To Compel or not to Compel: Extension of Arbitration Agreements to Non-Signatories

[Kushagra Jain and Vasundhara Sharan are 4th-year law students at Symbiosis Law School, Noida]

The rapid globalization and growing institutionalization of international commercial disputes has led to a plethora of international and national laws, rules, and commentary. Reference to arbitration originates from the contours of the arbitration agreement and maintains privity of contract, consent by the assigned parties, and confidentiality and protection of the parties involved. However, there has been an onset of modern and expansive international business transactions, each involving a complex web of intertwined agreements, multifaceted legal commitments, and interwoven positions of the corporate entities involved. Due to this, disputes involving non-signatories to an agreement are becoming more common than ever.

Disputes concerning non-signatories result in a myriad of issues pertaining to the compelling of arbitration by them against the signatories of an agreement. The inclusion or the rights of the non-signatories are governed by principles and theories of contract law and agency coupled with the fundamentals of international arbitration and the statutory laws in force at the seat of arbitration. While privity of contract acts as a massive impediment to a non-signatory’s motion to compel arbitration, the subject requires in-depth understanding and analysis. It is pertinent especially when subsidiaries, holding companies, entities, beneficiaries, contract assignees and other non-signatories to an arbitration agreement find themselves concerned with the same.

The application of the governing principles was recently observed in the United States of America, where the Ninth Circuit Court, in the case of Setty v. Shrinivas Sugandhalaya LLP, adjudicated over a plea by a non-signatory to compel arbitration against a signatory to the agreement. The facts delve into a Partnership deed between Setty and his brother, Nagraj pertaining to two competing incense manufacturing companies, namely, SS Bangalore and SS Mumbai (the defendant) respectively. Setty sued SS Mumbai for trademark infringement. Subsequently, SS Mumbai moved to compel arbitration against Setty, pursuant to an arbitration clause contained within the Partnership Deed. The Court, analyzing the facts of the case and applying the principle of equitable estoppel, stated that SS Mumbai was a non-signatory which could not be allowed to compel arbitration in the present situation.

Observing the breadth and complexity of the case-specific profiles of such disputes, this post seeks to draw the broad contours of the subject, delving specifically into the aforementioned legal principles and formal procedures used to validate the arbitration agreement’s binding nature on a non-signatory.

Group of Companies

The doctrine pertains to a group of companies, which albeit legally independent, owing to the contract’s terms, its performance, and its subsequent termination, and the degree of control warranted amongst the companies, are regarded as a single legal entity. Herein, non-signatories to the agreement, actively participating in the subjected contractual relationship, will be extended the rights and obligations under the arbitration agreement. 

The Supreme Court of India, propelling a growing hub in international arbitration, recognized the doctrine in Chloro Controls v. Severn Trentand thereafter in Ameet Lalchand Shah v. Rishabh Enterprises, wherein it was held that a direct relationship and a direct commonality should exist between the signatory and the non-signatory.

Alter-ego/Veil-Piercing

Under this doctrine, the agreement entered into by a subsidiary will be extended to the parent corporation when the conduct of the two showcases an explicit abandonment of separateness, regardless of the terms, structure or the privity of the agreement. Highly fact-relative, the disputes involve exploration of the environment and the circumstances under which the two parties operate. 

The factors are as follows: whether the two parties have common stock ownerships; or management; or whether the parent company finances the subsidiary’s expenses, capital, assets etc. Further, the court also takes into account other factors, such as whether the directors of the subsidiary function solely for the furtherance of the interests of the parents, the formalities and the level of control exercised by the latter over the former. 

Agency

Agency is “the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act”.

If a party signs an agreement in the capacity of a non-signatory’s agent, the non-signatory may be bound by the contract’s arbitration clause. However, where there is no explicit contract between the two and where the principal refutes the stated connection, the Court must ascertain the declaration of authority involving the concerned parties along with the nature and extent of the same. In a case before the Federal Supreme Court of Switzerland, the Court compelled the non-signatory principal to the arbitration due to the indistinguishable representation of the two entities.

Incorporation by Reference 

When non-signatories are party to arrangements where they integrate the arbitral arrangement into their agreements or when the arbitral agreement includes the non-signatory by reference, Courts allow the same to compel or be compelled to arbitration.

The functionality of this legal principle was observed in JS & H Const. Co. v. Richmond County Hospital Authority,wherein the Court discovered a clause in a subcontract that introduced by reference the “general conditions” of a prime contract. The contract expressly stated that the subcontractor must bear the same duties and obligations toward the prime contractor as the prime contractor did toward the hospital authority in the prime contract. 

Equitable Estoppel

Corroborating and upholding the principles of equity, this principle provides for the following two measures:

Firstlyit denies a party the right to claim the benefit of the contract while simultaneously bypassing the burdens attached with the same. The non-signatory thereby is compelled to arbitrate where it exploits the agreement under the garb of evasion. 

Secondly, it enables extension of the agreement to the party wherein the subject matter of the dispute is intertwined with the contract providing for arbitration, and there is a nexus between the two parties. 

In Setty, the Court observed that the claims at issue were not sufficiently intertwined with the Agreement to trigger its arbitration clauses. Therefore, it denied the non-signatory’s motion to compel arbitration. 

Third-party Beneficiary

In furtherance of commercial justice and reality, caselaw provides for examination of the intentions of the parties through the contract and its terms. An entity is examined to be a third-party beneficiary based on the following factors:if the terms of the contract facilitate inclusion of the third party either by name or by specified class; if it were evident through the terms used that the third-party was intended to benefit from the same; and if in relation to the contract’s matter, the promise had a serious and articulate interest in the wellbeing of the said third party.

Whereas a court considers the parties’ actions after the contract has been performed under the equitable estoppel principle, under the doctrine of third-party beneficiary, a Court would consider the intention of the parties at the time of drafting the contract.

Challenges to Non-signatories’ Inclusion to Arbitrations

Apart from the doctrines which help in deciphering whether a non-signatory can compel or be compelled to arbitration, there persist numerous other procedural and statutory impediments towards the same. 

Firstly, the subjected arbitrations are challenged on the requirement of ‘agreement in writing’ and mandatory signing of the concerned parties, as per the New York Convention. However, numerous jurisdictions, such as UK, New Zealand, relax the said mandate, but in turn have a strained and unclear relationship with the Convention. 

Secondly, the applicable law poses issues in the international domain, where often the tribunal separately determines the applicable law to the varied contracts and parties.

Finallythe tribunal, as well as the intervening Courts, are vary of such inclusion owing to the procedural issues arising from the same such as appointment of the tribunal, arbitration costs, timelines etc.

Suggestions and Conclusion

Whether a non-signatory may compel or be compelled would depend on the extent to which an adjudicator would go to find evidence of the requisite consent and intention. Such extent would depend on the jurisdictional and factual differences discussed above. It is a matter of parity and the nature of authority and application.

As was observed by a renowned commentator, justice does not seem to be served if the only criterion for refusing consent to arbitration was that the third party had not signed the arbitration agreement. The application of the above-stated doctrines helps in fulfilling the objective of justice and equity. This must be exercised judicially, since once the arbitration commences, and subsequently, the award is rendered, there is a very narrow margin for challenge within the limited statutory grounds. 

– Kushagra Jain & Vasundhara Sharan

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