Originally from Dispute Resolution Journal

INTERNATIONAL

Obligation of Nonsignatory

The New York Appellate Division reversed a trial court decision compelling arbitration of claims by a nonsignatory against a signatory to an agreement containing an arbitration clause.

The dispute arose out of a complex transaction involving several offshore entities owned by the same French businessman. World Business Center (WBC) leased several unfinished floors in a Manhattan hotel pursuant to a 30-year lease commencing June 1, 1998. The lease was governed by New York law and provided that if WBC exercised its right to buy the leased premises and there was a disagreement about the purchase price, that dispute would be arbitrated in New York.

The parties agreed to sell the hotel for $40 million less liabilities. It was structured as a sale of stock in Euro-American Lodging, the owner of the hotel, and Macson, the hotel franchisor. At the closing, $5.6 million was withheld from the seller for additional liabilities to be determined after closing. As part of the transaction, the lease was amended to provide that its cancellation or continuance was contingent upon Euro-American’s payment by Oct. 15, 2001, of funds withheld at closing to the seller’s attorney’s trust account. The lease amendment was subject to New York law and the jurisdiction of the New York courts.

All nine documents signed at closing, except the lease amendment, provided that they were subject to French law and the Paris Commercial Court. WBC signed only the lease amendment and two assignments of credits from the sellers to WBC. Two stock sale documents provided for mediation in New York, or failing that, litigation in the Paris Commercial Court. Each provided, “The clause concerning the determination of the guaranteed liabilities only is an express waiver of the main clause of the contract which grants jurisdiction to the Court of Commerce in Paris.”

When Euro-American allegedly failed to timely pay the $5.6 million to the seller’s trust account, WBC was refused possession of the leased premises. WBC sued, seeking specific performance of the lease amendment and damages. Euro-American cross-moved to dismiss and compel arbitration. The trial court issued an order compelling arbitration after finding that the lease amendment was a security device to insure Euro-Lodging’s payment of $5.6 million. It found that the closing documents as a whole constituted a valid agreement to arbitrate. The court said that since WBC and Euro-American had agreed to submit some disputes to arbitration, “it would be reasonable and within the essence of the agreements” to proceed to arbitration.”