This article has been written by Tanisha Kohli pursuing the Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.

Introduction

It is a cardinal principle of contract law that only the signatories to an agreement are bound by the terms of that agreement; however, a non-signatory party to an arbitration agreement can be bound by the arbitration agreement. In other words, this means that a party can initiate arbitration or be compelled to participate in the arbitration, even if it has not signed the arbitration agreement. An arbitration agreement is considered binding on a non-signatory by making use of the generally accepted principles of contract law, agency, and corporate law. These include principles such as estoppel, implied consent, lifting of the corporate veil, and the group of companies doctrine, among others. The aim of the article is to put forth the arguments in support of the fact that the ‘group of companies’ doctrine binds a non-signatory to an arbitration agreement in international commercial arbitration. 

What is the ‘group of companies’ doctrine?

By the applicability of the group of companies doctrine, where a company that is part of a corporate group, and controls a corporate affiliate that has executed a contract and is involved in the negotiation or performance of the contract, then the company may invoke or be subjected to an arbitration clause contained in that contract, notwithstanding the fact that it has not executed the contract itself.

The group of companies doctrine can bind the claimant and/or the respondent. For instance, the parent company of a subsidiary may wish to invoke arbitration against a third company with which the subsidiary had signed an arbitration agreement. Conversely, the claimant may invoke arbitration against the parent company of a subsidiary, under an arbitration agreement signed between the claimant and subsidiary. 

A landmark decision on the group of companies doctrine is ICC Case No. 4131, between Dow Chemical Company (“Dow”), together with various of its subsidiaries, and Isover Saint Gobain (“Isover”). In this case, several contracts containing ICC arbitration clauses had been signed between many of Dow’s 100% subsidiaries, but not Dow itself. Thereafter, as a result of issues that arose under the contracts, Dow and three of its subsidiaries commenced an ICC arbitration against Isover. Isover contended that the arbitral tribunal did not have jurisdiction to hear claims asserted by Dow, as well as one of its subsidiaries, on the ground that Dow and the subsidiary had not executed the concerned contract. The arbitral tribunal upheld the right of Dow and its subsidiaries to invoke the arbitration clause. The tribunal concluded that “irrespective of the distinct juridical identity of each of its members, a group of companies constitutes one and the same economic reality (une réalité économique unique),” and that the arbitration clause bound all the Dow companies which, “by virtue of their role in the conclusion, performance, or termination of the contracts containing said clauses, and in accordance with the mutual intention of all parties to the proceedings, appear to have been veritable parties to these contracts or to have been principally concerned by them and the disputes to which they may give rise.” A substantial body of international arbitration authority have discussed or relied upon the Dow Chemical as establishing the “group of companies doctrine”.

Not all jurisdictions have had a favorable attitude towards the group of companies doctrine. Thus, the acceptability of the doctrine will have to be determined by the law applicable to the arbitration agreement. Generally speaking, civil law jurisdictions such as France have been more willing to apply the doctrine. English courts on the other hand have rejected the doctrine, stressing the importance of the concept that each company is a separate legal entity, and that the distinction between the parent and subsidiary company cannot be bridged.

Argument 1 : there exists a tight group structure in the group of companies of the non-signatory

For the applicability of the group of companies doctrine, the group structure of the group of companies has to be sufficiently tight wherein one group member has to exercise significant control over the other group member(s), with strong financial and organizational links between the companies. This exercise of control is determined through fact patterns, such as commonly owned intellectual property, financing of one company by the other, common managerial personnel, sharing of assets, offices, and even premises, among others. 

Thus, it can be argued that the non-signatory, for instance, the parent company of the signatory subsidiary, belonged to the same group of companies at the time of negotiation and performance of the main contract and that the group structure is sufficiently tight, wherein in the non-signatory parent company has significant control over the signatory subsidiary. This control can be demonstrated by the relevant facts. For instance, it may be argued that there is a strong organizational link between the companies. The organizational chart of the non-signatory parent company includes people in charge of the performance of the agreements of the subsidiary, including the present main contract. This control is also indicated in the sharing of assets, for instance, a manufacturing plant which is used for the performance of the main contract between the parties is owned by the group of companies.

Argument 2 : the non-signatory has participated in every phase of the main contract

It is highly unreasonable and unlikely that the non-signatory actively participated in the conclusion and performance of the main contract, but it had no intention to be bound or benefited by the main contract.

1. Negotiation: In Dow Chemical case with regard to the non-signatory Dow Chemical Company (USA), it was stated that “this relationship could not have been formed without the approval of the American parent company, which owned the trademarks under which the relevant products were to be marketed in France.” Arguments along a similar line of reasoning can buttress the argument of the participation of the non-signatory in the negotiation of the main contract. For instance, it may be argued that in case of a manufacturing and supply agreement between the signatory subsidiary and the party initiating the arbitration, this agreement could not have been executed without the approval and involvement of the non-signatory parent company, since the non-signatory parent company owns the manufacturing facility used for manufacturing the necessary products.
2. Performance: The relevant facts can be relied upon to show the participation of the non-signatory in the performance of the main contract. 

For instance, performance could be evidenced by the following facts:

1. The CEO of the non-signatory took charge of the transactions under the main contract.
2. The non-signatory led all correspondence of the transactions under the main contract and confirmed the Purchase Orders under the main contract.
3. All Invoices for transactions under the Agreement were issued by the non-signatory. The payments under the invoices were made to the bank accounts of the non-signatory. Those payments were not reimbursed to the signatory which is part of the non-signatory’s group of companies. 
4. Breach of the Agreement: By relying upon the relevant facts, it can be argued that it is the conduct of the non-signatory that led to the breach of the main contract.

Argument 3 : it was the true intention of the parties that the non-signatory is bound by the main contract

The group of companies doctrine is akin to well-recognized principles of agency and implied consent. The common intention of all parties involved is the basis on which this doctrine rests. Written exchanges, such as letters, emails, invoices, and other less formal documents have been accepted as demonstrative of consent. The intention of the parties can be reasonably inferred as to the extension of said Contract and the arbitration clause to the non-signatory by the active participation of non-signatory in the negotiation, preparation and conclusion, and performance of the Contract.

Thus, it can be argued that the conduct of the non-signatory by participating in every phase of the main contract clearly shows that the non-signatory had the objective intended to be a party to the Agreement, and the non-signatory has conducted itself as if it were a party to the main contract. 

Argument 4 : consent to the underlying contract constitutes consent to the arbitration agreement

A party’s consent to the underlying contract carries with its consent to the associated arbitration clause, just as a party’s formal execution of the underlying contract carries with its consent to the arbitration agreement. Despite the separability presumption, it is elementary that a party’s signature on the underlying contract constitutes consent to the arbitration clause contained within that contract. It is in any event compelled by logic (a party’s assent to an instrument presumptively includes assent to all the instrument’s terms). Thus, it can be argued that by consenting to the main contract, as evidenced by its true intention and participation in the main contract, the non-signatory is also bound by the Arbitration Agreement.

Conclusion

It can be argued that a non-signatory to the Arbitration Agreement becomes a party to the Arbitration Agreement by virtue of the applicability of the ‘group of companies” doctrine because there exists a tight group structure in the group of companies of the non-signatory. The non-signatory has participated in every phase of the main contract, it was the true intention of the parties that the non-signatory is bound by the main contract, and that consent to the underlying contract constitutes consent to the Arbitration Agreement. 

References 

1. GARY B BORN, INTERNATIONAL COMMERCIAL ARBITRATION 1404 – 1524 (2nd ed. Kluwer 2014).
2. ICC Case No. 4131, IX Y.B. Comm. Arb. 131 (1984).
3. Interim Award in ICC Case No. 6610, XIX Y.B. Comm. Arb. 162 (1994);
4. Final Award in ICC Case No. 6519, 2(2) ICC Ct. Bull. 34 (1991); 
5. Partial Award in ICC Case No. 5894, 2(2) ICC Ct. Bull. 25 (1991); 
6. Award in ICC Case No. 5103, 115 J.D.I. (Clunet) 1206 (1988).
7. Bank of Tokyo Ltd v. Karoon [1987] AC 45, 64 (English Ct. App.). ICC Case No. 5894.
8. Adyasha Samal, Extending Arbitration Agreements to Non-Signatories: A Defence of the Group of Companies Doctrine, 11 KING's Student L. REV. 2 (2020).
9. Dow Chemical France & Ors v. Isover Saint Gobain, ICC Case No.4131.
10. GARY BORN, INTERNATIONAL ARBITRATION: LAW AND PRACTICE 69 (Kluwer Law International 2012).
11. Final Award in ICC Case No. 11160, 16(2) ICC Ct. Bull. 99 (2005) in GARY B. BORN,
    INTERNATIONAL COMMERCIAL ARBITRATION 1515 – 1642 (3rd ed. 2020).
12. GARY B BORN, INTERNATIONAL COMMERCIAL ARBITRATION 636 – 942 (2nd ed. Kluwer 2014).

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: