Binding the unbound and other magical creatures: latest trends on extending arbitral agreements to non-signatories

Introduction

It is well known that arbitration is based on consent and yet third parties who have not signed an arbitration agreement can – and have in fact been found to – be bound by it under certain circumstances. The development of international arbitration as a dispute resolution method has increasingly led to situations in which parties, arbitrators and national courts have had to decide complex issues that could potentially involve extending an arbitral agreement to third parties. This important practical issue has been attracting the attention of many legal scholars and practitioners for a long time.[1]

But the possibility of extending arbitral agreements to 'non-signatories'[2] has its legal limits. And experience has shown us that arbitration users may also be faced with some unpleasant surprises (such as the annulment or non-recognition of an award).

For example, on 9 March 2023, the German Federal Court of Justice ('BGH') issued a decision[3] that confirmed the Higher Regional Court of Koblenz's decision to not recognise or enforce in Germany an arbitral award issued in Russia. This case is particularly interesting because the German judges of both the lower and higher court considered that the arbitral tribunal had exceeded its powers by extending the arbitration agreement to a de facto group of companies.[4] In particular, the BGH stated that, since the right to effective judicial protection by a lawful judge is a fundamental right under the German Constitution (as in many other Western countries, such as Spain)[5], extending an arbitral agreement to third parties is a priori excluded and can only be exceptionally justified if a party's conduct is akin to accepting the arbitration agreement. The BGH found that this exception did not apply in the case at hand, despite the parties in question (seemingly bound by the arbitral agreement) being part of the same group of companies. This proves that the apparent 'magical' effects of arbitral agreements cannot always be taken for granted.

In any case, some jurisdictions have recently incorporated into their legislation express references to the possibility of extending arbitral agreements to third parties. Some of the world's most prominent institutional rules for commercial arbitration also refer to this matter. Furthermore, recent comparative case law has revealed the most commonly accepted standards for extending arbitration agreements to third parties, which is convenient for arbitration practitioners searching for comparative law arguments. This article briefly explores some of the latest trends regarding this subject.

Statutory provisions in comparative law

Firstly, extending arbitral agreements to third parties is nothing 'new', and proof of this is the fact that it has found its way into legislation. For example, in England, Section 8 of the Contracts (Rights of Third Parties) Act 1999[6] provides a statutory framework for extending arbitration agreements to third parties who have a right to enforce a substantive term in a contract subject to arbitration. The wording of Section 8 has not changed since 1999, and has not been a subject of the 2023 potential reforms to the English Arbitration Act 1996.[7] In Peru, Article 14 of the Peruvian Arbitration Act[8] emphasises that consent to be bound by an arbitration agreement, according to the principle of good faith, requires the active and decisive involvement of the third party at various phases of the contractual relationship in question, or a close connection to it. Furthermore, similarly to English law, such extension also covers those who seek to obtain specific rights or benefits from the terms of the contract. Finally, Italy adopts a comprehensive approach to non-signatory parties in relation to corporate matters, which remains intact following a 2023 reform. According to Article 838 bis of the Italian Civil Procedure Code,[9] if it is established in the company's articles of association, an arbitration clause becomes binding not only on the company but also on all its shareholders (even those whose status is in dispute) and new shareholders, who are automatically bound by the arbitration clause without having to give their express consent. This is also the case for company directors, liquidators and internal auditors who are also automatically bound upon accepting their appointment.

Institutional rules

In addition, major international commercial arbitration rules already provide for the possibility of joining non-signatories to arbitration proceedings, as parties, if specific conditions are met. A first set of rules requires a pre-existing party to request the joinder of the non-signatory party. For instance, Article 22(x) of the LCIA 2020 Arbitration Rules empowers arbitral tribunals, at a party's request, to allow non-signatories to join the proceedings when both parties expressly agree to this.[10] Likewise, Article 13 of the SCC 2023 Arbitration Rules enables parties to request that the proceedings be opened to third parties, provided the SCC retains jurisdiction over the dispute.[11] The ICC 2021 Rules allow parties to request third-party joinders under Article 7, as long as an Article 6 requirement that the Court is prima facie satisfied that an arbitration agreement binds all parties exists is met.[12]

The second set of rules allows a third party to ask to be joined to the proceedings and the arbitral tribunal to do so ex officio when that third party is prima facie bound by the arbitration agreement. Articles 7 of the SIAC Rules 2016[13] and 27 of the 2018 HKIAC Administered Arbitration Rules[14] give both parties and non-parties the right to request a joinder, and empower the arbitral tribunal (or the centre before the tribunal is constituted), at its own initiative, to join a non-signatory if it is prima facie bound by the arbitration agreement. The new MIAC Arbitration Rules, that will enter into force on 1 January 2024, will expand the scope of the current Article 17,[15] becoming the new Article 19, which will follow the same approach as SIAC and HKIAC in allowing non-signatories to ask to be joined to the proceedings and the arbitral tribunal or centre to join third parties, on their own merits, when all the parties consent or the non-signatory is prima facie a party to the arbitration agreement that gives the arbitral tribunal its jurisdiction.[16]

Latest developments in comparative case law

As with comparative law, it is important to examine the main internationally recognised criteria for extending the arbitral agreement to non-signatories, which often involves an interaction between supplementary doctrines applied by national courts and the legal provisions applicable to the arbitration agreement itself.[17] Evidently, this landscape is heavily influenced by the legal traditions of each of the jurisdictions in question, which may be more or less flexible when it comes to determining the existence of consent. As a result, while distinct approaches do make for an intricate legal landscape, we find some common ground across the three main clusters of doctrines invoked: those concerning the identities of the signatory and non-signatory parties; those regarding third-party beneficiaries; and those centred on the transfer or allocation of rights under the arbitration agreement. We will examine these doctrines in that same order.

The first set of doctrines include the 'piercing of the veil' theory (under which shareholders or directors can be held liable for a company's actions, setting aside limited liability)[18] or the 'single economic entity' doctrine, under which two or more companies are deemed to form a single economic unit and, if so, can be treated as a single entity also for dispute resolution purposes. Within this same doctrinal corpus, some jurisdictions, notably those influenced by French law,[19] apply the 'group of companies' doctrine to extend arbitration agreements to non-signatory affiliates of a corporate group when there is a sufficiently close relationship and mutual intent to arbitrate.[20] Following this doctrine, not long ago the Paris Court of Appeal partially annulled an arbitral award because it failed to extend the arbitration clause of a consortium investor agreement to multiple entities that joined it through a subsequent Memorandum of Understanding and played a major role in executing the main contract.[21] The common-law equivalent to the 'group of companies' doctrine (which, incidentally, English law rejects)[22] is the 'alter ego theory', which applies when a non-signatory and a signatory are closely related (such as a subsidiary or parent company, who would be the signatory's alter ego). In this case, the arbitration agreement is binding on both the signatory and the (alter ego) non-signatory. Worth mentioning is a recent Memorandum Order of the United States District Court for the District of Delaware, issued in the context of enforceability proceedings of a foreign award following the acquisition and reorganisation of the party against whom the award was sought to be enforced, which stated that under Delaware case law: '[i]n order to successfully establish alter ego liability, a plaintiff must show (1) that the corporation and its shareholders operated as a single economic entity, and (2) that an overall element of injustice or unfairness is present.' Lastly, the above doctrines in general only apply on a subsidiary basis and normally require a high standard of proof. For instance, the previously mentioned BGH decision of 9 March 2023 illustrates how strict German courts seem to be when establishing whether the parties have given their implied consent to arbitrate: the fact that a court 'pierces the corporate veil' does not automatically extend the arbitration agreement to third parties. According to the BGH, if a parent company or shareholder is directly liable for fraud, wrongdoing or injustice (a substantive point of law), an arbitration clause need not be extended to a non-signatory (a procedural point of law).

The second set of doctrines refers to 'third-party beneficiaries' who were not direct signatories of the contract itself but were intended to benefit from it, potentially becoming parties to the arbitration process, as they have rights and obligations under the contract that contains the arbitration agreement (i.e. including the arbitration agreement itself). In this context, common law jurisdictions often invoke the 'equitable estoppel' doctrine to prevent a party from taking inconsistent positions to its advantage, particularly when it has benefited from the contract having an arbitration clause. For example, in a recent 2020 decision about extending an arbitration clause to a subcontractor that had not signed the contract, the Supreme Court of the United States ('US Supreme Court') compiled the doctrines under which arbitration agreements can be extended to third parties, confirming that domestic estoppel doctrines are compatible with the 1958 New York Convention.[23] The continental law approach to 'third-party beneficiaries' is commonly articulated through the legal concept of stipulations pour autrui, which stands for a contractual provision made in the interest of a third party, commonly invoked in France and Switzerland.[24] For instance, a very recent 2023 decision of the Federal Supreme Court of Switzerland upheld its previous 2020 judgment that established that the beneficiary of a provision such as the disputed debt title also acquires both preferential and accessory rights against the debtor, including the arbitration clause. But the Swiss court also acknowledged that under previous case law in relation to guarantees (such as bonds or bank guarantees) the arbitral tribunal cannot assert its jurisdiction to rule on the creditor's rights against the guarantor solely because the contract binding the creditor and the debtor contains an arbitration clause.[25]

The third set of doctrines relates to transferring contractual rights and obligations, including the arbitration agreement, to parties other than the signatories (either via succession, subrogation, novation, assignment or similar legal acts).[26] Difficulties arise in cases such as assignment where the applicable law governing the assignment will determine whether an arbitration agreement is considered a right and as such, transferrable under the assignment, and whether the assignor continues to be a signatory. English, French and New York jurisdictions now generally presume that the arbitration agreement can be assigned to the assignee together with other favourable terms.[27] For instance, the United Kingdom Supreme Court ('UK Supreme Court') recently considered in 2021, following the execution of a franchise agreement with what is now a subsidiary in the food and beverages industry, whether the claimant could invoke the arbitration clause against the defendant's holding, despite the original contract having a non-oral modification clause. In doing so, the court confirmed the distinction between novation and assignment, and emphasised that only a matter of public policy can override an agreement between commercial parties. The UK Supreme Court found that there had been no novation and that any assignment without the assignee's consent is prohibited, and thus dismissed the possibility of extending the arbitration agreement.[28] Similar doctrines have been invoked in claims regarding agency, trusts and other matters concerning a general intent to be bound. Agency usually involves contracting in the name of a third party, with or without their consent, with varying criteria across jurisdictions.[29] Since trusts do not qualify as contracts, extending the arbitration clause to beneficiaries becomes all the more intricate, but it has been done in some jurisdictions based on a myriad of delegated consent theories.[30] Finally, general case law also typically examines the non-signatory's intent to be bound by the arbitration agreement, often inferred from their active involvement in the contractual relationship and pre-contractual dealings of the contract that contains the arbitration clause.

Conclusions

Arbitral clauses can indeed sometimes be surprising and magical 'legal creatures'. Arbitration is built on consent, but there are circumstances when parties, arbitral tribunals and national courts may determine that third parties (i.e. so-called non-signatories) are bound by an arbitration agreement.This situation has led some jurisdictions to incorporate statutory provisions that expressly allow arbitration agreements to be extended. Arbitral institutions have also reflected this in their institutional rules applicable to commercial arbitrations. When reviewing disputes concerning arbitrators' previous decisions, national courts apply different legal theories to determine whether third parties have actually 'consented' to arbitrate their disputes. These legal precedents adopt a more or less flexible approach when it comes to determining whether there has been consent and, as we have seen, are also heavily influenced by each respective jurisdiction's legal traditions. A sound understanding of this comparative case law and of the most well-known internationally accepted standards on the subject should be in every arbitration practitioner's toolkit.

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[1] See e.g. B. Hanotiau, Complex Arbitrations. Multiparty, Multicontract, Multi-issue and Class Actions, in Kluwer Law International (London: 2005); P. Mayer, 'The extension of the arbitration clause to non-signatories – The irreconcilable positions of French and English courts', in American University International Law Review (2012), Vol. 27, n.º 4 <https://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1786&context=auilr> accessed 26 October 2023; E. Silva Romero and L. Velarde Saffer, 'The extension of the arbitral agreement to non-signatories in Europe: a uniform approach?', in American University Business Law Review (2015), Vol. 5, n.º 3 <https://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=1098&context=aublr> accessed 22 October 2023, and see also S. Finizio, 'Changing arbitration. Solving the problem of consensual jurisdiction and third parties in a complex commercial world', in Young Arbitration Review (2023), Issue 45 <https://intranet01/Biblioteca/Documentos/libroonline/PT_YAR_45_Dec_Mar2023.pdf> accessed 2 November 2023.

[2] The term 'non-signatory' is not the most accurate, but has become a convenient way of describing in the international landscape those who may become a party to the arbitration proceedings despite not having signed the arbitral agreement. See N. Blackaby, et al, Redfern and Hunter on International Arbitration. Student version, in Oxford University Press (2015), Ed. 6, p. 14.

[3] See BGH decision, in German, available: <https://openjur.de/u/2467450.html> accessed 22 October 2023.

[4] M. Altenkirch and M. Barros Mota, 'German Federal Court of Justice on the extension of arbitration agreements to non-signatories (piercing of the corporate veil)', in Global Arbitration News (2023) <https://www.globalarbitrationnews.com/2023/06/30/germany-bgh-refused-recognition-and-enforcement-of-award-because-the-arbitral-tribunal-exceeded-its-personal-jurisdiction-by-extending-an-arbitration-agreement-to-a-de-facto-group-of-companies/> accessed 22 October 2023.

[5] Spanish Constitution, 29 December 1978, Art. 24, which guarantees, inter alia, the right to effective judicial protection, as well as the right to access a legally predetermined judge to hear ordinary proceedings. Available, in Spanish: <https://www.boe.es/buscar/act.php?id=BOE-A-1978-31229> accessed 2 November 2023.

[6] Contracts (Rights of Third Parties) Act 1999, Section 8, entered into force 11 November 1999 <https://www.legislation.gov.uk/ukpga/1999/31/section/8> accessed 23 October 2023.

[7] Law Commission 'Review of the Arbitration Act 1996' (6 September 2023) <https://www.lawcom.gov.uk/project/review-of-the-arbitration-act-1996/> accessed 23 October 2023.

[8] Peruvian Arbitration Act, Decreto Legislativo n.º 1071, 2 June 2008, Art. 14 <https://www2.congreso.gob.pe/sicr/cendocbib/con4_uibd.nsf/2C9D50264B99434A05257E2F005849F7/$FILE/DL_1071.pdf> accessed 23 October 2023.

[9] Italian Civil Procedure Code, Regio Decreto No. 1443 (Gazzetta Ufficiale No. 253), 28 October 1940 <https://www.gazzettaufficiale.it/atto/serie_generale/caricaArticolo?art.versione=2&art.idGruppo=145&art.flagTipoArticolo=1&art.codiceRedazionale=040U1443&art.idArticolo=838&art.idSottoArticolo=2&art.idSottoArticolo1=10&art.dataPubblicazioneGazzetta=1940-10-28&art.progressivo=0#art> accessed 23 October 2023.

[10] LCIA 2020 Arbitration Rules, Art. 22(x) <https://www.lcia.org/Dispute_Resolution_Services/lcia-arbitration-rules-2020.aspx> accessed 23 October 2023.

[11] SCC Arbitration Rules 2023, Art. 13 <scc_arbitration_rules_2023_eng.pdf (sccarbitrationinstitute.se)> accessed 23 October 2023.

[12] ICC 2021 Arbitration Rules, Art. 6.4)(i) <https://iccwbo.org/dispute-resolution/dispute-resolution-services/arbitration/rules-procedure/2021-arbitration-rules/> accessed 23 October 2023.

[13] SIAC Rules 2016, Art. 7 <https://siac.org.sg/siac-rules-2016> accessed 23 October 2023.

[14] 2018 HKIAC Administered Arbitration Rules, Art. 27 <https://www.hkiac.org/sites/default/files/ck_filebrowser/PDF/arbitration/2018%20Rules%20book/2018%20AA%20Rules_English.pdf> accessed 23 October 2023.

[15] MIAC Arbitration Rules (2019), entered into force 1 January 2020, Art. 17 <https://madridarb.com/wp-content/uploads/2020/04/REGLAMENTO_CIAM_DIGITAL-DEF2.pdf> accessed 23 October 2023.

[16] MIAC Arbitration Rules (2023), entering into force 1 January 2024, Art. 19 <https://madridarb.com/wp-content/uploads/2023/10/Reglamento_CIAM_2023.pdf> accessed 23 October 2023.

[17] E. Silva Romero and L. Miguel Velarde Saffer, supra Fn. 1.

[18] G. Born, 'International Arbitration' (Wolters Kluwer: 2015), pp. 575-578.

[19] France is considered to have a very flexible approach concerning the required threshold to prove implied consent, due to, inter alia, how prominent the 'group of companies' doctrine and justice considerations are under French law (see E. Silva Romero and L. Miguel Velarde Saffer, supra Fn. 1).

[20] M. Gómez Jene, 'El Convenio Arbitral: Statu Quo' in Cuadernos de Derecho Transnacional n.º 2/2017 (October 2017)

 <https://www.cuatrecasas.com/resources/publication-5f6868f2cfa78.pdf?v1.59.0.20230824> accessed 23 October 2023.

[21] New Europe Corporate Advisory Ltd and Epic Financial Consulting v Innova, Cour d'appel de Paris, Case n.º 16/24924 (18 December 2018), Portalis No. 35L7-VB7A-B2GJ7 <https://www.dalloz-actualite.fr/sites/dalloz-actualite.fr/files/resources/2019/01/16-24924.pdf> accessed 23 October 2023.

[22] This, together with the fact that English law has no general principle of good faith and the prominence of the doctrine of privity of contract, has led some to consider English law as having a very stringent approach towards the analysis of implied consent to arbitrate (see E. Silva Romero and L. Miguel Velarde Saffer, supra Fn. 1).

[23] US Supreme Court, Case n.º 18/1048 (1 June 2020) <https://www.supremecourt.gov/opinions/19pdf/18-1048_8ok0.pdf> accessed 23 October 2023.

[24] N. Blackaby, et al, Redfern and Hunter on International Arbitration. Student version, in Oxford University Press (2015), Ed. 6, p. 88.

[25] Tribunal Fédéral Suisse, Arrêt n.º 4A_546/2022 (9 January 2023) <https://www.bger.ch/ext/eurospider/live/de/php/aza/http/index.php?lang=de&type=highlight_simple_query&page=1&from_date=09.01.2023&to_date=09.01.2023&sort=relevance&insertion_date=&top_subcollection_aza=all&query_words=&rank=4&azaclir=aza&highlight_docid=aza%3A%2F%2F09-01-2023-6B_162-2022&number_of_ranks=8> and Tribunal Fédéral Suisse, Arrêt n.º 4A_528/2019 (7 December 2020) <https://www.bger.ch/ext/eurospider/live/de/php/aza/http/index.php?highlight_docid=aza%3A%2F%2F07-12-2020-4A_528-2019&lang=de&type=show_document&zoom=YES&> > accessed 23 October 2023.

[26] J.A. Cremades, 'Problems that Arise from Changes Affecting one of the Signatories to the Arbitration Clause', in ICC International Court of Arbitration Bulletin (1996), Vol. 7 n.º 2, p. 28.

[27] N. Blackaby, et al, Redfern and Hunter on International Arbitration. Student version, in Oxford University Press (2015), Ed. 6, p. 89.

[28] Kabab-Ji SAL (Lebanon) (Appellant) v Kout Food Group (Kuwait) (Respondent), 27 October 2021, during the Michaelmas Term [2021], Case ID: 2020/0036 <https://www.supremecourt.uk/cases/uksc-2020-0036.html> accessed 23 October 2023.

[29] N. Blackaby, et al, Redfern and Hunter on International Arbitration. Student version, in Oxford University Press (2015), Ed. 6, p. 90.

[30] Clifford Chance, 'Arbitration agreements in trust instruments - are they binding on beneficiaries?' (June 2013) <https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2013/06/arbitration-agreements-in-trust-instruments-are-they-binding-on-beneficiaries.pdf> accessed 23 October 2023.