Case: 10-40449 Document: 00511568141 Page: 1 Date Filed: 08/10/2011
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 10, 2011
No. 10-40449 Lyle W. Cayce
Clerk
GUY COVINGTON; RUSSELL COVINGTON,
Plaintiffs - Appellants
v.
ABAN OFFSHORE LIMITED, formerly known as Aban Loyd Chiles Offshore,
Limited,
Defendant - Appellee
Appeal from the United States District Court
for the Eastern District of Texas
Before JONES, Chief Judge, and DENNIS and CLEMENT, Circuit Judges.
DENNIS, Circuit Judge:
Guy Covington and Russell Covington appeal challenging the district
court’s conclusion that they, as agents of Beacon Maritime, Inc. (“Beacon”),
are bound by Beacon’s agreement to arbitrate disputes with Aban Offshore
Limited (“Aban”). We conclude that under settled principles of agency and
contract law the Covingtons are not personally bound by Beacon’s agreement
with Aban, and therefore we REVERSE the district court’s order compelling
arbitration and REMAND for further proceedings consistent with this
opinion.
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I.
The facts are straightforward and undisputed. At all relevant times,
the plaintiffs-appellants were officers and employees of Beacon. Guy was
Beacon’s Vice President of Sales and Marketing and Russell was its President
and a Director. On September 13, 2005, Guy, as Vice President and on behalf
of Beacon, executed a contract with Aban. Guy did not sign the contract in
his personal capacity; Russell did not sign it at all. The contract was for
Beacon to perform services for Aban, refurbishing its oil rig.
The contract contained a dispute resolution provision, Article XX, which
stated in relevant part:
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.
A dispute arose regarding Beacon’s performance, and Aban eventually
initiated arbitration proceedings against Beacon and also against the
Covingtons as individuals. The Covingtons then filed a petition in Texas
state court, seeking a declaratory judgment that they, in their personal
capacities, were not required to arbitrate against Aban. Invoking the federal
courts’ diversity jurisdiction, Aban removed the case to the United States
District Court for the Eastern District of Texas and filed a motion to compel
the Covingtons to arbitrate the dispute.
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The district court granted Aban’s motion to compel. It reasoned, “The
parties do not dispute that a valid arbitration agreement exists between Aban
and Beacon. Rather, they contest whether the Covingtons, as non-signatories
[in their individual capacities], are bound by it. Normally, courts apply . . .
contract law” to determine who is bound by such an agreement. Covington v.
Aban Offshore Ltd., No. 1:10-CV-5, slip op. at 4 (E.D. Tex. Mar. 15, 2010)
(citations omitted). However, the district court continued, it was unclear
whether federal or Texas contract law controlled. The district court
determined that it did not need “to decide the choice-of-law issue because, in
this case, federal and the applicable state law ‘dovetail to provide the same
outcome.’” Id. at 5 (quoting Graves v. BP Am., Inc., 568 F.3d 221, 223 (5th
Cir. 2009)). The district court concluded that the Covingtons were bound by
the arbitration agreement because both “federal and Texas state courts have
allowed non-signatory agents, employees, and representatives of a signatory
principal to compel arbitration when the non-signatories’ alleged wrongful
acts relate to their behavior as agents and fall within the scope of the
arbitration agreement.” Id. The district court rejected the Covingtons’
argument that such cases were distinguishable because “the courts compelled
arbitration in favor of non-signatories who sought the benefit of arbitration.”
Id. at 6. It reasoned that “[f]ederal courts . . . have applied the same
reasoning to compel arbitration against non-signatories who, like the
Covingtons, resisted arbitration.” Id.1 The district court concluded that there
was no reason to believe “that Texas state courts would deviate from federal
1
In support of this statement, the district court cited Lee v. Chica, 983 F.2d 883 (8th
Cir. 1993); Doran v. Bondy, No. 5:04-CV-99, 2005 WL 1907252 (W.D. Mich. Feb. 18, 2005); and
Creative Telecommunications, Inc. v. Breeden, 120 F. Supp. 2d 1225 (D. Haw. 1999).
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law on this point,” especially since “Texas state courts have noted the
importance of maintaining uniformity between federal and state arbitration
law.” Id. Based on this reasoning, the district court held that the
Covingtons, in their personal capacities, were bound by the arbitration
provision of the contract between Aban and Beacon.
The Covingtons filed a motion for a new trial, which the district court
construed as a motion for reconsideration and denied for essentially the
reasons given in its original opinion. This appeal followed.
II.
“We review a district court’s grant of a motion to compel arbitration de
novo . . . .” Am. Heritage Life Ins. Co. v. Orr, 294 F.3d 702, 708 (5th Cir.
2002). A court may compel arbitration only if it concludes that the parties
“ma[de] . . . the agreement for arbitration.” 9 U.S.C. § 4. “If the [court] find[s]
that [the parties made] no agreement in writing for arbitration . . . , the
proceeding shall be dismissed.” Id.
As the district court recognized, we have held that “[o]rdinary
principles of contract and agency law may be called upon to bind a
nonsignatory to an [arbitration] agreement whose terms have not clearly done
so.” Bridas S.A.P.I.C. v. Gov’t of Turkmenistan, 345 F.3d 347, 356 (5th Cir.
2003). Moreover, we agree with the district court that we need not decide in
this case whether those principles should be drawn from Texas law or federal
law,2 because both bodies of law lead us to the same conclusion. See Railroad
2
The contract states that it is to be governed by Texas law. The Supreme Court’s
opinion in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), supports the
application of state law: “When deciding whether the parties agreed to arbitrate a certain
matter (including arbitrability), courts generally . . . should apply ordinary state-law principles
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Mgmt. Co. v. CFS La. Midstream Co., 428 F.3d 214, 222 (5th Cir. 2005)
(“Where there are no differences between the relevant substantive laws . . . ,
there is no conflict, and a court need not undertake a choice of law analysis.”).
Contrary to the district court, however, we conclude that under
established principles of agency and contract law, the fact that Beacon
entered into the contract with Aban, thereby agreeing to the arbitration
clause, did not cause Beacon’s agents, the Covingtons, to be personally bound
by that agreement, even though Guy Covington executed the contract on
behalf of Beacon. The Restatement (Third) of Agency states: “When an agent
acting with actual or apparent authority makes a contract on behalf of a
disclosed principal, (1) the principal and the third party are parties to the
contract; and (2) the agent is not a party to the contract unless the agent and
third party agree otherwise.” Restatement (Third) of Agency § 6.01 (2006).
The Restatement (Second) of Agency says substantively the same thing:
“Unless otherwise agreed, a person making or purporting to make a contract
with another as agent for a disclosed principal does not become a party to the
contract.” Restatement (Second) of Agency § 320 (1958). Aban has not
that govern the formation of contracts.” Id. at 944. However, our court has stated that “the
federal substantive law of arbitrability” applies to the question of “to what extent a non-
signatory is bound by an arbitration provision contained in a contract she is suing under.”
Wash. Mut. Fin. Grp., LLC v. Bailey, 364 F.3d 260, 267 n.6 (5th Cir. 2004). (The question in
Washington Mutual was similar to, but distinct from, the question we are deciding here, which
is whether the Covingtons, who are non-signatories, are bound by arbitration provisions
contained in the contract between Aban and Beacon, under which they are being sued.) The
Texas Supreme Court has stated that, given the uncertainty about whether federal or state
law governs the question of whether a nonsignatory is bound by an arbitration agreement, “we
have determined to apply state substantive law and endeavor to keep it consistent with federal
law.” In re Labatt Food Serv., L.P., 279 S.W.3d 640, 643 (Tex. 2009) (citing In re Weekley
Homes, 180 S.W.3d 127, 130-31 (Tex. 2005)).
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alleged the existence of an agreement that empowered Beacon to contract on
behalf of the Covingtons as individuals. Therefore, the Covingtons are not
bound by the terms of Beacon’s arbitration agreement with Aban.
Further supporting such a conclusion, a recent Texas appellate
decision, Roe v. Ladymon, 318 S.W.3d 502 (Tex. App.–Dallas 2010, no pet.),
applied the above-stated principles to a set of facts very similar to those of the
present case and reached the same result we reach. There, Roe, a
homeowner, entered into a contract with Metro LLP, a contractor. Id. at 507.
Ladymon signed the contract in his capacity as a partner of Metro. Id. When
Roe was unsatisfied with Metro’s work, she pursued arbitration against both
Metro and Ladymon. Id. at 508. The arbitrator awarded damages to Roe and
held that Metro and Ladymon were jointly and severally liable for those
damages. Id. at 509. However, when Roe filed suit to confirm the arbitration
award, the state trial court “held that the arbitrator exceeded his authority in
rendering an award against Ladymon individually.” Id. The court of appeals
affirmed. The court explained that “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.” Id. at 521.
The Roe court distinguished its case from a different class of cases —
for example In re Vesta Insurance Group, Inc., 192 S.W.3d 759 (Tex. 2006) —
in which courts have held that plaintiffs who sign arbitration agreements can
be compelled to arbitrate their disputes with nonsignatory defendants. It
stated that in those cases, “a signatory to a contract containing an arbitration
clause filed . . . suit against non-signatory officers and agents of the other
party to the contract,” thereby attempting to avoid arbitration. Roe, 318
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S.W.3d at 520 (citing Vesta, 192 S.W.3d at 762-63). “The signatory plaintiff
was resisting arbitration [but] the non-signatory defendants sought to hold
the signatory plaintiff to abide by his agreement to arbitrate.” Id. In such
circumstances, “a signatory plaintiff cannot avoid its agreement to arbitrate
disputes simply by bringing . . . claims against the [nonsignatory] officers,
agents, or affiliates of the other signatory to the contract.” Id. (citing Vesta,
192 S.W.3d at 762-63). “[E]stoppel principles” indicate that the courts should
hold the plaintiff to his agreement to arbitrate. Id. By contrast, the Roe court
elaborated, under the facts in Roe there was no “basis to ‘estop’ [the
defendant] from refusing to arbitrate because he never agreed to arbitrate.”
Id. at 520-21. “[T]he party resisting arbitration did not sign the agreement to
arbitrate [in his individual capacity].” Id. at 520. The present case is like Roe
and unlike Vesta because here the parties resisting arbitration, the
Covingtons, never personally agreed to arbitrate. Thus, under Roe, the
Covingtons are not bound by the arbitration agreement.3
Federal courts addressing similar fact patterns have followed
essentially the same reasoning, and have reached analogous results. In Bel-
Ray Co. v. Chemrite (Pty) Ltd., 181 F.3d 435 (3d Cir. 1999), the Third Circuit
partially reversed a district court’s order compelling arbitration; the appellate
court held that only the defendant corporation and not its individual directors
and officers were bound by an arbitration agreement, because the directors
3
Aban cites In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185 (Tex. 2007), as
supporting its position that the Covingtons should be compelled to arbitrate. However, the
facts of In re Merrill Lynch are analogous to Vesta, not Roe. There, the defendants seeking to
compel arbitration were non-signatories and the plaintiff resisting arbitration was a signatory
to the agreement. Id. at 188.
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and officers had not personally agreed to arbitrate. Id. at 446. The Third
Circuit reasoned, “Arbitration is strictly a matter of contract. If a party has
not agreed to arbitrate, the courts have no authority to mandate that he do
so.” Id. at 444. Likewise, in Merrill Lynch Investment Managers v. Optibase,
Ltd., 337 F.3d 125 (2d Cir. 2003), the Second Circuit upheld a preliminary
injunction preventing a plaintiff from pursuing arbitration proceedings
against a defendant which was not a party to the arbitration agreement. Id.
at 132. The defendant resisting arbitration in Merrill Lynch was a
corporation which was affiliated with another corporation that had entered
into the arbitration agreement.
The Bel-Ray and Merrill Lynch courts both distinguished a prior case,
Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110 (3d Cir.
1993), in which plaintiffs who had signed an arbitration agreement had been
compelled to arbitrate claims against two nonsignatory defendants (an
individual and a corporation) that were agents of the other party to the
agreement. The Second Circuit succinctly explained that Pritzker was
distinguishable because “it matters whether the party resisting arbitration is
a signatory or not.” Merrill Lynch, 337 F.3d at 131; see also Bel-Ray, 181 F.3d
at 444-45.
The Supreme Court’s decision in First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938 (1995), is also consistent with our conclusion. First
Options involved a similar set of facts, although the Court’s opinion focused
on a slightly different question — the threshold issue of whether the parties
had “agree[d] to submit the arbitrability question itself to arbitration.” Id. at
943. In that case, the plaintiff (First Options) had entered into an arbitration
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agreement with a corporate defendant (MKI) and sought to compel MKI’s
owner and his wife (the Kaplans) to arbitrate, even though the Kaplans were
not parties to the arbitration agreement. The arbitration panel ruled that it
had the power to enter an award against the Kaplans despite their
unwillingness to arbitrate. But “the Third Circuit agreed with the Kaplans
that their dispute was not arbitrable,” id. at 941, and the Supreme Court
affirmed, id. at 949.
In summary, both the Texas and federal courts have recognized that in
determining whether a party can be compelled to arbitrate, “it matters
whether the party resisting arbitration is a signatory or not.” Merrill Lynch,
337 F.3d at 131. In this case, the parties resisting arbitration — the
Covingtons, in their individual capacities — are not signatories. Under
ordinary principles of agency law, their positions as Vice-President and
President of Beacon are insufficient to personally bind them to the arbitration
agreement. Aban points to nothing that indicates that the Covingtons
empowered Beacon to bind them individually. Therefore, we conclude that
they are not parties to, or bound by, the arbitration agreement.
Aban argues that the three federal cases relied upon by the district
court demonstrate that agency principles can be applied to “compel
arbitration against unwilling nonsignatories, like the Covingtons.” Appellee’s
Br. 11 (citing Lee v. Chica, 983 F.2d 883 (8th Cir. 1993); Doran v. Bondy, No.
5:04-CV-99, 2005 WL 1907252 (W.D. Mich. Feb. 18, 2008); Creative
Telecomms., Inc. v. Breeden, 120 F. Supp. 2d 1225 (D. Haw. 1999)). In those
cases, the courts held that unwilling nonsignatories were bound by
arbitration agreements because they were agents of corporations that had
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entered into those agreements. However, we find the Lee, Doran, and
Creative Telecommunications opinions unpersuasive because they relied
largely on cases involving signatories resisting arbitration, and failed to
recognize the importance of the distinction between signatories and
nonsignatories in the context of those cases. The district courts in Doran and
Creative Telecommunications also relied on the Eighth Circuit’s decision in
Lee. However, not only is Lee in conflict with the Second and Third Circuits’
decisions in Bel-Ray and Merrill Lynch, but it also appears to have been
impliedly overruled by subsequent caselaw. Lee was decided prior to First
Options, in which the Supreme Court affirmed the Third Circuit’s holding
that a non-signatory defendant, who was the owner of a corporation that had
agreed to arbitrate, was not personally bound by the corporation’s agreement.
More recently, in Nitro Distributing, Inc. v. Alticor, Inc., 453 F.3d 995 (8th
Cir. 2006), the Eighth Circuit has followed the same distinction on which the
Bel-Ray and Merrill Lynch courts relied, explaining that “situations where a
nonsignatory attempts to bind a signatory to an arbitration agreement” are
crucially different from those where “the signatory . . . is attempting to bind
the nonsignatory . . . to the arbitration agreement.” Id. at 999. The Nitro
court accordingly held that the nonsignatory plaintiffs in that case were not
bound by an arbitration agreement they had not signed. Id. Thus, Nitro, and
not Lee, appears to represent the current state of the law in the Eighth
Circuit, and it is in harmony with Bel-Ray and Merrill Lynch and with our
decision in the present case.
Aban also claims that because the arbitration provision in the contract
“provides that ‘all disputes arising hereunder’ shall be submitted to
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arbitration,” the provision was clearly intended to bind Beacon’s agents.
Appellee’s Br. 14. However, the arbitration provision also clearly and
explicitly indicates that it is only applicable to “the parties.” As explained
above, although Guy Covington signed the contract, he did so on behalf of
Beacon, not in his personal capacity. The Federal Arbitration Act “‘does not
require parties to arbitrate when they have not agreed to do so . . . .’” Will-
Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 217 (5th Cir. 2003) (quoting
EEOC v. Waffle House, Inc., 534 U.S. 279, 293 (2002)). Because no one has
alleged that Beacon had the authority to bind the Covingtons individually
and neither Covington signed the contract in his individual capacity, they
cannot have been parties to the contract. Consequently, the Covingtons are
not bound by the arbitration provision.
III.
For the foregoing reasons, the judgment of the district court is
REVERSED. The case is REMANDED to the district court for further
proceedings consistent with this opinion.
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