Equitable Estoppel and the Compulsion of Arbitration

I. INTRODUCTION Freedom of contract is longstanding principle deeply rooted in American jurisprudence, protected by Contract Clause and by Due Process Clauses of Fifth and Fourteenth Amendments.1 Because of legal system's high regard for freedom of contract, parties are free to negotiate virtually all issues, thus creating rights and limiting duties and obligations to one another. In exercising this freedom to contract, parties often negotiate an clause. These clauses, also referred to as predispute agreements, are contractual provisions agreed to in advance of any dispute that require party to submit any and all future disputes to arbitration.2 The American Arbitration Association's standard clause, for example, places following obligations on signatories: Any controversy or claim arising out of or relating to this contract, or breach thereof, shall be settled by administered by American Arbitration Association in accordance with its [applicable] rules and judgment on award rendered by arbitrator may be entered in any court having jurisdiction thereof.3 Despite promise to arbitrate, oftentimes one party will circumvent an agreement and turn to traditional dispute resolution mechanism: litigation. In these situations, defendant typically brings clause to court's attention, asking court to compel plaintiff to arbitrate. Upon being asked to enforce an agreement, court decides whether it is valid to compel parties to arbitrate. First, court must determine whether there is an agreement to arbitrate. The court must undertake this task first because arbitration is matter of contract and party cannot be required to submit to any dispute which he has not agreed so to submit.4 The gateway question of arbitrability (whether there is valid agreement) is undeniably an issue for judicial determination.5 Courts, not arbitrators, therefore scrutinize clauses to determine whether parties intended to agree to arbitration, which can be evidenced by signature to contract. Though signed agreement is the customary implementation of an agreement to arbitrate,6 courts recognize that there are situations in which a party may be bound by an agreement to arbitrate even in absence of signature.7 In certain disputes arising between signatory to contract and nonsignatory, court may rule that clause binds even nonsignatory to arbitrate dispute. In determining whether nonsignatory manifested requisite intent to arbitrate, courts are limited only by generally operative principles of contract law.8 The particular situations in which court could compel nonsignatory to arbitrate were first synthesized and articulated in Fisser v. International Bank.9 In Fisser, Second Circuit listed five principles on which courts had traditionally bound nonsignatory to clause: (1) assignment of contract; (2) exercising an option creating mutually binding contract to arbitrate; (3) addition of party through novation; (4) agency considerations in which nonsignatory is instrumentality of party bound by clause; and (5) enforcement by corporate beneficiary of an provision while it was inchoate.10 In addition to these five categories, court articulated new, sixth category, which formed basis for its judgment: alter ego theory.11 Under this theory, if nonsignatory is merely signatory's alter ego, it is a proper case to pierce corporate veil . . . and to hold those controlling it as one with it.12 This alter ego nonsignatory would be obligated to specifically perform signatory's other contractual obligations, including arbitration.13 Over years, courts have grouped these concepts into following five categories: (1) incorporation by reference, (2) assumption, (3) agency, (4) veil-piercing/alter ego, and (5) equitable estoppel. …