes that petitioners can be compelled to arbitrate in their capacity as representatives of the Nominee "investor group" for essentially the reasons stated immediately above. Petitioners' arguments to the contrary go the merits of the claims that may be asserted against them in such capacity, which is not an issue that is properly before the Court.

(Internal quotations and citations omitted).

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.