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Kuroda v. SPJS Holdings, L.L.C., C.A. No 4030-CC (Del. Ch. Nov. 30, 2010) (Chancellor Chandler)

November 30, 2010

In this opinion, the Court of Chancery denied the plaintiff’s motion to compel arbitration of the defendants’ counterclaims for misappropriation of trade secrets and use of infrastructure where none of the parties to the litigation was a party to an agreement containing an arbitration provision, and where the plaintiff failed to establish any of the common law exceptions that bind nonparties to a contract. 

Together, the plaintiff, Kenzo Kuroda (“Kuroda”), and the defendants set up investment vehicles, including Steel Partners Japan Strategic Fund, L.P.and Steel Partners Japan Strategic Fund (Offshore), L.P. (together, the “Funds”). Through the Funds, Kuroda and the defendants sought to invest in Japanese corporations. To govern their relationships, Kuroda and the defendants entered into several  verlapping contracts and agreements.  Steel Partners Japan Asset Management (the “Investment Manager”) was created to serve as the Funds’ investment manager. While providing its management services to the Funds, the Investment Manager engaged Steel Partners Japan, K.K. (the “Consultant”) to perform consulting services.  Kuroda was a 50% shareholder of the Consultant. In connection with the consulting work, the Investment Manager and the Consultant entered into a consulting agreement (the “Consulting Agreement”), which contained an arbitration provision (the “Arbitration Provision”). The Arbitration Provision provided that disputes arising out of or in connection with the Consulting Agreement were to be arbitrated in Japan.

Subsequently, Kuroda brought a lawsuit asserting claims against the defendants. The defendants brought counterclaims against Kuroda and third-party counterclaim defendants Fugen Capital Management LLC, Fugen Capital Partners LLC, and Fugen Capital Japan Fund, L.P. (collectively, “Fugen”). None of the parties to the litigation was a party to the Consulting Agreement. Earlier in the proceedings, the Court of Chancery dismissed most of Kuroda’s claims and most of the defendants’ counterclaims. Only Kuroda’s claim for breach of contract, the defendants’ counterclaim for misappropriation of trade secrets, and the defendants’ potential counterclaim for misuse of infrastructure remained.

Arguing that the defendants’ counterclaims arose out of the Consulting Agreement, Kuroda moved to compel arbitration of the defendants’ counterclaims pursuant to the Arbitration Provision.  In response, the defendants argued that (i) none of the parties to the litigation was a party to the Consulting Agreement and, therefore, the defendants could not be bound by the Consulting Agreement’s terms, and (ii) that Kuroda waived any right to compel arbitration by actively participating in the litigation. Kuroda countered by arguing that (i) Kuroda and Fugen themselves were entitled to invoke the Arbitration Provision, and (ii) under agency principles and equitable estoppel, the defendants were bound by the Arbitration Provision.

The Court of Chancery found that, because they were nonparties to the Consulting Agreement, neither Kuroda nor Fugen was entitled to invoke the Arbitration Provision. Though it   acknowledged that there are circumstances where it is  appropriate for an agent of a party to a contract to compel arbitration pursuant to that contract, the Court of Chancery did not find that this was such a case. First, the Court of Chancery found that throughout the litigation, Kuroda argued that he was not a party to the Consulting Agreement and that he was not bound by any of the duties in the Consulting Agreement. Second, the defendants sued Kuroda in his personal capacity, not as an alleged agent of the Consultant. Third, the Court of Chancery stated that the public policy in favor of arbitration does not apply where the dispute focuses on whether nonparties to an arbitration agreement must arbitrate. Last, the Court of Chancery found no agency relationship between Fugen and either of the parties to the Consulting Agreement. In light of these factors and because they were not parties to the Consulting Agreement, the Court of Chancery found that neither Kuroda nor Fugen could invoke the Arbitration Provision. 

Next, the Court of Chancery rejected Kuroda’s argument that, under the common law theory of agency, the defendants were bound by the Arbitration Provision. The Court of Chancery concluded that, even though the Funds’ formation documents gave the defendants some control over the Investment Manager’s work on behalf of the Funds, no agency relationship existed between the Investment Manager and the Funds or between the Investment Manager and the defendants. The Court of Chancery further held that even if a principal-agent relationship did exist between the Investment Manager and the defendants, the defendants would not be bound by the Consulting Agreement. Unlike cases where an agent was bound to its principal’s arbitration agreement, even when the agent did not sign the arbitration agreement, here, Kuroda was trying to bind an alleged principal to its alleged agent’s arbitration agreement. Noting this important distinction, the Court of Chancery denied Kuroda’s attempt to bind the defendants, as the Investment Manager’s alleged principal, to the Arbitration Provision.

Last, the Court of Chancery found that Kuroda could not invoke equitable estoppel to bind the defendants to the Arbitration Provision. While acknowledging that equitable estoppel compels a signatory to an arbitration agreement to arbitrate with a nonsignatory to the arbitration agreement in certain situations, the Court of Chancery noted that such was not the issue in this case. Here, none of the parties to the litigation was a signatory to the Consulting Agreement; a nonsignatory to an arbitration agreement was seeking to compel another nonsignatory to arbitrate. The Court of Chancery found no case where it required arbitration in similar  circumstances. Additionally, the Court of Chancery found that the defendants’ counterclaims did not rely on or depend on the terms of the Consulting agreement, and that a ruling by the Court of Chancery on the defendants’ counterclaims against Kuroda or Fugen would not adversely affect the Consultant’s rights. Thus, the Court of Chancery refused to apply equitable estoppel to bind the defendants to the Arbitration Provision.

Having denied Kuroda’s motion to compel arbitration of the defendants’ counterclaims because none of the parties to the litigation was a party to the Consulting Agreement and none of the recognized exceptions that bind nonparties to a contract existed in this case, the Court of Chancery did not address whether the counterclaims fell within the scope of the Arbitration Provision. For the same reason, the Court of Chancery did not address whether Kuroda had waived any right to compel arbitration by actively participating in the litigation.

The full opinion is available here