NAF Holdings, LLC ("NAF") attempted to merge with Hampshire Group, Ltd. ("Hampshire"), and failed. After the failed merger, NAF and its affiliates on one hand (which included NAF's parent corporation Efrem Gerszberg,) and Hampshire on the other hand, signed a settlement agreement releasing each side from liability.
Then NAF sued Li & Fung (Trading) Ltd. ("Li & Fung"), claiming Li & Fung caused the failure of the merger. In response, Li & Fung brought arbitration against Gerszberg pursuant to the settlement agreement between Gerszberg and Hampshire, claiming that Li & Fung was the third party beneficiary of the settlement agreement which Gerszberg is violating by having its subsidiary (i.e. NAF) sue Li & Fung.
Gerszberg sued to enjoin the arbitration, and the court granted the preliminary injunction. The court found that there were two parts to the claim: (1) who is to decide if Li & Fung truly was the third party beneficiary of the settlement agreement? and (2) who is to decide if a third party beneficiary have the standing to invoke the arbitration clause?
The court found that Thai-Lao Lignite (Thailand) Co v. Gov't of the Lao People's Democratic Republic, 2011 U.S. Dist. LEXIS 87844 (S.D.N.Y. Aug. 3, 2011), aff'd 492 Fed. Appx. 150 (2d Cir. 2012), answered the second question, but not the first. As to the second question Thai-Lao held that the arbitrator decides. But the court found that it was the first question that was implicated in this issue, and held that the court is to determine whether Li & Fung was the true third party beneficiary of the settlement agreement. Based on this decision, the court ordered further discovery and briefing.
Arbitrability decisions are always such a tangled web. I tried to make the fact pattern as plain as possible, but it is still a confusing read. Yet in international commerce, few legal questions are as important as this issue.