10 May 2018
The principle of “party autonomy” is one of the key aspects to almost every major international commercial arbitration debate. The arbitration agreement between the parties is fundamental to initiate and conduct arbitration proceedings. One of the most significant international policies, the UNCITRAL Model Law (“Model Law”), states that an arbitration agreement must be in writing. At first sight, this requirement could result in the conclusion that the arbitration agreement’s binding effect is limited to the formal signatories. However, this would lead to rather unsatisfactory situations.
Due to the dynamics and complexity of the parties’ contractual and legal relations, arbitration disputes often involve third parties. In such cases, formal signatories or concerned third parties regularly plead for an extended interpretation of the arbitration agreement. National courts and arbitral tribunals are then required to balance the concept of mutual consent with the principle of effectiveness of arbitration. Although the principle of mutual consent can be seen as rather absolute, non-signatories may nevertheless be included in an arbitration based on contractual aspects or specific concepts of applicable (national) laws. From a mere conceptual approach, the inclusion of non-signatory parties to an arbitration agreement may be justified in three main types of situations.
Consensual Approach
As a general rule, the inclusion of non-signatories does not mean that the arbitration agreement is (artificially) expanded to third parties but interpreted to include non-signatories as parties based on their consent to arbitrate. Such consent could either be given by means of “deemed consent” based on objective causes or “implied consent” based on the subjective expectation of the non-signatory.
The concept of implied consent can best be illustrated by the “Group of Companies” doctrine, which was introduced by the Dow Chemical case and addressed the members of a group of companies as “one and the same economic reality”. Following this approach, the (controlling) parent company shall not be able to use its likely not equally capitalized subsidiaries to avoid arbitration proceedings. The concept of deemed consent is, for instance, applied in the “Chain of Transactions” concept. This concept has been supported by a line of cases in France and basically means that the arbitration clause is interpreted to include parties, which entered into subsequent agreements, provided that these subsequent agreements are closely linked to or dependent on the agreement containing the arbitration clause. The facts of the case must provide for the reasonable expectation to be included in arbitration proceedings.
The main concern to these concepts addresses their legal uncertainty. Since they mainly depend on the individual case, they are generally difficult to assess in advance. Further, their application is also not universally accepted and may depend on the concerned jurisdiction and even the competent court. Thus, potential parties should rather be initially foreseen as formal signatories.
Contractual Approach
The binding effect of an arbitration agreement towards a non-signatory can also be reached by way of civil-law transactions. Possible situations include the transferring of contractual rights or obligations by way of an assignment or the representation of a party at the contract conclusion. The legitimacy and requirements for an assignment of contracts are basically determined by the national laws governing the concerned assignment and the respective agreement to be transferred. The modern approach tends to generally allow the assignment of arbitration agreements. The main question, however, concerns whether the concerned non-signatory may be obliged to arbitrate. In its Steward v McKenna & Kapada Ltd. Decision, for instance, the Irish High Court granted the assignee to an arbitration clause the choice to arbitrate or litigate before the national court.
Although the specific requirements mainly depend on the applicable national laws, non-signatories should regularly be bound by an assigned arbitration agreement. One of the main arguments concerns the risk that one of the parties could simply undermine the arbitration agreement by conducting certain civil transactions.
Piercing the Corporate Veil
Another type of situations, which must be clearly differentiated from the consensual approach, includes the concept of “Piercing the Corporate Veil”, where the inclusion of a non-signatory is provided by national laws targeting on the prevention of fraud and the misuse of the corporate form. Possible situations include the qualified undercapitalization of a signatory company or the lack of legal personality of the signatory company. Based on these scenarios, the legal ratio becomes apparent. Shareholders cannot rely on the corporate form of their company when the corporate form is abused for fraud or deliberate undercapitalization. Further, an arbitration agreement cannot be left without a contractual partner when the other (signatory) party’s foundation is legally defective or void.
The concept of Piercing the Corporate Veil may be welcomed as a legal remedy in the case of choosing the “wrong” contractual partner, who is attempting to act in a fraudulent manner. Parties to the arbitration agreement should keep this concept in mind to be prepared for certain “worst case scenarios”.