Fifth Circuit Rules Non-Signatories Not Bound by Arbitration Agreement

The U.S. Court of Appeals for the Fifth Circuit held that corporate officers did not personally agree to arbitrate and were not bound by an arbitration agreement.

Covington v. Aban Offshore, No. 10-40449 (5th Cir. August 10, 2011) involves a dispute between Aban Offshore Limited (“Aban”), owner of an oil rig, and Guy Covington and Russell Covington, officers and employees of Beacon Maritime, Inc. (“Beacon”) a contractor hired to refurbish the rig. In 2005, Guy, as Vice President and on behalf of Beacon, executed a contract with Aban. Russell did not sign it at all. The contract was for Beacon to perform services for Aban and contained the following dispute resolution provision:

All disputes arising hereunder or related to the work to be performed on the Vessel by Contractor shall first be attempted to be resolved by informal discussions between the parties. If the parties mutually agree in writing to terminate those informal discussions, or upon the written notice by one party to the other party terminating those informal discussions, the parties agree to submit the dispute to non-binding mediation. If non-binding mediation fails to resolve the dispute, the parties agree to submit the dispute to binding arbitration to be conducted by a panel of three (3) arbitrators.

Later, a disagreement arouse regarding Beacon’s performance and Aban initiated arbitration proceedings against Beacon and also against the Covingtons as individuals. The Covingtons resisted arbitration and a federal district court granted Aban’s motion to compel arbitration. The Covingtons now appeal.

The Fifth Circuit highlighted the agency principles involved said that “under either Texas law or federal law, neither contractor’s president nor its vice president of sales was bound by arbitration clause in contract between oil rig owner and contractor to furnish the rig, and therefore, they could not be compelled to arbitrate dispute over contractor’s performance, even though vice president of sales signed contract on behalf of contractor; neither president nor vice president of sales was an individual party or signatory to the contract, and there was no allegation that contractor had authority to bind the two corporate officers individually.”

The court cited Roe v. Ladymon, 318 S.W.3d 502 (Tex. App.–Dallas 2010, no pet.) and stated that there, “by signing the contract as an agent for a disclosed principal, Ladymon did not become personally bound by the terms of that contract, including the arbitration clause.” Then, the court distinguished In re Vesta Insurance Group, Inc., 192 S.W.3d 759 (Tex. 2006) stating that there, “the signatory plaintiff was resisting arbitration [but] the non-signatory defendants sought to hold the signatory plaintiff to abide by his agreement to arbitrate.” Next, the court reasoned that the present case is like Roe and unlike Vesta because the parties resisting arbitration, the Covingtons, never personally agreed to arbitrate.

Finally, the court cited First Options of Chicago, Inc. v. Kaplan514 U.S. 938 (1995) as consistent with the court’s conclusion. Accordingly, the court held that neither Beacon’s president nor its vice president of sales was bound by arbitration agreement.

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