The Third Circuit Rejects Arbitration by Estoppel

Flintkote Company v. Aviva PLC, 769 F.3d 215 (3d Cir. 2014).  Efforts to force arbitration on parties who did not agree to it continue.  In this case, however, the Third Circuit, speaking through Judge Vanaskie, refused to allow that.

Plaintiff Flintkote sought to bind defendant Aviva to an arbitration clause in a contract (“the Wellington Agreement”) to which Aviva was not a party.  The law is settled that, despite any policies that favor arbitration, “[i]f a party has not agreed to arbitrate, the courts have no authority to mandate that he do so.”  But the Third Circuit had previously issued a “recurring admonition” that a non-party to an arbitration agreement “may be equitably bound to arbitrate under traditional principles of contract and agency law.”  Flintkote invoked this principle in moving to compel arbitration, asserting that equitable estoppel justified compelling Aviva to arbitrate.  The district court granted Flintkote’s motion.  Aviva appealed.  Applying plenary review of the district court’s decision to compel arbitration, and viewing the merits using the summary judgment standard of review, the Third Circuit reversed the ruling for Flintkote.

Delaware law applied, and Delaware requires that a party who asserts equitable estoppel present “clear and convincing proof.”  (New Jersey’s standard is similar).  Judge Vanaskie found that Flintkote had not met that standard.  Flintkote argued that when Aviva engaged in mediation with Flintkote, along with other insurers, Aviva thereby “embraced” the Wellington Agreement.  But Judge Vanaskie found that the mediation proceeded pursuant to a different Mediation Agreement, not the Wellington Agreement.  Thus, although a party who “embraces” an agreement to which it is not a signatory can be bound to its terms when that party has benefited directly from that agreement, has selectively sought to enforce in its favor portions of that agreement, or has sued to enforce parts of that agreement, there was no factual basis for applying that concept here.  Judge Vanaskie also rejected Flintikote’s theory that it had detrimentally relied on Aviva’s participation in the mediation as a basis for compelling arbitration.  Among other things, any such reliance would not have been reasonable.

Judge Vanaskie quoted with approval a Delaware case that had stated that, in applying equitable principles to impose arbitration on a non-signatory to an arbitration agreement, courts must “proceed with a good deal of caution … lest nuanced concepts of equity be allowed to override established legal principles of contract formation.”  This was a wise observation.  Employing equitable principles to force arbitration upon a non-signatory to an arbitration agreement should be a rare event.  The Third Circuit rightly found that this was not a proper case to do that.