Inclusion of Non-signatory Third Parties in an Arbitration Proceeding

[Divyansha Agrawal is a B.A.LLB (Hons.) student at Jindal Global Law School]

Introduction                    

According to the principle of competence-competence, an arbitral tribunal in a given case has full authority to rule on its own jurisdiction. Articles 8 and 16 of the UNCITRAL Model Law re-affirm this principle. Article 16(3) of Model Law provides that the arbitral tribunal may rule on an objection that it lacks jurisdiction either as a preliminary question or in an award on the merits; the choice is left with the tribunal itself. Similarly, section 16 of the Arbitration and Conciliation Act, 1996 (the “Act”) incorporates the principle into Indian statutory law.

This principle has been extended to include cases pertaining to non-signatories. Arbitral tribunals in various jurisdictions have unanimously agreed on the application of the competence-competence rule in even cases involving non-signatories. National courts have also examined the Model Law to understand their obligation and decided accordingly (Pan Liberty Navigation v. World Link (H.K) Res. Ltd, (2005) BCCA 206.; Gulf Canada Res Ltd v Arrocham Int’l Ltd(1992) 66 B.C.LR 2d 113 ). A court also upheld the arbitrator’s power to decide, subject to judicial review, what parties are bound by the arbitration clause (Builders Federal v Turner Construction, 655 F. Supp.1400 (S.D.N.Y 1987)).

Supreme Court of India on the Issue

On 3 May 2018 the Supreme Court of India in Ameet Lalchand Shah v Rishabh Enterprise and Anr revisited the question of extending the scope of arbitration agreements to non-signatory third parties. According to the facts of the case, there were two principal agreements entered into by the respondents for setting up a solar plant. They had also entered into ancillary contracts with the appellant for leasing the photovoltaic products for the purpose of energising the solar plant. Their agreement with the appellants did not contain an arbitration clause. However, the principal agreements with another company did have a valid arbitration clause. Upon accrual of dispute between the appellant, the Court was posed with the question of enforceability of arbitration clause to appellants despite absence of an arbitration clause in their contracts. The appellants contented that the said agreements were inter-connected with the principal agreements. A single judge decided against the contention.

On appeal to the division bench, the Court looked at the factual relationship between the said agreements. It considered some of its previous pronouncements. In Chloro Controls India Pvt. Ltd. Vs. Severn Trent Water Purification Inc. & Ors., the Court had examined the scope of section 45 under the Part II of the Arbitration & Conciliation Act, applicable to international commercial arbitration, which gives the judicial authority the power to refer the parties to arbitration. According to the section, the court may refer the parties to arbitration at the request of either party or any person claiming through or under them. In Chloro Controls, the Court decided that the phrase “any person claiming through or under him” must be read to include a non-signatory third party. Provided that “the transaction should be of a composite nature where performance of the mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute. Besides all this, the court would have to examine whether a composite reference of such parties would serve the ends of justice”.

In this case the Court acknowledges that the pre-amendment section 8, applicable to the domestic arbitration, did not allow for integration of parties to a dispute if not specifically agreed upon by them. Following the 2015 amendment to the Act, section 8 has been brought in line with section 45 to include the phrase “if a party to the arbitration agreement or any person claiming through or under him”. The Court decided that the principal agreement lays down the purpose of the onward lease and acknowledges the contract between the respondents and appellants for the same. They agreed that the three agreements were for the same commercial project and inter-twined. The performance of one would be contingent on the other.

An International Perspective

Parties cannot be precluded by considerations of good faith from acting inconsistently with their own statements or conducts.1)  The Swiss Supreme Court,2) while relying on the principle of good faith enshrined in Article 2 of the Swiss Civil Code, held that in cases where one entity signs a contract but the actual performance is undertaken by a third party, an extension of the arbitration agreement can be made to compel the said non-signatory third party to be attached as a party to the arbitration proceeding (Decisión 4A_450/2013 , Swiss Supreme Court, 2013). In this case, the Court emphasized on the exception to the rule of privity when there is confusion with regard to the respective spheres of activity of a subsidiary and its parent (one of which is a signatory). They emphasized on the principle of reliance in order to protect the party’s erroneous, but reasonable, belief that it entered into a contract with the parent rather than the subsidiary, or with both. In such cases, to allow the parent company to avoid the agreed-to dispute resolution mechanism would be contrary to the principle of equity. In a subsequent case, the German Court opined that “to allow [a plaintiff] to claim the benefit of the contract and simultaneously avoid its burdens would both disregard equity and contravene the purposes underlying enactment of the Arbitration Act.” (International Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 418 (4th Cir.2000)).

Various jurisdictions have attempted to apply the ‘group of companies’3) doctrine to justify the extension of an arbitration agreement to a third party. According to the French group of companies doctrine, arbitration agreements are extended within the group if a representative of the non-signatory group company is involved in any way in the contract negotiations and performance of the contract, if this has occurred, as the true party to the main contract and the group company benefits or is expected to benefit from this occurrence.

Analysis

In the aforementioned case, the interpretation by the Supreme Court brings to uniformity the laws for governing both domestic and international commercial arbitration. The Supreme Court does a fair job in extending the arbitration agreement to the non-signatories in this case by examining the true purpose of the said agreements. However, the Supreme Court does not attempt to answer the question of voluntariness of the parties, which is a key principle in arbitration.

As a general principle of arbitration, a formal writing requirement is imposed by the New York Convention, the UNCITRAL Model law and most other national regimes. They fail to discuss in detail the application of these mandates in cases involving non-signatories. However, some authorities4) have argued that the formal requirements apply only to the arbitration agreement itself and not the extra contractual mechanisms by which an entity may succeed to or assume a party’s obligation and rights under that agreement. Validity of the arbitration agreement and determination of parties should be seen as two different issues. Hence, the formal requirement5) of writing cannot strictly be applied to the third parties. Additionally, it has been agreed upon by courts of various jurisdictions that in certain cases pertaining to estoppel, certain behaviour may substitute the compliance of a formal requirement on the basis of good faith (DFT 4A_376/2008, Swiss Federal Tribunal).

For the extension of the arbitration agreement,6) the active participation of the non-signatory party and its own direct interest in the conclusion of the contract are decisive. A non-signatory will be bound by the arbitration agreement if it can be shown that it was an active participant in the conclusion and execution of the contract and it had a direct interest in this contract. This approach is followed in French jurisprudence, where the prevailing opinion extends the arbitration clause to a non-signatory based on ‘trade practices’, where the participation of the non-signatory with the conclusion and execution of the contract were found to be decisive (X. S.A.L., Y. S.A.L. et A. v. Z. Sàrl, Tribunal federal, Ire Cour Civile, 4P.115/2003, 16 October 2003, 5.1.1).

Conclusion

The scope of an arbitration agreement has always been a contentious issue. It is difficult to reconcile the principles of voluntary submission to alternate dispute resolution vis-à-vis the practical attempts to prevent parties from abusing the mechanism to avoid liability. Courts have constructed various factors like the interconnectedness of the agreements and the relationship between the group of companies. These judicially recognisable principles have been introduced to set a boundary in an otherwise vague understanding of the ‘parties’ to a dispute. Thus far, the Indian position was clear on this issue as far as international commercial arbitration was concerned. This judgement has incorporated the wide understanding of the term ‘parties’ in the domestic arbitration cases.

Divyansha Agrawal

1) J.Lew, L. Mistelis & S. Kroll, Comparative International Commercial Arbitration, pg-7-30,(2003)

2) Segesser, Georg von, et al. “Swiss Supreme Court Extends Arbitration Agreement to a Third Party: Potential Risk for Corporate Groups.” Kluwer Arbitration Blog.

3) See Sandrock Effects of Arbitration Agreements in the Group, in: Böckstiegel / Berger / Bredow (ed.), The Participation of Third Parties in Arbitration, 2005, p. 96 ff. (SchiedsVZ 2014, 274, beck-online)

4) Gary Born. International Commercial Arbitration. second ed., vol. 1, Wolters Kluwer, 2014.

5) Habbegger, Extension of arbitration agreement to Non-signatories and requirements of form, 22 ASA Bull.398, 410 (2004).

6) Marc Blessing. Introduction to Arbitration – Swiss and International Perspectives. Swiss Commercial Law Series vol. 10

 

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