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Fencourt Reinsurance Co. v. ITT Industries, Inc.

Issue Discussed: Arbitrability/Scope of Arbitration

Submitted by Patricia St. Peter, Jennifer M. Geelan

Date Promulgated: June 20, 2008

Issue Decided: Enforcement of mandatory arbitration clauses against nonsignatories

The Eastern District of Pennsylvania has held that a nonsignatory reinsurer was subject to a mandatory arbitration clause under common law agency principles governing relationships between corporations and wholly owned subsidiaries and the doctrines of equitable estoppel and third-party beneficiaries. In Fencourt Reinsurance Co. v. ITT Industries, Inc., the reinsurer, Fencourt Reinsurance Co. (“Fencourt”), filed a complaint for breach of contract, unjust enrichment, promissory estoppel, and breach of the duty of good faith, claiming that the defendant, ITT Industries, Inc. (“ITTI”), breached an agreement to indemnify Fencourt for its reinsurance obligations totaling approximately $85.5 million. ITTI moved to dismiss the plaintiff reinsurer’s complaint, arguing that the dispute was subject to a mandatory arbitration clause, or, in the alternative, that the case should be stayed pending arbitration.

While defendant ITTI maintained that a mandatory arbitration clause in an agreement governing the relationship between the parties controlled, plaintiff Fencourt argued that because it was not a signatory to that agreement, it could not be forced to arbitrate and, thus, should be allowed to proceed with its claim in court. The Eastern District of Pennsylvania agreed with the defendant, holding that Fencourt was subject to the agreement’s mandatory arbitration clause. It ordered a stay pending the resolution of the arbitration proceedings between the parties.

Background

Prior to 1995, Fencourt was a wholly owned subsidiary of ITT Corp. and while a wholly owned subsidiary of ITT Corp., Fencourt was required to provide reinsurance to ITT Corp.’s insurance company Century Indemnity Company (“Century”) under a domestic casualty program. Fencourt alleged that ITT Corp. promised to indemnify and hold Fencourt harmless for any net loss which Fencourt incurred in reinsuring Century under the program.

After 1995, ITT Corp. split into three unaffiliated public companies, and Fencourt became a wholly owned subsidiary of one of those public companies, ITT Hartford. In December 2004, Century made a claim for $85.5 million in reinsurance from Fencourt, and, according to Fencourt, the claim fell within the scope of the domestic casualty program. Fencourt argued that ITTI, another public company created by the ITT Corp. split, succeeded to ITT Corp.’s obligations under the domestic casualty program and asked ITTI to reimburse the losses incurred in paying Century’s claim. ITTI refused to do so. When ITT Corp. split in 1995, it was accomplished through a distribution agreement (“DA”) that contained a broad arbitration clause requiring mandatory arbitration for any dispute “arising out of, or in any way related to” the DA. ITTI commenced arbitration against Fencourt and ITT Hartford under the DA’s arbitration clause, seeking a declaration that ITTI was not responsible for Century’s demand. When Fencourt filed suit, ITTI filed a motion to dismiss, arguing that the dispute was subject to a mandatory arbitration clause or, alternatively, that the case should be stayed pending arbitration.

Parties’ Contentions Regarding Application of the Mandatory Arbitration Clause

ITTI argued that Fencourt was required to arbitrate the dispute under the DA’s mandatory arbitration clause. ITTI reasoned that because the DA superseded all previous agreements between the parties, Fencourt was suing under the DA and, therefore, was subject to the DA’s mandatory arbitration clause. Fencourt argued that the DA’s arbitration clause was irrelevant as it was suing under the indemnification agreement and not the DA. Fencourt also argued that the DA was not binding on it since Fencourt had not signed it. In response, ITTI contended that the fact that Fencourt did not sign the agreement was irrelevant since Fencourt was a third-party beneficiary under the DA. ITT Hartford and its affiliates were indemnified under the DA’s indemnification provision. As Fencourt was an affiliate of ITT Hartford, it was, thus, a third-party beneficiary under the DA. ITTI further argued that Fencourt was estopped from arguing that the DA’s arbitration clause was inapplicable, because Fencourt had accepted promissory notes in connection with the DA. Finally, ITTI argued that Fencourt relied on the DA to establish that ITTI succeeded to ITT Corp.’s obligations, further estopping Fencourt from contending that the DA’s arbitration provision was inapplicable.

Court’s Decision

The Eastern District of Pennsylvania agreed with ITTI that Fencourt was subject to the mandatory arbitration clause in the DA, and ordered a stay of the case pending completion of the arbitration. The court held that the specific language of the DA made it clear that Fencourt was bound by the DA as a wholly owned subsidiary of ITT Corp. prior to 1995, and of ITT Hartford thereafter. Accordingly, the DA’s arbitration clause covered the dispute between Fencourt and ITTI. The court concluded that the fact that Fencourt did not sign the DA was irrelevant. Under agency theory, a nonsignatory can be compelled to arbitrate. The court held that ITT Corp., as Fencourt’s parent prior to the execution of the DA, and ITT Hartford, as Fencourt’s parent after the execution of the DA, could bind Fencourt to the terms of the DA and did so. The court further found that Fencourt was required to arbitrate based upon the doctrine of equitable estoppel. The court noted that it is a basic premise of equitable estoppel that a party may not argue that provisions of an agreement do not apply after invoking other provisions of that same agreement. In other words, a nonsignatory may not “embrace” a contract for some purposes, and later disclaim other terms of the same contract. As Fencourt had relied on the DA and had benefited from the agreement as well, the court held that it was estopped from arguing that the DA’s arbitration clause did not apply. The court’s final reason for holding that Fencourt was subject to the mandatory arbitration clause in the DA was Fencourt’s status as a third-party beneficiary of that agreement. Under the third-party beneficiary doctrine, a nonsignatory of an agreement may be bound by the agreement’s arbitration clause where its claim arises out of the agreement under which it was intended to be a third-party beneficiary. The court held that the terms of the DA demonstrate that Fencourt was a third-party beneficiary of the DA and that Fencourt’s claim against ITTI arose out of its status as a third-party beneficiary of the agreement.

* Patricia St. Peter is a partner at Zelle Hofmann Voelbel & Mason. She concentrates her practice in the areas of complex insurance coverage, reinsurance coverage and bad faith litigation throughout the United States. Pat has served as lead counsel in the prosecution and defense of matters brought in state and federal courts in over 30 jurisdictions and has handled matters involving the September 11 terrorist attack on the World Trade Center, catastrophic hurricane losses, environmental and long-term exposure to harmful substances, asbestos, mold, construction defects, Y2K (first party), advertising injury, professional liability, and technology. Jennifer Geelan is an associate at the firm.