In Ogden Power Development – Cayman, Inc. v. PMR Limited Co., No. 14-CV-8169 (S.D.N.Y. May 21, 2015), a federal court in New York dismissed a motion to compel arbitration with prejudice as to a signatory not bound by the arbitration clause, ruling that dismissal without prejudice would have deprived the signatory of the right to have the court hear issues of arbitrability.
Petitioners, Ogden Power Development – Cayman, Inc., Quezon Generating Co., Ltd., and GPI Quezon, Ltd, and Respondents PMR Limited Co. and PMR Power Co. had entered into a shareholders agreement including an arbitration clause calling for American Arbitration Association (“AAA”) arbitration in New York. Petitioners filed a petition in the U.S. District Court for the Southern District of New York to compel arbitration and concurrently commenced arbitration under the agreement. After arbitration was underway, Petitioners filed a motion in the district court proceeding for dismissal without prejudice of their own petition to compel. The court granted the motion as to Respondent PMR Limited. However, it denied the motion as to PMR Power after finding that PMR Power was not bound by the arbitration clause.
The court first addressed the procedural posture of the case, noting that in the Second Circuit, a plaintiff’s (or petitioner’s) motion to dismiss its own complaint without prejudice under Fed. R. Civ. P. 41(a)(2) is not granted as a matter of right, but rather only where the opposing party would not suffer any legal prejudice through the dismissal, and if consideration of other factors relating to procedural fairness (the “Zagano factors”) militate in favor of the dismissal.
The court then examined the question of legal prejudice. Respondents argued they would be prejudiced by dismissal, because it would infringe on their right to have the court determine issues of arbitrability of the dispute. The court noted that while arbitrability is normally a question for the courts, parties may agree to have such questions determined by the arbitral tribunal. The incorporation of the AAA rules, which reserve questions of arbitrability for the tribunal, in the shareholders agreement constituted clear and unmistakable evidence that the parties bound by the arbitration provision intended that an arbitrator decide the issue of arbitrability.
The court next examined whether all relevant parties were bound by the arbitration provision. The shareholders agreement included an arbitration provision that applied not to any dispute under the agreement, but only “[i]n the event a dispute arises among the Shareholders.” Petitioners and Respondent PMR Limited were defined in the agreement as shareholders, but PMR Power, Inc. was specifically defined as a signatory “solely for the purposes of acknowledging that its consent hereto is not required . . . and to acknowledge receipt . . . of the PMR Closing Payment” and was not defined as a shareholder under the Agreement.
The court concluded that Respondent PMR Limited was bound by the arbitration agreement, and because it had reserved questions of arbitrability for the arbitration tribunal, it would not suffer legal prejudice through a dismissal. Holding that the Zagano factors also favored dismissal, the court therefore granted the motion for dismissal as to PMR Limited.
However, the court found that due to the restricted nature of the arbitration clause, PMR Power could not be deemed to have clearly reserved the decision of arbitrability for the arbitral tribunal. It therefore found that PMR Power would be prejudiced by dismissal of the motion to compel without prejudice, because PMR Power would be forced either to submit the issue of arbitrability to the tribunal or to file an action for declaratory relief for the purpose of protecting its right to have a court decide arbitrability.
Finally, the court examined the merits of the motion to compel PMR Power to arbitrate, and found that, under New York law, PMR Power was not subject to the arbitration clause. Therefore, as to PMR Power, the court dismissed the petition to compel arbitration with prejudice.
A version of this post originally appeared in the July 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.