ADR Update: Fifth Circuit Overturns Arbitration Award Against Corporate Officers

InĀ DK Joint Venture 1 v. Wayland, the Fifth Circuit held that corporate officers were not personally bound by arbitration provisions in agreements executed on behalf of the corporation. In Wayland, the plaintiff businesses filed arbitration demands against fifteen corporations and individual corporate officers, asserting claims for fraud, breach of contract, and breach of fiduciary duty. The arbitration clauses were contained in contracts relating to a purported oil and gas venture and granted authority to the arbitration panel to determine its own jurisdiction.

The United States District Court for the Northern District of Texas issued an order stating that all defendants, including the corporate officers in their individual capacity, were bound by the arbitration agreement. The arbitration panel awarded the plaintiffs over $13.5 million in damages and fees for their claims against the chief financial officer and chief executive officer of the defendant corporations in their personal capacity. The federal district court later granted the plaintiffs’ motion seeking confirmation of the arbitration award and the defendants appealed.

The Fifth Circuit addressed the issue of whether the corporate officers, “in their personal capacities, [were] bound by the arbitration agreements that were entered into by the defendant corporations, of which they were the CEO and CFO.” The Court explained that the individual corporate officers did not become personally bound by the terms of a contract, including the arbitration clause, by signing the contracts as the agent of a disclosed principal. As non-signatories or parties to the contracts at issue, the CEO and CFO never personally agreed to arbitrate and, therefore, could not be compelled to do so. The Court held that “under ordinary principles of contract and agency law, [the corporate officers] were not personally bound by the arbitration agreements that their corporations entered into and therefore the arbitration panel lacked jurisdiction to render an award against them.”