law-arbitration-direct-benefits-equitable-estoppel Texas Supreme Court Arbitration Jurisprudence | FAA | TAA
enforcing arbitration clauses against nonsignatories | motion to compel arbitration against nonparties to the
contract containing arbitration provision | |
DIRECT BENEFITS EQUITABLE ESTOPPEL
Direct benefits estoppel is a type of equitable estoppel first applied in the arbitration context by federal courts
and subsequently adopted by our state courts. See In re Kellogg Brown & Root, Inc., 166 S.W.3d at 739. (citing
Bridas S.A.P.I.C. v. Gov't of Turkm., 345 F.3d 347, 361-62 (5th Cir. 2003)). Under direct benefits estoppel, a
nonsignatory plaintiff seeking the benefits of a contract is estopped from simultaneously attempting to avoid the
contract's burdens, such as the obligation to arbitrate disputes. See In re Kellogg Brown & Root, Inc., 166 S.W.
3d at 739. The doctrine recognizes that a party may be estopped from asserting that the lack of his signature
precludes enforcement of the contract's arbitration clause when he has consistently maintained that other
provisions of the same contract should be enforced to benefit him. See Southwest Texas Pathology Assoc.,LLP
v. Roosth, 27 S.W.3d 204, 207 (Tex. App.-San Antonio 2000, pet. dism'd). Thus, a non-signatory plaintiff may
be compelled to arbitrate "if it seeks through the claim, to derive a direct benefit from the contract containing
the arbitration provision."Weekley, 180 S.W.3d at 131. In certain circumstances, a non-signatory may also be
compelled to arbitrate if it deliberately seeks and obtains substantial benefits from the contract outside the
context of its claim. See id. at 132. Carr's argument is premised on both applications of direct benefits estoppel.
Although the breach of contract claim has been nonsuited [in this case - In Re Morgan Stanley Co Tex. 2009],
the doctrine of direct benefits equitable estoppel may apply to compel the arbitration of other claims. A person
who has not agreed to arbitrate may nevertheless be compelled to do so when the person “seeks, through the
claim, to derive a direct benefit from the contract containing the arbitration provision.” In re Kellogg Brown &
Root, Inc., 166 S.W.3d 732, 741 (Tex. 2005); see also In re Weekley Homes, L.P., 180 S.W.3d 127, 131 (Tex.
2005). Equitable estoppel is inapplicable, however, when the benefit is merely indirect; that is, when the
substance of the claim arises from general obligations imposed by state law, including statutes, torts and other
common law duties, or federal law. In re Kellogg Brown & Root, 166 S.W.3d at 740-41; see, e.g., R.J. Griffin &
Co. v. Beach Club II Homeowners Ass’n, 384 F.3d 157, 162, 164 (4th Cir. 2004) (refusing signatory’s request to
apply equitable estoppel and compel arbitration against another signatory; the legal duties the signatory builder
allegedly violated did not depend on the terms of the contract but arose from the common law and statute and
thus signatory resisting arbitration was not seeking a direct benefit of the contract); Intergen N.V. v. Grina, 344
F.3d 134, 140, 145 (1st Cir. 2003) (refusing signatory’s request to apply equitable estoppel to compel
nonsignatory to arbitration because nonsignatory had relied upon misleading and inaccurate extra-contractual
assurances and sustained losses; nonsignatory alleged state-law causes of action apart from the contract,
including intentional deceit, negligent deceit, unfair trade practices, promissory estoppel, tortious interference
with advantageous relations, and quantum meruit); Westmoreland v. Sadoux, 299 F.3d 462, 467 (5th Cir. 2002)
(refusing nonsignatory’s request to apply equitable estoppel to compel signatory to arbitration where that
signatory’s suit did not rely upon the terms of its shareholder agreement or seek to enforce any duty created by
the agreement); see also Mohamed v. Auto Nation USA Corp., 89 S.W.3d 830, 837 (Tex. App.—Houston [1st
Dist.] 2002, no pet.)(refusing nonsignatory’s request to apply equitable estoppel and compel arbitration where
suit against nonsignatory did not rely on employment contract to assert claims for race discrimination,
intentional infliction of emotional distress, or negligent hiring, supervision, and retention); cf. Fridl v. Cook, 908
S.W.2d 507, 513 (Tex. App.—El Paso 1995, writ dism’d w.o.j.) (refusing to compel arbitration where signatory
party resisting arbitration had alleged independent fraud claim). SOURCE: Footnote 2 of majority opinion in: In
re Morgan Stanley & Co, Inc. No. 07-0665 (Tex. Jul. 3, 2009)(Medina) (arbitration vs. litigation: legal capacity of
party to arbitration agreement, who decides the issue? Court or arbitrator?)
IN RE MORGAN STANLEY & CO. INC., SUCCESSOR TO MORGAN STANLEY DW, INC.; from Dallas County;
5th district (05-07-00590-CV, ___ SW3d ___, 07-17-07 Opinion by the Dallas CoA)
The petition for writ of mandamus is denied.
Justice Medina delivered the opinion of the Court [pdf], in which Chief Justice Jefferson, Justice Wainwright,
Justice Green, Justice Johnson, and Justice Willett joined.
Justice Brister delivered a concurring opinion.
Justice Willett delivered a concurring opinion.
Justice Hecht delivered a dissenting opinion.
(Justice O'Neill not sitting)
JUSTICE BRISTER ADVISES RELIANCE ON DIRECT BENEFITS ESTOPPEL TO MAKE ARBITRATION
CLAUSE ENFORCEABLE AGAINST CUSTOMER ALLEGING LEGAL INCAPACITY AS A DEFENSE
A person “cannot both have his contract and defeat it too.”Even those who had nothing to do with
an arbitration agreement are bound by it if they seek to gain the benefits of the larger contract in which it is
contained. Accordingly, it is irrelevant whether Helen Taylor was mentally incompetent; even if she was, she is
still bound to arbitrate because her legal guardian’s suit depends entirely on account agreements that contain
Every claim Taylor asserts against Morgan Stanley (breach of fiduciary duty, negligence, malpractice, and
violations of securities law) has no basis unless Morgan Stanley was her broker. Every legal duty Morgan
Stanley owed Taylor arises from the account agreements. Because Taylor’s guardian insists that Morgan
Stanley violated duties it owed her as a client, he cannot “turn [his] back on the portions of the contract, such
as an arbitration clause, that [he] finds distasteful.”3
Justice Brister delivered a concurring opinion (suggesting direct benefits estoppel as an alternative theory to
enforce arbitration clause in the underlying agreement that may otherwise be unenforceable) In re Morgan
Stanley & Co, Inc. No. 07-0665 (Tex. Jul. 3, 2009)(Medina) (arbitration vs. litigation: legal capacity of party to
arbitration agreement, who decides the issue?)
tried to compel arbitration based on a direct benefits equitable estoppel theory. See Meyer v. WMCO-GP, LLC,
211 S.W.3d 302, 305 (Tex. 2006); Sherer v. Green Tree Servicing LLC, 548 F.3d 379, 382 (5th Cir. 2008).
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