PARTY TO AN ARBITRATION AGREEMENT CASE OF NON SIGNATORY

‘’

FRAMEWORK

Section I : Evolution of the doctrine

Section II : Status of the doctrine in different

jurisdictions

Section III: Submissions 2

SECTION I

THE DOCTRINE A non-signatory may benefit from or be

bound by an arbitration agreement signed by a group company because of its role in the transaction

Used to justify extending the scope and effects of a tribunal’s jurisdiction to non-signatory companies of the corporate group to which the signatory company belongs

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FORMULATION OF THE DOCTRINE Dow Chemical v. Isover Saint Gobain (ICC

Award, 1982)Contractual arrangements between two Dow

subsidiaries and Saint GobainContracts entered into between the parties

permitted any Dow subsidiaries to make deliveries contemplated under the contracts In practice only one claimant was making deliveries

Claimants were four Dow entities connected with the contracts

Contracts were governed by French law and provided for arbitration under the ICC rules

Contracts silent about law governing arbitration agreement

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FORMULATION OF THE DOCTRINE Autonomy of arbitration clause - tribunal separated

arbitration agreement & main contract

Distinguished between ‘merits’ of the dispute & ‘scope & effect’ of arbitration clause

Applied French law to merits of the dispute

ICC rules applied to “scope & effect” of arbitration clause

Article 8, 1975 Rules - tribunal can decide upon its own jurisdiction without referring to national law, unless expressly agreed otherwise

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DOW ARBITRATION AWARD Arbitration clause signed by two of the

companies was also intended by the parties to be available to other Dow entities

The non-signatory parent exercised absolute power over its signatory subsidiaries and the non signatory subsidiaries “effectively and individually participated in the conclusion, performance and termination of the contracts”

Even though distinct juridical identity, a group of companies constitutes “one and the same economic reality”

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DOW ARBITRATION AWARD Tribunal took into account

That the contractual relationship could not have been formed without the approval of the parent company

“Common intent of parties”- Law governing Arbitration agreement

French case laws dealing with international arbitration “Usages conforming to needs of international

commerce” Enforceability of award in France (Article 26- 1975

rules) International public policy

Paris Court of Appeals affirmed Dow7

SECTION IISTATUS OF THE DOCTRINE

Not followed consistently in ICC awards

Recognized by French courts

Rejected in UK in Peterson case

USA follows ‘alter ego’ & also applies other doctrines to achieve similar results

Indian courts normally guided by common law

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SUBSEQUENT ICC AWARDS ICC case no. 7626 of 1985

Governing law- Indian law. Refused to apply the doctrine citing English case laws on lifting of corporate veil as Indian position same as in UK. Did not interpret ‘common intent of the parties instead applied proper law.

ICC case no. 4504 of 1985 Tribunal concluded though interference by parent in

performance of the agreement, but on facts not enough to construe ratification of arbitration agreement

ICC case no. 6519 of 1991 Only to group entities which effectively took part in the

negotiations which led to the contract or those directly concerned by it, to the exclusion of those which were only instruments of a financial transaction in the hands of a majority shareholder

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SUBSEQUENT ICC AWARDS Extended to companies that participated in

negotiation, conclusion, or termination of contract

Incipient poof required that if signatory to contract it would have accepted the arbitration agreement

Degree required for proving ‘intention to arbitrate’ is not uniform

Expansive application of ‘common intention of parties’ 10

FRANCE- TERRA FIRMA ‘Group of companies’ recognized under

French law Where parties directly implicated in the

performance of the contractProvided, it is possible to infer a presumption of

awareness of arbitration agreement ‘Common intention of parties’ for

determining law of arbitration agreement as touchstone provided no mandatory provision of French law or international public policy violatedLiberal interpretation given by French courts ‘Full Autonomy’ of arbitration agreement

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USA- ALTERNATE APPROACHES Courts determine ‘party’ Doctrine not explicitly recognized Doctrine of ‘alter ego’ applied with similar results Alternate approach followed in some decisions

Where the charges against a parent company and its subsidiary are inherently inseparable, the court may refer claims against the non-signatory parent for arbitration

If the parent corporation is forced to try the case in court, the arbitration proceedings would be rendered meaningless

Approach is to further the federal ‘pro-arbitration policy’ Application of other principles

Equitable estoppel Agency Third Party Beneficiary etc

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USA- DOCTRINE OF ALTER EGO Ordinary contract law principles for

determining alter ego statusStandard extremely difficult to satisfyStrong presumption of separate legal entity

Compelling evidence that one entity dominated another’s day to day actions

This power was exercised to work fraud or gross injustice upon a third party

As a result separate legal personality gets blurred

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UNITED KINGDOMPeterson Farms Inc. v. C & M Farming

Ltd. (February, 2004)

Proper law of contract- Arkansas law ICC Tribunal did not apply Arkansas law

principles to determine ‘Law governing arbitration agreement’

Applied Dow/ French Principle of ‘common intent of parties’

Tribunal cited ICC ‘precedents’ & applied ‘Group of Companies Doctrine’

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UNITED KINGDOM Peterson Farms Inc. v. C & M Farming Ltd.

S. 2(1),English Arbitration Act applicable – ‘Seat’ Agreement between parties that as to the

applicability of “Group of Companies”, Arkansas law same as English law

In English law, ‘Law governing Arbitration Agreement’ usually follows ‘Proper Law of Contract’

Court held that the doctrine was not recognized in English law. Separate legal entity cornerstone of English company law Limited exceptions recognized

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UK- ALTERNATE APPROACHES “….any person claiming under or through a party to

the agreement” (S. 82 (2), Eng. Arbitration Act, 1996) Entities closely related to establish that non-signatory within the

purview of arbitration clause

Third party beneficiary [Contracts (RTP) Act, 1999] S 1(4), (5): third party's right of enforcement is subject

to the contract's terms and conditions and the courts may award all the remedies which are available to the parties

S 8: deems a third party to be a party to the arbitration agreement

Agency, Assignment, Subrogation, Promissory estoppel etc. 16

INDIA- UNTESTED WATERS Group of Companies’ not tested in Indian courts yet

‘Arbitration & Conciliation Act, 1996 ‘Party’ means party to an arbitration agreement (S. 2.

(1) (h) ) Power of court to refer parties to arbitration (S. 8 )

Sukanya Holdings v. Jayesh Panda (2003 SC) Application by non-signatory for joinder to arbitration

proceedings The Court held that there is no power conferred on

the court to add parties who are not parties to the agreement in the arbitration proceedings

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INDIA- UNTESTED WATERS Indian courts generally not sympathetic to third

party rights

Strong English common law traditions

Decision in ONGC v. SAW Pipes (2003 SC) Expanded the definition of ‘Public Policy’ under s. 34, A&C Act,

1996 If award is ‘patently illegal’ it may be set aside In contravention of the terms of the contract Decision undermines ‘finality’ of arbitral awards Applicable to ‘international commercial arbitration’ held in

India Not applicable to awards from New York & Geneva Convention

countries18

GROUP OF COMPANIES: IS IT ‘LAW’?

Dow cited previous ICC awards and noted that arbitral awards progressively create ‘case law’

Fouchard’s Test – Autonomy, Consistency & Publication Applies law determined by parties & limited authority

independent of arbitration agreement Arbitration institutions independent and isolated Awards often not consistent Generally not published (exception - ICC) Full publication goes against requirement of confidentiality

Other Considerations Proceedings being open to public is an essential requirement Arbitrator’s authority is derived from consent of parties

whereas Court’s mandate flows from a constitutional document

A Private body may not set precedent for public body like court Tribunal becomes ‘functus officio’ after the award is given

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SECTION IIISUBMISSIONS

‘Group of companies’ - fact specific application

Where ‘Law governing arbitration agreement’ is silent the status of third parties may be determined by reference to proper law of contract

Expansive interpretation of ‘common intent of parties’ to determine law governing arbitration agreement

Implications of the Peterson caseParties’ choice of governing law Parties’ choice of seat of arbitration

May give rise to forum shopping

Implications for ICC governed arbitrations

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SUBMISSIONS

‘Consent’ as touchstone to determine third party rights

Extension to non-signatories may be based on other doctrinally sound principles and rules

Care should be taken at the time of drafting of contractParties should clearly specify governing

law of the arbitration agreementForesee potential third parties issues

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