Arbitration is a fundamental component of modern construction contracting. Many in the industry recognize the potential benefits and protections arbitration can provide to the business in the event of a dispute. But an important question many contracts do not address is: who does the arbitration agreement cover? Does it include the business entity only, or the individuals acting on behalf of the entity?
As courts have long recognized, entities can generally only act through their employees, representatives, or agents.[1] This article discusses the circumstances in which an agent may rely on an arbitration provision entered by its employer. This is known as the agency doctrine.
As a general rule, arbitration is a creature of contract—a party cannot be compelled to arbitrate a dispute unless they have expressly consented to do so.[2] However, in certain circumstances a party that hasn’t signed an agreement (a non-signatory) may still seek the benefits and protections of that agreement. While there are multiple scenarios in which this may occur, this article focuses only on the “agency doctrine.”
Under this doctrine, a non-signatory “agent” of an entity—such as an employee with agency authority, officer, or representative—may assert the protections of a contract signed by that entity.[3] This can include, in some circumstances, the contract’s arbitration provision.
Although not an exhaustive legal guide, this article highlights practical ways owners, general contractors, and subcontractors can account for the agency doctrine in both contract drafting and dispute resolution.
Non-Signatory Enforcement: A Brief Background
Modern construction projects are built on layers of interconnected contracts and relationships. When a lawsuit is filed, how (and who) a plaintiff chooses to sue can create complex issues related to arbitration provisions. For example, what happens when a plaintiff sues a company’s officers or employees instead of the company itself?
Because a business entity can only act through its employees and representatives, there are scenarios in which many courts permit agents who did not sign a contract to nonetheless invoke its benefits and protections. Importantly, state law governs whether a non-signatory can enforce a contract’s arbitration provision. The United States Supreme Court has held that traditional state law contract principles can extend contractual rights and obligations, like arbitration agreements, beyond just the signing parties.[4]
This means that non-signatory enforcement can vary significantly from state to state.
The Agency Doctrine
The agency doctrine enables agents of an entity to enforce contract provisions against a party that asserts contract-related claims against the agents. Consider this scenario: A dispute arises between a general contractor and a subcontractor, who are both bound by an arbitration agreement. Hoping to avoid arbitration, the general contractor sues some of the subcontractor’s key employees individually as an attempted workaround because these individuals did not sign the contract with the arbitration agreement. In many jurisdictions—assuming the general contractor’s claims are based on the contract—the subcontractor’s employees may use the agency doctrine to compel arbitration.
A 2014 case from the First Circuit Court of Appeals illustrates agency principles in action. In Grand Wireless, Inc. v. Verizon Wireless, Inc., Grand sued Verizon and one of Verizon’s employees for unfair and deceptive trade practices. The court compelled Grand to arbitrate its claims against the employee, even though the employee had not signed the contract between the two entities. This was because the contract contained a broad arbitration clause and Grand’s claims against the employee “relate[d] solely to her performance as an employee” of Verizon.[5]
Both the Grand Wireless case and the example scenario above are emblematic of the purpose underlying the agency doctrine: ensuring arbitration means something. Because business entities can only act through their agents, allowing a party to avoid arbitration by simply suing the agents acting on an entity’s behalf would render arbitration agreements effectively meaningless.[6] As one court put it, the agency doctrine is necessary “to prevent the plaintiff from circumventing the arbitration agreement” through hyper-legal maneuvering.[7]
Limitations
While the agency doctrine is recognized in many jurisdictions, it is critical to remember that agency principles (and other non-signatory enforcement mechanisms) are rooted in state contract law. This means obtaining counsel familiar with these issues in your jurisdiction is essential.
Further, most courts are hesitant to override the clear intent of the contracting parties. Thus, if an arbitration provision contains unambiguous language that specifically excludes agents from its coverage, a court is likely to enforce this language.
Finally, applying agency principles is not always straightforward, it is often a fact-intensive exercise. When considering whether a non-signatory can assert the protection of an arbitration agreement, courts may consider factors such as: (1) the scope of the agreement; (2) the nature of the relationship between the contracting parties; and (3) the extent to which the individual sued was truly acting as an “agent” of the entity.[8]
Practical Drafting Considerations
Careful drafting at the outset can help prevent costly disputes later. When a dispute arises, parties should not have to rely on creative legal arguments to overcome unclear contract language. Clear contract language reduces uncertainty and leaves less room for courts or arbitrators to be the ones determining the parties’ intent.
When drafting arbitration provisions, parties should consider the following issues:
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Expressly Define Who Is Covered
In deciding a contract dispute, courts generally begin with the contract’s plain language. This includes whether the parties intended certain rights and obligations to extend to non-signatories. Using clear, unambiguous language that specifically includes or excludes agents from an arbitration provision will reduce fights over whether a dispute is subject to arbitration. Expressly noting that a provision encompasses “subsidiaries, affiliates, agents, [and] employees…” strengthens the agent’s argument when seeking to rely on the arbitration agreement.[9]
Parties should also assess whether the overall structure of their agreements supports their intended dispute-resolution scope. For example, if a prime contract’s arbitration provision encompasses agents but a subcontract does not, this inconsistency can create openings for (or barriers to) non-signatory enforcement based on agency principles.
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Alight Contract Language with Actual Agency Relationships
Because the agency doctrine only encompasses actions taken in an official or representative capacity, parties should ensure their contract language reflects actual project responsibilities. For example, if a construction manager regularly acts on behalf of a contracting entity, that role can be expressly defined in the agreement. Unclear responsibilities or inconsistent conduct can weaken the argument that an individual was acting as an “agent” and is entitled to invoke a contract’s protections.
Conclusion
Arbitration provisions do not exist in a vacuum. In the construction industry, where projects are achieved through the combined efforts of executives, financial officers, project managers, engineers, and many others, limiting the protections of an arbitration agreement is often impractical. The agency doctrine recognizes this reality and plays a critical role in preserving the integrity of dispute resolution in construction contracting. And understanding how your jurisdiction applies the agency doctrine is important when drafting arbitration agreements.
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The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.
[1] Altobelli v. Hartmann, 499 Mich. 284, 296 (2016).
[2] United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960).
[3] Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, 7 F.3d 1110, 1121–22 (3d Cir. 1993).
[4] Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631 (2009).
[5] Grand Wireless, Inc. v. Verizon Wireless, Inc., 748 F.3d 1, 3–5, 9–13 (1st Cir. 2014).
[6] Id. at 11.
[7] Mayer v. Soik, 2021 Wisc. App. LEXIS 363, at *16 (Wis. Ct. App. 2021).
[8] Id. at *17.
[9] Mey v. DIRECTV, LLC, 971 F.3d 284, 287 (4th Cir. 2020).