Bel-Ray Company, Inc. v. Chemrite (Pty) Ltd.

181 F.3d 435 (3rd Cir. 1999)
  • Opinion Date: June 28, 1999

CONTRACTS; ASSIGNMENTS—Unless a different intention is manifested, a contract provision prohibiting assignment of contract rights, but not declaring such an assignment to be void, gives the obligor a right to damages but does not render the assignment ineffective.

A New Jersey Corporation entered into a series of agreements with a South African corporation for distribution of the New Jersey corporation’s products in South Africa. Each of the agreements required arbitration of “any and all disputes relating to th[e] agreement or its breach” under the American Arbitration Association rules, and according to New Jersey substantive law, in a locality within New Jersey. The agreements specifically required the New Jersey’s company’s written consent to any assignment of the South African company’s interests under the agreement. A time came when the South African company sent the New Jersey company notice that it had changed its name. Thereafter, the South African company sold its business to another company and then entered liquidation. The successor company continued to operate the old company’s business at the same location, with the same employees and management, and continued to conduct business in the same manner and in accordance with the agreements. The new South African company and the New Jersey company subsequently engaged in discussions, one topic of which was whether the new South African company was bound by the agreements. The New Jersey company suspected that the new South African company intended to appropriate trade secrets and then deny that it was bound by the agreement. As a result, it filed an action in the District Court for the District of New Jersey to compel the new South African company and its directors and shareholders to arbitrate certain claims under the arbitration clauses. In addition, it filed an action in South Africa seeking to enjoin the South African company from continuing to use the New Jersey company’s intellectual property and trade name. The South African company responded to the New Jersey action by asking the District Court to either stay the proceedings or enjoin the New Jersey company from seeking to compel arbitration on the ground that it had waived its right to arbitrate by initiating the South African litigation. Two months later, the individual directors and shareholders requested the same relief. A court may only compel a party to arbitrate where that party has entered into a written agreement to arbitrate. The only written agreements to arbitrate were those between the original parties. It was undisputed that the original South African company assigned the agreements to its successor. If those agreements were effective, then the new South African company, accepting the benefits under the agreement, would be bound by the arbitration clause. The new South African company, however, contended that the assignments were ineffective because the New Jersey company did not consent to the assignments in writing as was required by the agreements. Therefore, it argued, there was no written agreement to arbitrate. The Third Circuit Court applied New Jersey law. To it, the New Jersey Supreme Court had never addressed the effect of contractual provisions limiting or prohibiting assignments. Nonetheless, it had guidance from recent cases in which the Appellate Division had interpreted section 322 of the Restatement (Second) of Contracts. That section provides that a contract provision prohibiting an assignment of contract rights, unless a different intention is manifested, gives the obligor a right to damages for breach of the terms forbidding assignment, but does not render the assignment ineffective. The Third Circuit’s analysis was that the Appellate Division distinguished between an assignment provision’s effect upon a party’s “power” to assign and its “right” to assign. A party’s “power” to assign is limited only where the parties clearly manifest their intention to limit. Here, none of the agreements stated that an assignment without the New Jersey company’s written consent would be void or invalid. Consequently, the agreements’ assignment clauses did not contain the requisite clear language to limit the original South African company’s “power” to assign the agreements. The assignment was held to be enforceable and the new South African company was bound to arbitrate claims “relating to” the agreements.

The individual defendants (the directors, officers and shareholders of the new South African company) contended that because they did not individually agree to arbitrate claims with the New Jersey company, they were not bound by the arbitration clauses. The New Jersey company insisted that the individual defendants were bound by the arbitration clauses based upon their status as the South African company’s agents. The Court phrased the relevant issue to be “whether an employee or agent who did not agree to arbitrate can be compelled to arbitrate his personal liability on the basis of a commitment made by the corporation he serves.” The Court could find no authority for the proposition that the individuals were bound by the agreement. An agent of a principal, even one who negotiates and signs a contract for the principal, does not become a party to the contract. Under traditional agency principles, the only way an agent can be bound by the terms of the contract is if that agent is made an agent of that contract by the principal acting on behalf of the agent with actual, implied or apparent authority. This was not the case here. Consequently, the District Court erred when it held that the individuals were required to arbitrate.