Non-Signatory Not Obligated to Arbitrate Claims Against Manufacturer, Distributor

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

The doctrine of direct benefits estoppel did not obligate an oil drilling company to arbitrate its claims against a manufacturer and a distributor of mooring ropes because the drilling company did not “embrace” the Purchase Order Agreements between the manufacturer and distributor that contained a mandatory arbitration clause, according to the U.S. Court of Appeals in New Orleans.

A federal district court’s dismissal of the drilling company’s suit—based on the application of the doctrine of direct benefits estoppel—was reversed, and the case was remanded for further proceedings.

To fulfill the drilling company’s order for mooring ropes, the distributor entered into Purchase Order Agreements with the manufacturer that incorporated a mandatory arbitration provision. The drilling company was not shown to have been furnished a copy of those agreements, and its orders for the mooring ropes did not contain an arbitration clause, the court noted.

After the mooring ropes allegedly failed—damaging the drilling company’s rigs—the company brought suit against the manafucturer and distributor for breach of warranty, fraud, and other claims.

The district court held that the drilling company was required to arbitrate its claims because they were premised on the manufacturer’s failure to perform according to the Purchase Order Agreements.

“Embracing” Contract

Direct benefits estoppel involved non-signatories who, during the life of a contract, “embraced” the contract, despite their non-signatory status, and then attempted to repudiate the arbitration clause in the contract during litigation, the appellate court observed.

A non-signatory could embrace a contract containing an arbitration clause either by:

(1) knowingly seeking and obtaining direct benefits from the contract or

(2) seeking to enforce the terms of the contract or asserting claims that must be determined by reference to the contract.

The first of those two possibilities was not satisfied because there was no evidence that the drilling company had any knowledge of the Purchase Order Agreements at the time that it purchased and received the ropes. Thus, the drilling company did not have the knowledge required to support the “knowingly exploited” theory of direct benefits estoppel.

Since the drilling company did not seek to enforce a specific term of the Purchase Order Agreements, the second theory of direct benefits estoppel could apply only if the drilling company’s claims could be determined solely by reference to the Purchase Order Agreements.

Non-Contractual Claims

As a plaintiff, the drilling company was not required to base its claims on the Purchase Order Agreements and could, disclaim any reliance upon them, the court held. The drilling company argued that all of its claims were based either on pre-purchase misrepresentations or on obligations imposed by law. Thus, the second theory of direct benefits estoppel did not apply.

The September 15 decision in Noble Drilling Services, Inc. v. Certex USA, Inc. will appear in the CCH Business Franchise Guide.