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MASEFIELD AG v. COLONIAL OIL INDUSTRIES

April 18, 2005.

MASEFIELD AG and MASEFIELD LTD., Plaintiffs,
v.
COLONIAL OIL INDUSTRIES, INC., Defendant.



The opinion of the court was delivered by: PETER LEISURE, District Judge

OPINION AND ORDER

In this action, plaintiffs, Masefield AG and Masefield Ltd., seek injunctive relief enjoining defendant from pursuing arbitration against them before the International Chamber of Commerce ("ICC"). Plaintiffs also request judgment declaring that they have no agreement to arbitrate with defendant and are not bound to arbitrate with defendant. Plaintiffs now petition the Court for a preliminary injunction barring defendant from arguing before the three-member Arbitration Tribunal (the "Tribunal"), to be formed by the ICC, that the Tribunal has the power to determine whether plaintiffs must arbitrate defendant's demands. After filing their written submissions, the parties appeared before the Court for oral argument on April 12, 2005. For the reasons that follow, plaintiffs' request for a preliminary injunction is GRANTED.

  BACKGROUND

  According to the complaint, on September 23, 2003, defendant, a large independent oil distributor, entered into a purchase agreement (the "Contract") with Masefield America ("MA"), a company affiliated with plaintiffs. (See Complaint ("Compl.") ¶ 13.) The Contract provided that MA would sell approximately 50,000 tons of fuel oil to defendant each month of the one-year period beginning November 1, 2003 through October 31, 2004. (Id.) The Contract also contained an arbitration provision, which stated in pertinent part:
Unless otherwise agreed between the parties in writing any disputes between them shall be resolved by Arbitration in City of New York, United States of America, under the rules of Conciliation and Arbitration of the International Chamber of Commerce, each party appointing its own Arbitrator with a third being appointed by the two so chosen.
(Id. ¶ 14.) On October 29, 2004, defendant filed a demand for arbitration (the "Arbitration Demand") with the ICC, alleging that MA, along with plaintiffs, defaulted on the Contract by failing to deliver fuel oil during the months of September and October 2004. (Id. ¶ 13.) Defendant claimed that this breach caused it to sustain damages of $3,644,520. (Id.)

  Plaintiffs' action was triggered by defendant's decision to name plaintiffs, along with MA, as parties in the Arbitration Demand, even though plaintiffs are not signatories to the Contract. (Id. ¶ 2.) The complaint states that, though affiliated with plaintiffs, MA is a separate and independent company, and neither Masefield AG nor Masefield Ltd. is a parent or a subsidiary of MA.*fn1 (Id. ¶ 3.) Thus, while MA filed a response to the Arbitration Demand, denying that it breached the Contract, (id. ¶ 13), plaintiffs, in several submissions to the ICC, argued that they were not parties to any arbitration agreement with defendant, should not be included as respondents in this arbitration, and are not subject to ICC jurisdiction, (id. ¶ 17).

  On January 31, 2005, the ICC informed plaintiffs that it was referring the threshold issue of arbitrability to the Tribunal. (Id. ¶ 18.) As a result, plaintiffs filed the instant action on February 17, 2005, seeking (1) injunctive relief barring defendant from pursuing any arbitration against them, and (2) a declaratory judgment that they have no agreement to arbitrate with defendant and are not bound to arbitrate with defendant. On March 8, 2005, the Court endorsed plaintiffs' application for an order to show cause why the preliminary injunction and the declaratory judgment should not be granted, and, as noted above, the parties appeared before the Court for oral argument on April 12, 2005. DISCUSSION

  I. Arbitrability To Be Determined by the Court

  As a preliminary matter, the parties dispute whether the Court or the Tribunal should decide whether plaintiffs have agreed to arbitrate with defendant. Both sides primarily rely upon First Options of Chicago, Inc. v. Kaplan, wherein the Supreme Court ruled that "[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is `clea[r] and unmistakabl[e]' evidence that they did so." 514 U.S. 938, 944 (1995) (quoting At&T Tech., Inc. v. Communications Workers, 475 U.S. 643, 651 (1986)); see also Abram Landau Real Estate v. Benova, 123 F.3d 69, 72 (2d Cir. 1997) ("When parties disagree about whether they ever entered into an arbitration agreement, a court decides that issue, absent a clear and unmistakable delegation of that authority to an arbitrator.") (citations omitted). Plaintiffs argue that the Court should decide this issue because they have not entered into any contract with defendant containing an arbitration provision, much less demonstrated any intention to give the Tribunal the power to determine whether they agreed to arbitrate with defendant. (See Plaintiffs' Memorandum Of Law In Support Of Their Application For An Order To Show Cause Why This Court Should Not Prohibit Colonial Oil Industries, Inc. From Asserting Its Right To Arbitrate Against Plaintiffs ("Pls. Mem.") at 5.) Defendant, on the other hand, contends that the Tribunal, not the Court, should determine the issue of arbitrability because the Contract's broad arbitration provision constitutes "clear and unmistakable evidence" of the parties' intentions to refer this decision to the arbitrators. (See Defendant's Response to Order to Show Cause ("Def. Mem.") at 3.)

  In First Options, the Supreme Court directs lower courts to apply "ordinary state-law principles that govern the formation of contracts" when determining whether the parties agreed to arbitrate a particular issue, including arbitrability. See First Options, 514 U.S. at 944 (citations omitted). Under New York law, which applies here pursuant to paragraph 19 of the Contract, it is axiomatic that the formation of a contract requires 1) offer, 2) acceptance, and 3) consideration. See Deutsche Asset Mgmt. v. Callaghan, No. 01 Civ. 4426, 2004 U.S. Dist. LEXIS 5945, *47 (S.D.N.Y. Apr. 7, 2004) (Motley, J.) (citations omitted). Moreover, the intent of the parties assumes "central importance" when determining whether a contract was formed. Id. (citations omitted).

  Here, defendant simply presumes that plaintiffs are parties to the Contract before arguing that the broad arbitration provision contained within it manifests plaintiffs' intent to submit the issue of arbitrability to the Tribunal. Defendant has not attempted to explain why the Contract agreed to by MA and defendant should be considered probative of plaintiffs' intent to agree with defendant. Furthermore, defendant does not challenge plaintiffs' assertion that they played no role in negotiating the terms of the Contract with defendant. (See Declaration of Kenhardt Scheepers ("Scheepers Decl."), dated March 1, 2005, ¶¶ 5-6.) Thus, on the present record, the Court is unwilling to interpret the Contract as anything more than a manifestation of the intentions of MA and defendant, and rejects defendant's contention that the arbitration provision clearly and unmistakably reveals plaintiffs' desire to arbitrate arbitrability with defendant. Because defendant relies solely on the breadth of the Contract's arbitration provision*fn2 and does not direct the Court to any clear and unmistakable evidence that plaintiffs agreed with defendant on any issue, much less the issue of arbitration, the Court will decide whether plaintiffs are bound to arbitrate with defendant. See First Options, 514 U.S. at 944. II. The Arbitration Provision May Not Be Enforced Against Plaintiffs

  As this Court has stated in the past, "[i]t is fundamental that arbitration agreements are creatures of contract law." Scher v. Bear Stearns & Co., 723 F. Supp. 211, 214 (S.D.N.Y. 1989) (Leisure, J.) (citation omitted). Thus, "`a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit.'" Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995) (quoting United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960)). "Absent an express agreement to arbitrate, [the Second Circuit] has recognized only `limited theories upon which [it] is willing to enforce an arbitration agreement against a non-signatory.'" Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 129 (2d Cir. 2003) (quoting Thomson, 64 F.3d at 780). The five recognized theories are: "1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel." Id. at 129 (quoting Thomson, 64 F.3d at 776). Defendant maintains that three of the five theories apply to plaintiffs in this case. Specifically, defendant asserts that plaintiffs are bound to arbitrate, even though they are not signatories to the Contract, because (1) plaintiffs' participation in the performance of the Contract amounts to estoppel; (2) plaintiffs were MA's agents; and (3) MA is no more than plaintiffs' alter ego. (See Def. Mem. at 5.) The Court will address each argument in seriatim.

  A. Estoppel

  Guided by ordinary principles of contract and agency, the Second Circuit has reasoned that a non-signatory may be bound by an agreement containing an arbitration provision where the non-signatory knowingly exploited and accepted the benefits of an agreement.*fn3 See MAG Portfolio, 268 F.3d at 61 (quoting Thomson, 64 F.3d at 778, and citing Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1064 (2d Cir. 1993)). The Circuit has emphasized that "[t]he benefits must be direct — which is to say, flowing directly from the agreement." Id. (citing Thomson, 64 F.3d at 779). In Am. Bureau of Shipping v. Tencara Shipyard, S.P.A., 170 F.3d 349, 353 (2d Cir. 1999), for example, non-signatory owners of a vessel were found to directly benefit from an agreement containing an arbitration provision between a shipyard and a classification society, where the classification of the vessel enabled the owners to secure insurance at lower rates and sail the vessel under a certain country's flag. Similarly, a non-signatory to an agreement, which governed the use of a trade name and contained an arbitration clause, was estopped from arguing that it was not bound to arbitrate after it had received a copy of the agreement, did not object to it when given the opportunity to do so, and utilized the trade name pursuant to the terms of the agreement. See Deloitte, 9 F.3d at 1064.

  Conversely, where "the agreement [is] not the direct source of the benefit," a non-signatory is not bound to arbitrate. Thomson, 64 F.3d at 778-79. In Thomson, two companies entered into an exclusive trade agreement. Id. at 775. Subsequently, a third party competitor acquired one of the companies in an apparent attempt to force the remaining company out of the market. Id. The unacquired signatory was now bound to trade only with a company that was a subsidiary of its competitor and the level of trading declined. Id. The Court ruled that the non-signatory was not subject to arbitration because the benefit derived by the non-signatory flowed from its acquisition of one of the signatories, not directly from the agreement itself. Id. at 779. Defendant contends that Masefield AG is estopped from avoiding arbitration because its receipt of all of the proceeds from the eight cargoes of fuel oil purchased by defendant constituted a direct benefit flowing from the Contract. (See Def. Mem. at 5.) Plaintiffs concede that Masefield AG assisted MA in directing defendant to make its payments under the Contract directly to Masefield AG for a debt owed by MA to Masefield AG. (See Scheepers Decl. ¶ 9). However, plaintiffs argue, inter alia, that the proceeds are an indirect benefit, and therefore insufficient for ...


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