By: Thomas S. Tripodianos Published: June 2009

Can a California Consultant compel Developer in New York Federal court to submit a dispute to arbitration pursuant to an unsigned agreement?

Question. Consultant, a California corporation with offices worldwide, provides technical and management support services for various infrastructure projects. Developer, a New York corporation, retained Consultant to provide engineering and consulting services in connection with the development of a property in Connecticut. The parties' relationship was governed by a Master Services Consulting Agreement (“MSA”) that included, among other terms, a broad arbitration provision. The MSA provided that the terms for Consultant's services would be negotiated between the parties through various Task Orders. Each Task Order incorporated by reference the terms of the MSA.

Eventually, a dispute arose between the parties concerning work performed by Consultant. After several attempts to resolve the dispute proved unsuccessful, Consultant served Developer with a demand for arbitration claiming that it was owed the sum of $1,788,127 for services rendered. Pursuant to the arbitration provision in the MSA, the American Arbitration Association scheduled an arbitration hearing in California. Can the Consultant in New York Federal court, compel Developer to submit the dispute to arbitration pursuant to the MSA and Task Orders?

Answer. YES.

A. Does the Federal Court have Diversity Jurisdiction

A federal court has the authority to compel arbitration under the Federal Arbitration Act (“FAA”), provided that the court has jurisdiction over the underlying controversy. Here, Developer contends that the Court has no authority to compel arbitration and that the matter must be remanded to the state court because subject matter jurisdiction is lacking. In particular, Developer contends that the parties are not diverse and the amount in controversy is less than the $75,000 required by 28 U.S.C. 1332.

1. Whether the Parties are Diverse

It is well-settled that, for diversity jurisdiction purposes, a corporation is a citizen of the state where it is incorporated and of the state where it has its principal place of business.. It is undisputed that Developer is a citizen of New York. Although Consultant is incorporated in California, Developer contends diversity jurisdiction is lacking because Consultant's principal place of business is also in New York. Where, as here, a corporation's activities are “decentralized and spread across numerous states, courts apply what is known as the ‘nerve center’ test,” to determine a corporation's citizenship.. Under the “nerve center” test, courts focus on those factors that identify the place where the corporation's policies originate.

Developer contends that Consultant's principal place of business must be in New York because all of Developer's business dealings with Consultant have taken place in New York. However, the fact that the parties' business dealings were all conducted in New York does not go to the salient question of where the company's policies originate. Consultant has been headquartered in Southern California since its formation in 1970. Consultant's Long Beach, California headquarters houses hundreds of employees as well as the Chief Executive Officer, the Chief Financial Officer, the General Counsel and the company's marketing, corporate, and human resources departments. Under the circumstances, there can be no question that Consultant's corporate policies are promulgated in California. Accordingly, Consultant has met its burden to show that the parties are diverse.

2. Whether the Amount in Controversy Exceeds $75,000

A party invoking the diversity jurisdiction of the federal courts must show that there is a reasonable probability that the amount in controversy exceeds $75,000. Developer contends that there is no monetary amount in controversy because it the only issue before the Court is whether to stay arbitration. Consultant counters that the Court may look to the amount it is seeking in the underlying arbitration to assess whether the amount in controversy requirement is met. The Consultant is correct.

In determining whether the jurisdictional amount in controversy is satisfied a court may look to the amount a party might obtain in the arbitration that it seeks to compel. Here, in the putative arbitration proceeding, Consultant is seeking $1,788,127 from Developer for services rendered. Thus, there is a reasonable probability that the amount in controversy exceeds $75,000. Accordingly, because Consultant has met its burden to establish that the Federal Court has subject matter jurisdiction over this action.

B. Can the Consultant compel Developer to submit the dispute to arbitration?

The FAA provides, in pertinent part, that “[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court ... for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C. 4. It is well-established that the FAA creates a strong federal policy in favor of arbitration. However, arbitration is a “matter of contract [and] ... a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit.”

Here, Developer claims that it is not bound by the MSA-and therefore not bound by the arbitration provision contained therein-because the MSA was never signed by a Developer representative. Consultant counters with an affidavit from its Project Manager, who avers that he witnessed Developer’s Chief Financial Officer sign the MSA. This purely factual dispute need not be resolved because there is an independent reason why the parties should be compelled to submit this matter to arbitration.

The Second Circuit has held that a nonsignatory to a particular agreement can be bound by an arbitration clause in that agreement where the nonsignatory enters into a separate contract that incorporates the arbitration provision. Here, pursuant to the terms of the MSA, the parties negotiated and entered into various Task Orders that set forth the price and nature of the services Consultant was to perform. Each Task Order provided that “except as otherwise specified herein, the terms and conditions of the [MSA] are incorporated in this Task Order by reference.”

Developer does not and cannot dispute that these Task Orders were signed by an authorized Developer representative. In light of the fact that the Task Orders unequivocally incorporated the MSA by reference, Developer is bound by the MSA and the clear and unambiguous arbitration provision contained therein.

Accordingly, Consultant can compel arbitration.

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