TNS Holdings, Inc. v. MKI Securities Corp., 1998 N.Y. Int. 0123 (Oct. 22, 1998).

ARBITRATION - SUBSIDIARY - ALTER EGO EXCEPTION

ISSUE & DISPOSITION

Issue

Whether, absent a showing of fraud, a subsidiary of a corporation will be bound to an arbitration clause in the contract of a related entity.

Disposition

No. Although there are exceptions to the general rule that a party must be a signatory to a contract for an arbitration clause to apply, fraud is necessary element for the application of the alter ego exception. Here, there is no evidence of fraud.

SUMMARY

MKI and Batchnotice are subsidiaries of MAI. TNS Holdings signed two contracts with MKI and one contract with Batchnotice for hardware and software. The contract between TNS and Batchnotice contains an arbitration clause which is at the center of this dispute. At the time of the signing of the contract, Batchnotice had no assets other than the software to be purchased pursuant to the contract with TNS. TNS claimed that the provisions of the contract were worked out with MKI and it only learned that Batchnotice would be the signatory 24 hours prior to the signing of the contract. TNS Holdings argued that MKI should be bound to the arbitration clause because MKI acted as the alter ego of Batchnotice.

The Court of Appeals acknowledged that arbitration is favored as a matter of public policy, but "unless the parties have subscribed to an arbitration agreement it would be 'unfair to infer such a significant waiver on the basis of anything less than a clear indication of intent.'" TNS Holdings at para. 8 (citing Matter of Marlene Industries Corp., 45 N.Y.2d 327, 333-34 (1978) ). The court then rejected the alter ego exception to this rule and stated that the rule is akin to piercing the corporate veil and requires fraud even if Batchnotice was dominated by MKI. In addition, the timing of the agreement did not show any fraud or inequity and the interrelatedness between the agreements was not enough to impute to MKI an agreement to arbitrate.

Prepared by the liibulletin-ny Editorial Board.