Party to an Arbitration Agreement Party to an Arbitration Agreement Case of Non SignatoryCase of Non Signatory

‘‘Group of Companies Doctrine’Group of Companies Doctrine’

Mohit SarafMohit Saraf

PartnerPartner

Luthra & Luthra Law OfficesLuthra & Luthra Law Offices

IndiaIndia

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FrameworkFramework

Section I : Evolution of the doctrineSection I : Evolution of the doctrine

Section II : Status of the doctrine inSection II : Status of the doctrine in different jurisdictions different jurisdictions

Section III: SubmissionsSection III: Submissions

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Section ISection I

The DoctrineThe Doctrine

A non-signatory may benefit from or be A non-signatory may benefit from or be bound by an arbitration agreement signed bound by an arbitration agreement signed by a group company because of its role in by a group company because of its role in the transactionthe transaction

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

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Formulation of the DoctrineFormulation of the Doctrine Dow Chemical Dow Chemical v.v. Isover Saint Gobain Isover Saint Gobain (ICC Award, (ICC Award,

1982)1982)– Contractual arrangements between two Dow subsidiaries and Contractual arrangements between two Dow subsidiaries and

Saint GobainSaint Gobain

– Contracts entered into between the parties permitted any Dow Contracts entered into between the parties permitted any Dow subsidiaries to make deliveries contemplated under the subsidiaries to make deliveries contemplated under the contractscontracts

» In practice only one claimant was making deliveriesIn practice only one claimant was making deliveries

– Claimants were four Dow entities connected with the contracts Claimants were four Dow entities connected with the contracts

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

– Contracts silent about law governing arbitration agreementContracts silent about law governing arbitration agreement

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Formulation of the DoctrineFormulation of the Doctrine Autonomy of arbitration clause - tribunal separated arbitration Autonomy of arbitration clause - tribunal separated arbitration

agreement & main contractagreement & main contract

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

Applied French law to merits of the disputeApplied French law to merits of the dispute

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

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

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Dow Arbitration AwardDow Arbitration Award Arbitration clause signed by two of the companies was Arbitration clause signed by two of the companies was

also also intendedintended by the parties to be available to other Dow by the parties to be available to other Dow entitiesentities

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

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

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Dow Arbitration AwardDow Arbitration Award Tribunal took into accountTribunal took into account

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

– ““Common intent of parties”- Law governing Arbitration Common intent of parties”- Law governing Arbitration agreementagreement

– French case laws dealing with international arbitrationFrench case laws dealing with international arbitration– ““Usages conforming to needs of international commerce” Usages conforming to needs of international commerce” – Enforceability of award in France (Article 26- 1975 rules)Enforceability of award in France (Article 26- 1975 rules)– International public policyInternational public policy

Paris Court of Appeals affirmed DowParis Court of Appeals affirmed Dow

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Section IISection II

Status of the DoctrineStatus of the Doctrine Not followed consistently in ICC awardsNot followed consistently in ICC awards

Recognized by French courtsRecognized by French courts

Rejected in UK in Rejected in UK in PetersonPeterson case case

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

Indian courts normally guided by common law Indian courts normally guided by common law

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Subsequent ICC AwardsSubsequent ICC Awards ICC case no. 7626 of 1985 ICC case no. 7626 of 1985

– Governing law- Indian law. Refused to apply the doctrine citing English 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. 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 Did not interpret ‘common intent of the parties instead applied proper law.law.

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

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

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

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

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Subsequent ICC AwardsSubsequent ICC Awards Extended to companies that participated in Extended to companies that participated in

negotiation, conclusion, or termination of contract negotiation, conclusion, or termination of contract

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

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

Expansive application of ‘common intention of Expansive application of ‘common intention of parties’parties’

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France- Terra FirmaFrance- Terra Firma ‘‘Group of companies’ recognized under French law Group of companies’ recognized under French law

– Where parties directly implicated in the performance of Where parties directly implicated in the performance of the contractthe contract

– Provided, it is possible to infer a presumption of Provided, it is possible to infer a presumption of awareness of arbitration agreementawareness of arbitration agreement

‘‘Common intention of parties’ for determining law Common intention of parties’ for determining law of arbitration agreement as touchstone provided of arbitration agreement as touchstone provided no no mandatory provision of French law or international mandatory provision of French law or international public policy violatedpublic policy violated– Liberal interpretation given by French courtsLiberal interpretation given by French courts– ‘‘Full Autonomy’ of arbitration agreement Full Autonomy’ of arbitration agreement

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USA- Alternate ApproachesUSA- Alternate Approaches Courts determine ‘party’Courts determine ‘party’ Doctrine not explicitly recognizedDoctrine not explicitly recognized Doctrine of ‘alter ego’ applied Doctrine of ‘alter ego’ applied with similar resultswith similar results Alternate approach followed in some decisionsAlternate approach followed in some decisions

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

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

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

– Equitable estoppel Equitable estoppel – AgencyAgency– Third Party Beneficiary etcThird Party Beneficiary etc

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USA- Doctrine of Alter EgoUSA- Doctrine of Alter Ego

Ordinary contract law principles for determining Ordinary contract law principles for determining alter ego statusalter ego status– Standard extremely difficult to satisfyStandard extremely difficult to satisfy

– Strong presumption of separate legal entityStrong presumption of separate legal entity

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

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

As a result separate legal personality gets blurredAs a result separate legal personality gets blurred

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United KingdomUnited Kingdom Peterson Farms Inc. Peterson Farms Inc. v. v. C & M Farming Ltd. C & M Farming Ltd.

(February, 2004)(February, 2004)

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

principles to determine ‘Law governing arbitration principles to determine ‘Law governing arbitration agreement’agreement’

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

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

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United KingdomUnited Kingdom

Peterson Farms Inc. Peterson Farms Inc. v. v. C & M Farming Ltd.C & M Farming Ltd.– S. 2(1),English Arbitration Act applicable – ‘Seat’S. 2(1),English Arbitration Act applicable – ‘Seat’– Agreement between parties that as to the applicability Agreement between parties that as to the applicability

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

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

– Court held that the doctrine was not recognized in Court held that the doctrine was not recognized in English law.English law.

» Separate legal entity cornerstone of English company lawSeparate legal entity cornerstone of English company law» Limited exceptions recognized Limited exceptions recognized

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UK- Alternate ApproachesUK- Alternate Approaches “…“….any person claiming .any person claiming under or throughunder or through a party to the a party to the

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

within the purview of arbitration clausewithin the purview of arbitration clause

Third party beneficiary [Contracts (RTP) Act, 1999]Third party beneficiary [Contracts (RTP) Act, 1999]– S 1(4), (5): third party's right of enforcement is subject to the 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 contract's terms and conditions and the courts may award all the remedies which are available to the partiesthe remedies which are available to the parties

– S 8: deems a third party to be a party to the arbitration S 8: deems a third party to be a party to the arbitration agreementagreement

Agency, Assignment, Subrogation, Promissory estoppel etc.Agency, Assignment, Subrogation, Promissory estoppel etc.

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India- Untested WatersIndia- Untested Waters

Group of Companies’ not tested in Indian courts yetGroup of Companies’ not tested in Indian courts yet

‘‘Arbitration & Conciliation Act, 1996Arbitration & Conciliation Act, 1996– ‘‘Party’ means party to an arbitration agreement (S. 2.(1) (h) )Party’ means party to an arbitration agreement (S. 2.(1) (h) )– Power of court to refer parties to arbitration (S. 8 )Power of court to refer parties to arbitration (S. 8 )

Sukanya Holdings Sukanya Holdings v. v. Jayesh Panda Jayesh Panda (2003 SC)(2003 SC)– Application by non-signatory for joinder to arbitration 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 WatersIndia- Untested Waters Indian courts generally not sympathetic to third party Indian courts generally not sympathetic to third party

rightsrights

Strong English common law traditionsStrong English common law traditions

Decision inDecision in ONGC ONGC v. v. SAW Pipes SAW Pipes (2003 SC)(2003 SC)– Expanded the definition of ‘Public Policy’ under s. 34, A&C Act, 1996 Expanded the definition of ‘Public Policy’ under s. 34, A&C Act, 1996 – If award is ‘If award is ‘patently illegal’patently illegal’ it may be set aside it may be set aside– In contravention of the terms of the contractIn contravention of the terms of the contract– Decision undermines ‘finality’ of arbitral awardsDecision undermines ‘finality’ of arbitral awards– Applicable to ‘international commercial arbitration’ held in IndiaApplicable to ‘international commercial arbitration’ held in India– Not applicable to awards from New York & Geneva Convention Not applicable to awards from New York & Geneva Convention

countriescountries

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Group of Companies: Is it ‘law’? Group of Companies: Is it ‘law’?

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

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

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

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

Court’s mandate flows from a constitutional documentCourt’s mandate flows from a constitutional document– A Private body may not set precedent for public body like courtA Private body may not set precedent for public body like court– Tribunal becomes ‘Tribunal becomes ‘functus officio’ functus officio’ after the award is givenafter the award is given

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Section IIISection III

SubmissionsSubmissions ‘‘Group of companies’ - fact specific applicationGroup of companies’ - fact specific application Where ‘Law governing arbitration agreement’ is silent Where ‘Law governing arbitration agreement’ is silent

the status of third parties may be determined by the status of third parties may be determined by reference to proper law of contractreference to proper law of contract

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

Implications of the Implications of the PetersonPeterson case case– Parties’ choice of governing law Parties’ choice of governing law

– Parties’ choice of seat of arbitration Parties’ choice of seat of arbitration

» May give rise to forum shoppingMay give rise to forum shopping

– Implications for ICC governed arbitrations Implications for ICC governed arbitrations

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SubmissionsSubmissions

‘‘Consent’ as touchstone to determine third party Consent’ as touchstone to determine third party rights rights

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

Care should be taken at the time of drafting of Care should be taken at the time of drafting of contractcontract– Parties should clearly specify governing law of the Parties should clearly specify governing law of the

arbitration agreementarbitration agreement– Foresee potential third parties issuesForesee potential third parties issues

Luthra & Luthra Law OfficesLuthra & Luthra Law Offices

New Delhi . Mumbai New Delhi . Mumbai msaraf@luthra.commsaraf@luthra.com