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May 12, 2020

Extension of the Arbitral Agreements

Dispute Resolution
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Under what circumstances could arbitrators assume jurisdiction over claims made against a non-signatory to the arbitration agreement (or the contract containing it)?

 

In principle, the rights and obligations arising from the arbitration agreement are a bipolar nature; only those who are parties to the arbitration agreement have this right. Despite this bipolar nature of arbitration, as it is accepted by the many courts, arbitral awards and doctrines, in some cases the arbitrators may assume jurisdiction over claims against a non-signatory to the arbitration agreement.

 

      I.          Assumption of consent to arbitrate based on conduct

When the determination of non-signatory’s conduct whether there is explicit or implied consent by the non-signatory to an arbitration agreement, the underlying contractual relationship shall be evaluated.[1] On some occasions, for the acceptance of the non-signatory’s intention to be bound to the arbitration agreement, the explicit conduct can be taking into consideration. The group companies one of the most basic examples of this thesis. In Swiss Law in which the Swiss Federal Tribunal applied ordinary rules of Swiss Contract Law in order to interpret the behaviour and statements of a non-signatory party as an intention to be bound by the arbitration agreement, the party shall have a pre-dominant role during the commercial relations and/or “the statements and behaviour of the non-signatory party under aspects of good faith and established a so-called “normative”(implied) consensus[2].  

 

    II.          Representation and Agency

The arbitration agreement may be extended to non-signatory by a representative or agency that is acting on behalf of the non-signatory who is bound with the arbitration agreement. “The representation and agency principle is invoked in a group of companies situations, and the binding effect of representation or agency results from general principles of law[3]  and so the validity shall be determined by substantive laws.

 

The evaluation of the theory of agency in civil law is far different than in the United States in which the agents, employees and the representatives are bound with a principle under the terms of the valid an arbitration clause. [4]

Even if there is not any explicit authorization given to the representation, with the idea of apparent mandate or ostensible authority granted by some courts and the arbitral awards, the principal can be bound to arbitration agreement concluded by the representative.[5]

 

 III.          Group of companies Doctrine

The doctrine “Group of Companies” debated firstly by most scholarly in the 1970s in France with the famous case, Dow Chemical v. Isover St. Gobain[6], that party requested to be joined will have been played a role during all the negotiations and conclusions’ stages of the contract.[7]

 

The doctrine never gets the broad acceptation by the other jurisdiction mostly in common law jurisdictions, so the separate legal entities cannot be considered as a corporate group due to the principles of separate legal personality and limited liability[8].

 

 IV.          Third party beneficiaries and guarantee clauses

With the explicit/implied guarantees and the third-party beneficiaries that a person who will get benefit from an agreement concluded by the other two parties, –although it is not general– the arbitration clause can be extended.

 

The French Court confirmed that “the arbitration clause contained in the underlying agreement could not have any influence on the execution of the first demand guarantee and counter-guarantees due to the reason that it is autonomous from the underlying guarantee.”[9]

 

On the other hand, in the USA, in the case Spear, Leeds & Kellogg v. Central Life Assur. Co., the Court of Appeals has confirmed that the right to arbitrate can be conferred to a third party if the intention to arbitrate can be recognized from the contract.[10] Likewise, there are various cases in which the courts adopted the same criteria for the extension of the arbitration clauses. [11]

 

    V.          Piercing the Corporate Veil

Mostly adapted by the Anglo-American law, the theory of “Piercing the Corporate veil” refers to putting aside the separate legal existence of corporations and holding shareholders and directors responsible for the corporations’ actions and debts.

 

This rule is not definite; for most legal system particularly in Swiss Law, this theory cannot be a reason for the extension arbitration clause to non-signatories, but by grounding the legal basis such as fraud of the abusive shareholder, disregarding corporate personality may be  in the face of abusive shareholder conduct such as fraud[12].

 

The heart of the matter is the principle of “bona fides”; any situation contrary to the obligation to act in good faith does not deserve the legal protection. As explained in the case of Flynt Distributing Co v. Harvey, to apply this theory; the following criteria shall be considered : “(i) there is such unity of interest and ownership that the separate personalities of the corporation and the individuals no longer exist and (ii) failure to disregard the corporation would result in fraud or injustice.”[13]

 

Best regards,

Kılınç Law & Consulting

 

[1] Natalie Voser ‘Multi-party Disputes and Joinder of Third Parties.’, (Kluwer Law International 2009) pp. 372 – 373

[2] Micheal, Mraz, Extension of an Arbitration Agreement to Non-Signatories: Some Reflections on Swiss Judicial Practice, 2009, pp, 57

[3] Natalie Voser ‘Multi-party Disputes and Joinder of Third Parties.’, (Kluwer Law International 2009) pp. 376 – 377

[4] Bernard Hanotiau, “Problems Raised by Complex Arbitrations Involving Multiple Contracts- Parties- Issues- An Analysis” (Kluwer Law International 2001, Volume 18, Issue 3) pp. 259 – 260

[5] ICC. Case no. 5730 of 1988, Bernard Hanotiau, award no 188/1991 of 11 February 1993 “Problems Raised by Complex Arbitrations Involving Multiple Contracts- Parties- Issues- An Analysis” (Kluwer Law International 2001, Volume 18, Issue 3) pp. 260 – 261

[6] William W. Park, “Non-signatories and International Contracts: An Arbitrations’ Dilemma, Multiple Parties in International Arbitration ( Oxford 2009)p,20

[7] Stavros Brekoulakis, “Rethinking Consent in International Commercial Arbitration: A general Theory for Non-Signatories Journal of International Dispute Settlement,2017, 8, 616, doi: 10.1093/jnlids/idx012

[8] UK House of Lords in Solomon v Solomon [1986], Stavros Brekoulakis, “Rethinking Consent in International Commercial Arbitration: A general Theory for Non-Signatories Journal of International Dispute Settlement,2017, 8, 616, doi: 10.1093/jnlids/idx012

[9] Bernard Hanotiau, “Arbitration and Bank Guarantees: An Iustration of the Issue of Consent to Arbitration in Multicontract-Multiparty Disputes” (Kluwer Law International 1999, Volume 16, Issue 2) p.15-16

[10] Bernard Hanotiau, “Problems Raised by Complex Arbitrations Involving Multiple Contracts- Parties- Issues- An Analysis” (Kluwer Law International 2001, Volume 18, Issue 3) pp. 261- 262

[11] Hugh Collings v. International Dairy Queen, Inc. Bernard Hanotiau, “Problems Raised by Complex Arbitrations Involving Multiple Contracts- Parties- Issues- An Analysis” (Kluwer Law International 2001, Volume 18, Issue 3) pp. 262 – 263

[12] William W. Park, “Non-signatories and International Contracts: An Arbitrations’ Dilemma, Multiple Parties in International Arbitration ( Oxford 2009)p,16

[13] Sandrock, Otto, “Arbitration Agreements and Groups of Companies””, 1993, Vol 27 No, 4, pp 941-962. Heinonline, p.960, ed87  

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