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This case decides as a matter of first
impression in Massachusetts that a party may not enforce
an arbitration provision in an agreement it never
executed by invoking equitable estoppel. Judge Gants
applies a simple adage: you can’t have your cake and eat
it too.
The arbitration provision was part of a
tax shelter agreement executed by Vassalluzzo and Ernst
& Young. Sidley Austin LLP provided legal advice in
connection with the tax shelter transactions, but was
not a signatory to the agreement. Nevertheless, when
Vassalluzzo sued the law firm for negligence and other
claims arising from the transactions, Sidley Austin
invoked the agreement and sought to enforce its
arbitration provisions. The firm acknowledged that it
had not signed any arbitration agreement with
Vassalluzzo, and could not be compelled to arbitrate any
disputes under the agreement. Nevertheless, the law firm
contended that it could compel Vassalluzzo to arbitrate
under the doctrine of equitable estoppel.
The court noted that although no
Massachusetts court had addressed this issue, a
surprising number of federal courts have. Under the
so-called broad approach, a non-signatory to an
arbitration agreement may compel a signatory to
arbitrate “where a careful review of the relationship
among the parties, the contracts they signed … and the
issues that had arisen among them discloses that the
issues the non-signatory is seeking to resolve in
arbitration are intertwined with the agreement that the
estopped party has signed.” Id. at *3. By
contrast, under the so-called narrow approach, “the
essential question is whether plaintiffs would have |
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an independent right to recover against
the non-signatory defendants even if the contract
containing the arbitration clause were void. The
plaintiff’s actual dependence on the underlying contract
in making out the claim against the nonsignatory
defendant is therefore always the sine qua non of an
appropriate situation for applying equitable estoppel.”
Id.
Judge Gants expressed confidence that
Massachusetts courts will adopt the narrow approach to
equitable estoppel, because this approach “is focused
precisely on preventing a litigant from contending that
a non-party has obligations to him under an agreement
that contains an arbitration provision and, at the same
time, contending that the litigant is not thereby
limited to arbitration to enforce these contractual
obligations against the non-party.” Id. at *4. If
courts were to adopt the broad approach, then “the only
one who would be having its cake and eating it too would
be Sidley Austin, which contends that it has the right
to require Vassalluzzo to resolve their dispute through
arbitration when it wishes to do so … but insists that
Vassalluzzo could not require Sidley Austin to resolve
their dispute through arbitration precisely because
Sidley Austin never agreed to arbitration.” Id.
While such a result might serve the interests of
judicial efficiency, it would not serve the interests of
equity. “There is nothing equitable about requiring a
client, without the client’s informed consent, to waive
his right to a jury trial and his access to the judicial
system when he prosecutes a malpractice claim against
his attorney.” Id. at *5.
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