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THE DIRECT BENEFITS THEORY OF ESTOPPEL WAS NOT APPLICABLE TO PLAINTIFF, A NONSIGNATORY TO THE AGREEMENT WITH THE ARBITRATION CLAUSE; THE PLAINTIFF, THERFORE, COULD NOT BE COMPELLED TO ARBITRATE (FIRST DEPT).

The First Department, reversing Supreme Court, determined a nonsignatory, the plaintiff Rosh, Inc., could not be compelled to arbitrate pursuant to the direct benefits theory of estoppel:

The court should have denied the motion to compel arbitration of Rosh’s claims because Rosh is a nonsignatory to the agreement that contains the arbitration clause and defendants failed to show that the direct benefits theory of estoppel applies …  Under that theory, a nonsignatory may be compelled to arbitrate where it “knowingly exploits the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement” … .

Here, the arbitration clause was contained in a partnership agreement. However, Rosh was not a party to that agreement nor a partner in the partnership. Rather, Rosh was a ten percent owner in a limited liability company that was the general partner of the partnership. This did not constitute a direct benefit to Rosh from the partnership agreement … .

Moreover, before Rosh could be compelled to arbitrate, it had to invoke or attempt to enforce the terms of the partnership agreement … . To the contrary, all of Rosh’s claims were asserted under the operating agreement of the limited liability company or based on its status as a member of that company. Gilat v Sutton, 2023 NY Slip Op 05363, First Dept 10-24-23

Practice Point: Plaintiff was a nonsignatory to the agreement with the arbitration clause. Because plaintiff did not directly benefit from or exploit the agreement, plaintiff could not be compelled to arbitrate pursuant to the direct benefits theory of estoppel.

 

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