In Jensen v. U-Haul Co. of California, decided in December 2017 by California’s Fourth Appellate District Court of Appeal, the Court outlined six ways by which a litigant may be bound by an arbitration agreement even if the litigant did not sign. These are:
- Incorporation by reference;
- Assumption;
- Agency;
- Veil-piercing or alter ego;
- Estoppel; and
- Third-party beneficiary.
Incorporation by reference is self explanatory. If any agreement of the litigant incorporates by reference the terms of another agreement with a binding arbitration provision the litigant can be bound by the arbitration provision even though the litigant did not sign the arbitration agreement.
Similarly, if the litigant assumed an agreement that contained a binding arbitration provision, the litigant steps into the shoes of the person or entity that did sign the arbitration provision. Consequently, that litigant would be bound by the arbitration provision.
An agent can bind its principal to a binding arbitration agreement even if the principal did not sign the agreement, provided the agent had the apparent or express authority to bind its principal.
An entity that is determined to be the alter ego of a party that signed a binding arbitration agreement may be bound by a binding arbitration agreement signed by the party. This is also because, as a matter of law, the Court will require the alter ego step into the shoes of the party that signed the binding arbitration agreement.
If a party takes a position that it is bound by a binding arbitration agreement, even though that party did not sign the agreement, the party will be stopped from arguing that it is not bound by the binding arbitration agreement.
Finally, a third-party beneficiary may enforce a contract if it is expressly made for the third-party beneficiary’s benefit. Whether a party that did not sign the arbitration agreement is a third-party beneficiary bound by the arbitration agreement turns on whether there was an intent to benefit the third-party.
In Jensen the Court determined that the plaintiff who was injured when a tire blew on a U-Haul truck that was rented by the plaintiff’s employer, was not bound by the binding arbitration agreement in the rental agreement and, thus, could not be compelled to arbitrate its claims against U-Haul.
Before you sign an agreement, assume a written obligation, give an agent authority to bind you, act as a conduit for another company, take a position on being subject to binding arbitration or seek to enforce a contract you did not sign but from which you may derive a benefit, talk to a lawyer.
The forum in which you will litigate and your rights to a jury trial and appeal may depend on the advice you receive.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
