Multiple Parties, Multiple Contracts: Who Decides Where the Dispute Goes

Start with who signed what

Lay the contracts side by side. Each one has a dispute clause or none, and each clause names a forum, a set of rules and a scope. An owner's contract with a general contractor may require AAA arbitration; the general's subcontract may incorporate the prime contract "by reference"; the subcontractor's supplier may have sold on terms that say Dallas County courts. A parent's master agreement may arbitrate while the subsidiary's purchase orders are silent and the principal's personal guaranty says nothing about forum. Each pairing of parties is governed by its own document, and the first question in every multi-party fight is simply whether these two parties agreed to arbitrate with each other.

The default answer for a party that signed nothing is no. Both the Federal Arbitration Act and the Texas Arbitration Act enforce agreements, and a person who did not agree cannot be made to arbitrate. The exceptions are the subject of this article.

When a non-signatory is bound: direct-benefits estoppel

In In re Kellogg Brown & Root, Inc. (Tex. 2005) the Texas Supreme Court adopted the doctrine of direct-benefits estoppel. A non-signatory can be compelled to arbitrate under a contract it did not sign if, through its claim, it seeks to derive a direct benefit from the contract containing the arbitration clause. A party cannot sue to enforce specific terms of an agreement while refusing the arbitration provision inside it. The court drew the line carefully: a claim can relate to a contract, or be unthinkable without it, and still not be a claim for a direct benefit under it. In that case a second-tier subcontractor's quantum meruit claim for the value of its work was not arbitrable under the first-tier subcontract, because the subcontractor's right to payment came from its own contract, not from the one with the clause.

The practical test is to ask what the non-signatory's claim rests on. If it sues on the contract, pleads its terms, or claims as a third-party beneficiary, it has chosen the contract and takes the arbitration clause with it. If it sues on its own contract or on a tort that does not depend on the terms, estoppel generally does not reach it.

Other theories that bind or benefit a non-signatory

• Agency. An officer, employee or agent who acted for a signatory is often able to invoke the clause when sued for conduct within that role, and may be bound by it, because the principal's agreement is treated as reaching the agent's acts on its behalf.
• Incorporation by reference. A subcontract that incorporates the prime contract, including its dispute clause, binds the subcontractor to arbitrate with the general. Whether it also binds the subcontractor to arbitrate with the owner depends on the words of both documents; the rules for standard forms are discussed in disputes under AIA and other standard form construction contracts.
• Assumption and succession. A party that takes over a contract, by assignment or by conduct, takes its arbitration clause.
• Alter ego. Where the corporate separateness between a signatory and an affiliate is disregarded, the clause follows.
• Third-party beneficiary. A person the contract was made to benefit, who claims under it, is generally held to its terms.

Each theory is a question of state contract law and of the particular words. The same theories work in reverse: a non-signatory parent or affiliate sued alongside a signatory frequently moves to compel arbitration of the claims against it, arguing that the claims are intertwined with the contract. Texas courts look at the substance of the claims, not the labels.

Who decides: the court or the arbitrator

By default a court decides whether a valid arbitration agreement exists and whether it covers the dispute and the parties before it. The contract can change that. A delegation clause sends questions of arbitrability to the arbitrator, and the Supreme Court requires clear and unmistakable evidence that the parties intended that. In Henry Schein, Inc. v. Archer & White Sales, Inc. (2019), a case that came out of a Texas federal court, the Supreme Court rejected the "wholly groundless" exception: where the contract delegates arbitrability to the arbitrator, a court may not decide the question itself even if it thinks the argument for arbitration is meritless. It must send the question to the arbitrator.

Many clauses delegate indirectly by adopting provider rules. Rule R-7(a) of the AAA Commercial Arbitration Rules gives the arbitrator the power to rule on his or her own jurisdiction, including objections to the existence, scope or validity of the arbitration agreement and to the arbitrability of any claim. Whether adopting those rules is clear and unmistakable evidence of delegation is argued in nearly every contested case, and the answer can differ when the party resisting is a non-signatory who never agreed to the rules at all. A court will not send a non-signatory to an arbitrator to decide whether the non-signatory is bound unless it first finds some agreement that reaches that person. The general framework is laid out in whether the arbitration clause in your contract is enforceable in Texas.

One dispute, two forums

When the analysis ends with some claims arbitrable and others not, the result is parallel proceedings. Under § 171.021 of the Texas Civil Practice and Remedies Code the court must order arbitration on a showing of an agreement and a refusal to arbitrate, and under § 171.025 it must stay the court proceeding on the arbitrable issues. Claims against the non-signatory stay in court; whether the court also stays them while the arbitration runs is within its discretion, and courts often do so when the arbitration will decide facts common to both. The alternative, two cases moving at once with inconsistent results possible, is the strongest argument for everyone to agree on one forum.

Joinder and consolidation inside the arbitration

The AAA rules address the multi-party problem directly but narrowly. Under Rule R-8(a), two or more arbitrations may be consolidated if all parties to all of them agree. Without agreement, the party requesting consolidation must file its request within 90 days of the date the AAA determines that the filing requirements for the last-filed case were met, and the arbitrator in the first-filed case, or a consolidation arbitrator appointed for the purpose, decides it by weighing the compatibility of the arbitration agreements, applicable law, the timeliness of the request, common issues of law or fact, and the interests of justice and efficiency. Under Rule R-8(b), additional parties may be joined if all existing parties and the party to be joined agree; absent consent, a joinder request must be submitted before an arbitrator is appointed or within 90 days of the filing determination. A party that waits loses the right to ask.

Two limits follow. The AAA cannot join a person who never agreed to arbitrate at all; joinder operates among parties who have arbitration agreements, and the theories above still govern whether a non-signatory can be reached. And consolidation requires compatible clauses; an AAA clause and a JAMS clause cannot be consolidated by either provider.

Example

Suppose a Dallas developer contracts with a general contractor under a form that requires AAA arbitration. The general's subcontract with a mechanical subcontractor incorporates the prime contract by reference. The subcontractor buys equipment from a supplier whose terms select Dallas County district courts. The HVAC system fails. The developer demands arbitration against the general; the general joins the subcontractor, which has agreed to arbitrate through incorporation, within the 90-day window of R-8(b). The subcontractor wants the supplier in the same proceeding, but the supplier never agreed to arbitrate with anyone and its terms choose court. Direct-benefits estoppel does not reach it, because its claim for the equipment price rests on its own terms. The result is an arbitration among developer, general and subcontractor, and a separate Dallas County suit between the subcontractor and the supplier, which the court stays until the arbitrators decide whether the equipment or the installation caused the failure. Had the subcontractor's purchase order required the supplier to accept the dispute terms of the prime contract, there would have been one proceeding.

What to do when the contracts do not match

First, map every party to every clause before anyone files, because the first filing often decides the forum for the whole dispute and a party that litigates in court may waive its right to arbitrate later; that risk is covered in whether you can avoid arbitration and go to court. Second, consider a one-time agreement among all parties to a single forum; a non-signatory often prefers one arbitration to being the only defendant left in court. Third, if parallel proceedings cannot be avoided, decide which should move first and ask the court for a stay that reflects it. Fourth, on future contracts, make the chain consistent: the same provider, the same rules, and an express consent to joinder and consolidation with related parties.

Tina Wysk represents owners, contractors, companies and their principals in multi-party disputes split between Dallas courts and arbitration, including motions to compel and to stay. Her arbitration and mediation practice page has more.