Non-Signatories and Abuse of Corporate Structure in International Commercial Arbitration

i. Third party beneficiaries

Firstly, it must be noted that arbitration is contractual by nature. However, it does not follow that the obligation to arbitrate attaches only to a party which has personally signed the written arbitration agreement[26].

Secondly, when it comes to third party beneficiaries, parties’ extent of participation in conclusion of the contract or its execution must be assessed thoroughly. One needs to weigh relevant party’s influence on the termination of the contract and its knowledge of the content of the contract. Furthermore, it must be assessed whether a party knew about the arbitration agreement and the content of such agreement. The latter would prove that a non-signatory party is aware of the arbitration clause and obligations contained therein[27].

The self-standing validity and effectiveness of the arbitration clause in the agreement requires that the obligation to arbitrate includes parties which are directly implicated in the performance of the contract and in the disputes, provided they are aware of the arbitration agreement, even though they were not signatories of the contract itself[28].

Thus, receipt of payments due in connection with the agreement can be regarded as direct consent to the terms of the agreement and substantial involvement in the performance of a contract. Therefore, when it comes to third party beneficiaries, who know under what basis they are receiving payments, they should be regarded as having full knowledge of the agreement and, respectively, the arbitration clause. Such a conduct would demonstrate that third party beneficiaries consented to being bound by the arbitration agreement. The latter would also imply a tacit consent[29].

In addition, it can be stated that, receipt of payments by beneficiaries can be viewed as an engagement in a commercial relationship with the original party, framed by the agreement (including the arbitration clause).

As it is provided in the commentary, courts and arbitral tribunals will take into consideration the conduct of the party in the negotiation and performance, and will infer consent to be bound where there was a significant involvement by the party[30]. In making its assessment the tribunal should consider not just the arbitration agreement, but all economic and legal aspects of the dispute[31].

For example, the Paris Court of Appeals in Société V 2000 v Société Project[32] held that that the effects of the arbitration clause extend to parties directly involved in the performance of the contract, provided that the actions and surrounding circumstances raise the presumption that they were aware of the existence and scope of the arbitration clause.

Another example may be brought by the practice of U.S. courts which state that “for a person to be an intended third-party beneficiary, the contract must have been entered into directly or for the benefit of that person”[33].

Therefore, taking into account basic principles of contract law, it can be stated that creditor beneficiary can enforce the contract against the party who owes the benefit or against the party who has contracted to provide it[34]. Similarly, a right to enforce the contract should raise the presumption that a third party was aware of the existence and scope of the contract, including the arbitration clause. In addition, it can be stated that if the terms of the contract specifically state that a third party will be a creditor beneficiary, the contract cannot be satisfied without the involvement of the third party. Therefore, the latter could be regarded as significant involvement, which would satisfy the requirements of making the presumption, according to which the third party was aware of the existence and scope of the contract and the arbitration clause contained therein.

Taking into account the above and the principle that each party knows her rights and duties, it can be legitimately presumed that the third party beneficiary was aware of its rights and duties under the contract, including the arbitration clause.

Were it otherwise, the ability of the tribunal to render an effective award would be undermined. The autonomous validity and effectiveness of the arbitration agreement would support the conclusion that third party beneficiaries consent to the agreement by their conduct.

It should also be noted that even if one would not consider the argument of significant involvement as basis to presume the awareness of the arbitration clause, another argument could be brought merely on the existence of third-party beneficiary in the contract.

As provided in the commentary, the third party may either be able to invoke or may be bound by an arbitration clause contained in the contract[35]. Therefore it follows that if third party beneficiary is able to enforce the contract against the original party, then the original party is also enabled to enforce the contract against third party beneficiary.

This conclusion is also confirmed by a number of cases[36]. As an example, the practice of arbitration under ICC Rules should be noted:

“It is generally accepted that if a party is bound by the same obligations stipulated by a party to a contract and this contract contains an arbitration clause or, in relation to it, an arbitration agreement exists, such third party is also bound by the arbitration clause, or arbitration agreement, even if it did not sign it”[37]

This conclusion is also provided in UNIDROIT principles of International Commercial Contracts, Art. 5.2.1 (2004) – “A promise in a contract creates a duty to the promisor to any intended beneficiary to perform the promise, and the intended beneficiary may enforce the duty”, or as it is provided in Rights of third parties Act 1999 of England, “where a substantive term of a contract is subject to an arbitration agreement, then that term cannot be conferred on a third-party beneficiary without subjecting that party to the arbitration agreement”.

Further, the situation is more complex when the entities involved are all of different nature, for example in case of concession contracts or public procurement agreements. In addition, the situation is even more complex where there is no information regarding the relationship or subordination of these entities. However, usually it may be presumed that the holding company subordinates its subsidiaries, and it can be stated that it should be bound by the arbitration clause, because the subsidiaries were acting on behalf of the controlling company.

For example, in Dallah[38] case, the Tribunal found that, notwithstanding the fact that the government did not sign the arbitration agreement, it was still bound to arbitrate, because an entity which signed the respective contract was the alter ego of the government. The tribunal based its decision on the fact that the government was exclusively involved in the negotiations upon signing the contract. The Tribunal also stressed that it applied “the transnational general principles and usages reflecting the fundamental requirements of justice in international trade and the concept of good faith in international business.”

Another example can be brought by the Pyramids Plateau Case[39] where the Egyptian Ministry of Tourism participated in the negotiations of the contract, and the Minister of Tourism executed and concluded the contract. The tribunal held that by signing the actual contract by a government official was a clear evidence of the intention by the Egyptian government to be bound by arbitration agreement.

However, third party beneficiary is not the only means of the extension of arbitration clause to third parties. Other concepts such as one economic entity should also be analysed as the ‘Doctrine of Group of companies’ is also relevant is this context.

ii. Group of companies

As it was stated above, the benefit acquired by the third party may serve as a basis to claim that the third party beneficiary is bound by the arbitration clause. Similar argumentation could be brought in case of concession contracts, because the nature of concession contracts provides that these contracts are basically concluded in favour of the state as a whole and not in favour of certain public entities. For example, in ICSID case Vivendi[40], a dispute arose from concession contract concluded by French company, its Argentine affiliate and province of Argentina, concerning operation of water and sewage system. Argentine maintained that the dispute related exclusively to the concession contract to which it was not a party. The Tribunal, while dealing with the question of its jurisdiction, found that under international law it was well established that the actions of states political subvisions were attributable to the central government.

Therefore, it can be argued that there is no difference which party from the group of companies signed the contract, because their actions and activities are considered as acts of its controlling entity – the state in the example of concession contracts or the holding company in case of private agreements.

Another example was brought in one of the ICC cases where the arbitral tribunal relied in part on the ‘Group of Companies doctrine’ to find that a State entity, which was one of the respondents in the case, could be held liable for the acts of a second respondent in the case, who represented a sub-division (i.e. the Ministry of Agriculture) of that State entity[41].

It can be argued that in this case the state and its entities formed “one and the same economic reality” [42]. The latter term was brought in the Isover-Saint-Gobain v. Dow Chemical[43] case.

It was stated in the latter case that a parent company will be deemed to be bound by an arbitration agreement entered into by one of its subsidiaries if the parent company appears to be chiefly concerned by the contract and any disputes that may arise in its connection. The court held, in substance, that the self-standing validity of an arbitration agreement in an international contract requires that its scope be extended to parties which are directly implicated in the performance of the contract and in the disputes that may arise therefrom, as long as it is established that their situation and activities gives rise to the presumption that they were aware of the existence and the scope of the arbitration agreement, even though they were not named in the contract containing it. Whereas this case law was originally limited to the extension of arbitration agreements to companies of a group under the justification that a group should be viewed as a whole, according to the economic reality, courts and arbitral tribunals have been prompt to free themselves of this obstacle and apply it in other cases as well.[44]

Similarly, in ICC Case No. 10510 of year of 2000, the arbitral tribunal extended the arbitration agreement to B Japan, acting as wholly owned subsidiary of B France, signatory of a distribution agreement with S, a Japanese company – whose purpose was the distribution in Japan of B France products – the arbitration clause contained in the said agreement. Or as it was the case in ICC Case no. 2375 of 1975, where the tribunal stated:

“a whole where each of the dominated and dominant companies of the two groups are indissolubly bound and committed<…> it would be inconceivable that the arbitral tribunal should isolate the (arbitration) clause of Article 9 from these complex links and decide that it does not apply to the present proceedings”.[45]

Similarly, since if it would be established that a parent company is exercising total control on its subsidiaries, the ‘alter ego doctrine’ must also be applied[46]. There were a substantial number of cases where subsidiary companies were regarded as the alter ego of their parent companies[47] and the latter was usually found to be bound by the contracts signed by its subsidiaries[48].

In Hamilton v. Water Whole International Corp[49]., the U.S. Court of Appeals for the Tenth Circuit identified nine relevant factors for determining when a corporation becomes an alter ego.

These factors were:

(1) whether the dominant corporation owns or subscribes to all the subservient corporation’s stock, (2) whether the dominant and subservient corporations have common directors and officers, (3) whether the dominant corporation provides financing to the subservient corporation, (4) whether the subservient corporation is grossly undercapitalized, (5) whether the dominant corporation pays the salaries, expenses or losses of the subservient corporation,(6) whether most of the subservient corporation’s business is with the dominant corporation or the subservient corporation’s assets were conveyed from the dominant corporation, (7) whether the dominant corporation refers to the subservient corporation as a division or department, (8) whether the subservient corporation’s officers or directors follow the dominant corporation’s directions, and (9) whether the corporations observe the legal formalities for keeping the entities separate.

For example, in JJ. Ryan & Sons vs. Rhone Poulenc Textile[50], the Court noted that when allegations against „a parent company and its subsidiary are based on the same facts and are inherently inseparable, a court may refer claims against the parent to arbitration even though the parent is not formally a party to the arbitration agreement“.

Thus, although formally parties may be regarded as separate companies, legal independence of these individual entities is not relevant in certain cases, because a group of companies constitutes one and the same economic reality where the circumstances of a contract’s conclusion, performance, and termination, and the degree of influence amongst members of the group warrants such an inference[51]. When the claims against the companies are based on the same facts and are inherently inseparable, a party which has not signed the arbitration agreement should be considered bound by the agreement, or else the arbitration proceedings would be rendered meaningless[52].

So when one is considering the applicability of arbitration clause to a company coming after corporate structuring or reorganization, determination of whether an arbitration clause should be considered to bind other companies of the group or its shareholders is a matter which must be decided on a case-to-case basis, requiring close analysis of:

(a) the circumstances in which the agreement was made;

(b) the corporate and practical relationship existing on one side and known to those on the other side of the bargain;

(c) the actual or presumed intention of the parties as regards the rights of non-signatories to participate in the arbitration agreement; and

(d) the circumstances under which non-signatories subsequently became involved in the performance of the agreement and in the dispute arising from it[53].

Another example can be brought by the practice of The Swiss Federal Tribunal which on 16 October 2003 dealt with non-signatories. In this case, three Lebanese companies (X, Y and Z) entered into a construction contract containing an arbitration clause. When a dispute arose, Z commenced proceedings against X, Y and Mr A. (who was not a party to the agreement), on the basis that Mr A. actively participated in the negotiations and performance of the contract. The Federal Tribunal, applying the principle of good faith, allowed an extension of the arbitration agreement to Mr A[54].

Similarly, as it was stated by the Tribunal in 1977 award in ICC Case No. 2626:

“The dominant trend in case law holds that an arbitration agreement is not only valid between the parties, but can also be relied upon against their heirs, their legatees, their assignees and all those acquiring obligations.”

In the latter award, the arbitrators concluded that the conversion of a limited liability company (societe a responsabilite limitee), which had signed an arbitration agreement, into joint stock corporation (societe par actions) did not prevent the arbitration agreement from being relied upon against the company as it existed after the conversion.

Furthermore, an example of abusive corporate structuring can be observed in the ICC Case No. 5730 (“Orri”) where the Tribunal found that a single fact pattern might lend itself both to disregard of the corporate form and to finding implied consent. A parent company’s fraudulent manipulation[55] of an undercapitalized subsidiary could justify disregard of the corporate form, as well as a finding that the subsidiary acted merely as agent for the parent company, which was the true contracting party.

Although the inquiry is fact-specific in each case, courts will look to whether corporate formalities, such as regular maintenance of board minutes, books, and records have been disregarded, whether the same office space was used by the corporate entity and the individual shareholders, whether there has been a commingling of funds and other assets of the corporation with those of the individual officers or shareholders, and whether corporate funds or assets have been diverted to non-corporate uses such as the personal uses of the corporation’s officers or shareholders.

iii. Agency

Alternatively, traditional principles of agency law may bind a non-signatory to an arbitration agreement[56]. Where it is established that one party signed the agreement to arbitrate as agent for a third party, the latter will be also considered bound by the arbitration agreement[57] .

A principal may authorize an agent to bind it on the basis of actual authority, apparent authority, or subsequent ratification. Therefore, if one would consider a state or a holding company as a presiding body in respect of all its subsidiaries or affiliates, then it could be stated that the subordinated party signed the contract (and the arbitration clause) on behalf of controlling entity[58].

In the alternative, if there was no actual authority for subordinated entity to act as agent, the controlling entity may be bound as a result of apparent authority[59]. A principle, whose conduct leads a third party reasonably to believe that the agent has authority to act on its behalf, is prevented from invoking against the third party the lack of authority and is therefore bound by the latter’s act [Agency Convention Art. 14]. Whether the third party’s belief was reasonable will depend on the circumstances of the case[60]. Apparent authority is an application of the general principle of good faith and the prohibition of inconsistent behavior[61] (UNIDROIT Arts. 1.7, 1.8).

As it was argued, a principal will generally be bound by an arbitration clause in a contract signed by its agent[62]. As a result, arguments about whether a non-signatory should be compelled to arbitrate will only arise where there is no explicit contract between the principal and its agent[63] and the principal does not wish to be part of the arbitration. In China National, for example, the Federal Supreme Court of Switzerland upheld the decision by the arbitral tribunal against a signatory agent based on the fact that agent and principal held themselves out as one indistinguishable entity[64].

As it is provided in the case law[65] – „Ordinary contract and agency principles determine which parties are bound by an arbitration agreement, and parties can become contractually bound absent their signatures.“[66]

Although, application of the institute of agency may be problematic in various jurisdictions as its principles are not universally applied, it just indicates that there are various tools to consider when trying precluding state entities or holding companies to escape its obligations arising under arbitration agreement.

iv. Estoppel

As it was observed above, there are number of tools in international practice which would preclude parties evading their obligations while hiding under corporate structure.

In this context, the doctrine of estoppel should be considered as well, because the latter doctrine serves to preclude a party from enjoying rights and benefits under a contract while at the same time avoiding its burdens and obligations[67].Estoppel will recognize a party which has not signed the contract as bound by an arbitration agreement where the party is inextricably intertwined with the contract, or alternatively where the party has received a direct benefit under the agreement[68].

As it was stated in Deloitte[69] case, “A party is estopped from denying its obligation to arbitrate when it receives a direct benefit from a contract containing an arbitration clause”.

Another example can be brought by McBro Planning[70] case which concerned a hospital construction dispute. The hospital had two separate agreements with its electrical contractor, Triangle, and its construction manager, McBro. Both contracts contained identical arbitration provisions, however the Triangle agreement expressly denied any contractual relationship between Triangle and McBro. Despite the denial of any contractual agreement, the court compelled Triangle to arbitrate its claims with McBro. The court found that the dispute was inextricably linked with McBro’s contract with the hospital and the parties were sufficiently connected, such that Triangle was estopped from denying arbitration.

Or as it was even more complex issue in ABS[71] case, where Tencara had contracted with a syndicate to build a yacht. The contract required the American Bureau of Shipping (ABS) to classify the yacht. Tencara entered into a contract containing an arbitration clause for the ABS to classify the yacht. The yacht sustained serious hull damage due to poor design and construction. Tencara sued the ABS in Italy and the yacht’s owners sued the ABS in France. The ABS brought suit in New York to compel all parties to arbitrate their claims together. The owners claimed they were not a party to the contract between Tencara and the ABS and, therefore, were not a party to the arbitration agreement. The court held that the owners were obliged to arbitrate. Since the owners had received the benefit of the ABS’s classification in the form of lower insurance rates and being able to sail in French waters, they were precluded from claiming the arbitration agreement did not apply to them.

Therefore, where a party received significant direct benefits arising from the agreement, it should be estopped from denying the extension of arbitration clause and should be bound by the arbitration agreement which forms part of the agreement from which it directly benefits[72].

As it was stated by one U.S. federal court judge “a non- signatory [should be prevented] from embracing a contract, and then turning its back on the portions of the contract, such as [the] arbitration clause, that it finds distasteful” [E.I. DuPont (U.S.)].