TNS Holdings, Inc. v. MKI Securities Corp.

Decision Date22 October 1998
Citation703 N.E.2d 749,92 N.Y.2d 335,680 N.Y.S.2d 891
Parties, 703 N.E.2d 749, 1998 N.Y. Slip Op. 8978 TNS HOLDINGS, INC., Formerly Known as TradeNET, Inc., et al., Respondents, v. MKI SECURITIES CORP., Appellant, et al., Respondent.
CourtNew York Court of Appeals Court of Appeals
OPINION OF THE COURT

CIPARICK, Judge.

At issue on this appeal is whether a corporation that is related to, but not itself, a party to an agreement containing an arbitration clause can be compelled to arbitrate a dispute arising from an alleged breach of that agreement. We conclude that, absent a showing of abuse of the corporate form, the nonsignatory corporation cannot be compelled to arbitrate.

I.

Plaintiffs-respondents, TNS Holdings, Inc. and two of its officers and major shareholders, Richard Zachar and George Bloukos, have brought this action against MAI and two of its subsidiaries, MKI and Batchnotice, claiming breach of several agreements. During 1992 and 1993, plaintiffs had been in negotiations with MKI, a company engaged in bond trading, to sell TNS' primary asset--a software system for on-line bond trading called "TradeNET." Three main written agreements were executed: those for Hardware Purchase and Software Licensing were between MKI and TNS and the third, a Software Purchase Agreement, was between TNS and Batchnotice, who would take title to the software for internal tax purposes. The third agreement contained the arbitration clause at the center of this dispute. Although plaintiffs say they learned that Batchnotice would be the signatory only 24 hours before signing, they acknowledge that the main provisions of the Software Purchase Agreement were worked out in prior meetings with MKI, including a "sustained discussion" on whether to require arbitration as a means of dispute resolution, which MKI and TNS eventually agreed to make a part of their Software Purchase Agreement.

Claiming that they were in a fragile economic situation and that MKI offered the agreement to TNS on a "take it or leave it" basis, TNS signed the Software Purchase Agreement with Batchnotice. Because Batchnotice had no assets other than the software to be purchased from TNS, a letter from the parent MAI, dated September 2, 1993, ensured that it would cover any failure to perform under the agreement. Plaintiffs claim that the written agreements were accompanied by an oral agreement from MKI's President to employ several key TNS employees, including Zachar and Bloukos, for the five-year duration of the Software Purchase Agreement.

The current action was precipitated by MKI's firing of Zachar and Bloukos. Plaintiffs claimed a breach of the alleged oral employment agreement that accompanied the written agreements and sued defendants for rescission and damages for breach of contract. Defendants moved to stay the action and for an order compelling plaintiffs to arbitrate this dispute with "Batchnotice, Limited," as provided by the Software Purchase Agreement.

The IAS Court found that "plaintiffs' claims center on the provisions of the Software Purchase Agreement * * * and thus fall within the scope of the arbitration clause." The decretal paragraph ordered "the parties * * * to proceed promptly to arbitration as to the claims raised in this complaint" (emphasis added). Eighteen months later, plaintiffs sought arbitration as to all defendants. Defendants moved by order to show cause to stay the arbitration as against MAI and MKI on grounds that they were not parties to the arbitration agreement. Supreme Court denied the motion, stating that the court had previously "ordered arbitration for all parties involved" (emphasis added).

A divided Appellate Division modified by staying arbitration as to MAI. The majority determined that MKI was the "alter ego" of Batchnotice, and as such could be compelled to arbitrate, but that there was no evidence that MAI had acted as the "alter ego" of Batchnotice. The majority further held that as to MKI, there were issues in the underlying dispute involving MKI and arising from other related agreements that were so "inextricably interwoven" and so closely related as to compel MKI's participation in the arbitration (243 A.D.2d 297, 301, 663 N.Y.S.2d 144). The dissent concluded that plaintiffs had failed to meet their heavy burden of proving their "alter ego" theory and that only Batchnotice, the actual signatory to the agreement, was required to arbitrate a dispute regarding its terms. The Appellate Division granted defendants leave to appeal to this Court, and we now reverse.

II.

Although arbitration is favored as a matter of public policy (see, Matter of Smith Barney Shearson v. Sacharow, 91 N.Y.2d 39, 49, 666 N.Y.S.2d 990, 689 N.E.2d 884), equally important is the policy that seeks to avoid the unintentional waiver of the benefits and safeguards which a court of law may provide in resolving disputes. Indeed, unless the parties have subscribed to an arbitration agreement it would be ...

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