This article has been written by Dishani Dutta pursuing the Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho. This article has been edited by Aatima Bhatia (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).
Table of Contents
Introduction
An arbitration agreement is governed by general principles of Contract and Agency laws; therefore, an agreement/contract only confers rights or impose obligations when parties have signed or at least demonstrated a manifest of intent to become a signatory party. Under general rule, non-signatories cannot be bound or compelled to arbitrate, as they are not privy to the contract. However, if there exists a third-party beneficiary in the contract, the common law also takes that party into account. In appropriate circumstances, non-signatories can be bound to arbitrate as an exclusive exception to the rule of Privity of Contract. Since the element of Consent in arbitration holds water, the nature of non-signatory involvement is ambiguous. Relationship of the third party to the signatory and relevance of the non-signatory to the subject matter of arbitration that they are being bound to, are some factors taken into account, besides the composite nature of transaction between the non-signatory and signatory. In this article we deal with theoretical expectations in the light of Indian jurisprudence to bring a non-signatory to consensus.
Theories binding non-signatories to arbitration
There is no specific strategy or mechanism devised that an arbitrator could refer to while administering a non-signatory party to an arbitral proceeding. The process of compelling a non-signatory seeks its foundation in complex and fact-oriented theories of contract and corporate laws. Various courts and arbitral tribunals adhere to these theories for dealing with non-signatory parties.
- Incorporation of Reference
Obligation to arbitrate extends to a non-signatory if they have executed a contract with a signatory that has incorporeal arbitration agreement by reference. When a party is a signatory of an agreement that incorporates or refers to a secondary agreement including an arbitration clause, the party can be bound by that arbitration clause even though they are non-consenting non-signatory to the secondary agreement including the arbitration clause. In other words, the arbitration clause is non-existent in the primary contract signed by the party. It is rather found in a separate and pre-existing document that is referred to in the primary contract. Therefore, arbitration becomes binding on the party by virtue of expressed reference to the contractual document inclusive of the arbitration clause (called “relation perfecta”) Thus, the arbitration clause is acknowledged as part of the primary contract.
Giriraj Garg vs. Coal India Ltd. and Others The Apex Court found precedence in the Queen’s Bench Division judgement in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL and MR Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696.The Appellant was the successful bidder at the e-auction scheme for distribution of coal issued by the Respondent, and instituted contractual relationships. The Respondent thereby issued Sale Orders to the Appellant. Adhering to the general terms of the scheme, the Appellant has deposited earnest money with the Respondent. Appellant was unable to procure the booked quantity of coal within an explicit time frame, subsequently the earnest amount for purchase of coal deposited by Appellant was forfeited on account of alleged breach of terms of scheme. Appellant invoked arbitration, and filed a section 11 application before the Jharkhand High Court on instance of failure of the Respondent in appointing an arbitrator.
The application was rejected by Hon’ble Court on grounds of absence of arbitration clause in the Sale Orders. The Supreme Court of India, in adherence to Section 7(5) of the Arbitration and Conciliation Act, 1996 – The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract. The Apex court held that the Sale Orders had explicit reference to the principal Scheme. Therefore, the guidelines, office orders, notices as well as dispute resolution mechanism contained in the Scheme govern the contractual relation of parties.
- Agency
The Principal is bound by the actions of their Agent under the theory of vicarious liability. Thus, any arbitration agreement executed by the Agent shall extend to the Principal even though they have not signed or consented to the same. However, there must exist an Agency-Principal fiduciary relationship which must be relevant to the arbitrable dispute at hand. It is pertinent that the Agent acted within the scope of their authority when entering into arbitration agreement on behalf of the Principal. Mere natural parent-subsidiary relationship does not confer Agency privileges; therefore, the Agency relationship will only hold water when it has been sculpted as a contract. Ambiguity involving Agent’s actual authority shall negate the attempt to bind the non-signatory Principal to arbitration.
If an Undisclosed Principal is the beneficiary to an arbitration agreement executed by their Agent, they may enforce arbitration as a non-signatory, even though the signatory party was not apprised of their existence. The appellate court in the English case of Interbras Cayman Co. V Orient Victory Shipping Co. passed judgement based on this principle.
- Equitable Estoppel
Both non-signatory and signatory parties may compel arbitration under this doctrine. Courts observed two versions of the doctrine of Equitable Estoppel when adjudicating a non-signatory submission to an arbitral proceeding –
- The first strand [Direct Benefit Theory]: The doctrine is grounded in the nature of contractual relation of the non-signatory to the contract/agreement. Parties are estopped from renouncing obligation to arbitrate based on mere absence of their signature in the contract/agreement, whereas they have enforced and maintained status quo as consistent beneficiary of that same contract. In other words, the non-signatory is compelled to submit to arbitration when they have embraced the agreement and procures benefit from it. Courts exercise estoppel to bind a non-signatory to arbitration that consciously exploits the agreement containing the arbitration clause. The estopped party asserts their contract-based claims upon reliance on the underlying contract containing arbitration clause, with aim to maintain their beneficiary status during the tenure of the contract. By virtue of Equitable Estoppel, the non-signatory is curtailed from challenging that agreement as a measure to evade arbitration.
- The second strand: The Court by virtue of this principle, may grant a non-signatory powers to bind an unwilling signatory to arbitration, vice versa annex a ‘willing’ non-signatory to arbitration. The doctrine of equitable estoppel allows a non-signatory to an arbitration agreement to invoke arbitration, only on the instance of a signatory’s reliance on the terms in the contract when asserting their claims against the non-signatory. The relation of the non-signatory’s contractual obligations and duties to alleged wrongs that are subject of arbitration, lays grounds for compelling a non-signatory to arbitration.
- Third- party beneficiary
This theory bears resemblance to direct benefit estoppel as aforementioned. However, they have intrinsic distinctions. Court atones a willing non-signatory third-party beneficiary (plaintiff) to invoke arbitration against a signatory provided a valid arbitration agreement subsists. The plaintiff is allowed to assert claims arising only out of the contract containing an arbitration clause. Here, the beneficiary third-party has been nominated to incur benefits from the contract executed by the signatory, provided the beneficiary is an ‘intended beneficiary’. By way of this reference, the non-signatory third-party can submit to arbitration where need be.
In the case of Mississippi Fleet Card v. Bilstat, Inc., the judgement recognises the non-signatory as a third-party beneficiary of the contract subject to arbitration, thereby binding them to submit to arbitration. The Court laid down a comprehensive test for determination of entity as the third-party beneficiary –
- The spectrum of the contractual terms can be subjective of interpretation vis a vis the inclusion of third-party. Mention by name or a specific class can be an implication of the same.
- The third-party has significance to the contract subject to arbitration. The ‘intent’ to encompass the third-party in the form of a beneficiary must be explicit.
- The subject matter of Contract has substantial interest in rendering genuine benefit to the third-party on its enactment.
- Assumption
A non-signatory’s manifestation of intent to assume the contract containing the arbitration clause, thereby, embracing obligation to arbitrate, is corresponding to their waiver of objection to being bound. The non-signatory shall be deemed to have impliedly consented to arbitration.
- Veil- piercing/ Alter-ego
The centrifugal idea of the Doctrine of Alter–ego or Piercing the Corporate Veil is that a corporation, its managing directors and shareholders are alter ego (literally meaning counterpart) of each other. When mere or no distinction is observed between the shareholders/directors and the corporation or a limited liability corporation, that is, when both act like two sides of the same coin, it shall be identified as the Veil-Piercing or Alter-ego doctrine. A non-signatory is bound to arbitration where it is observed to be the alter-ego of the signatory, in turn allowing the opposition to “pierce the corporate veil”. Courts view this principle as police of fraud and associated torts.
Extension of the arbitration agreement to a third party is envisaged when a signatory party is found to represent them, and such representation is not merely arising out of being part of a corporate body under Group of Companies doctrine, and such representation arrangement was created in attempts to evade arbitration. Such frivolous strategies amount to an abuse of rights creating exposure for piercing of corporate veil.
- Group of companies doctrine
The central idea of this Doctrine is that when numerous companies form part of a large corporate group, they may be addressed as a single legal entity or une réalité économique unique. However, each company is legally independent of each other – but under this Doctrine, a group of companies shall be treated as one unit and under the umbrella of the same economic reality, where the circumstances, termination and performance of a contract as well as its degree of control executed among the group companies warrant such an inference. The key to binding a non-signatory party to the arbitration is to seek expressed or implied consent in any “group of companies” decision-making – an agreement of one company cannot be binding on another company due to its mere affiliation to the parent concern under the Group of Companies, implying the shareholders and affiliates do not share rights and liabilities under the general rule.
The obligation to an arbitration agreement can be extended to a non-signatory party of a group of companies, who are an active participant in a contractual relationship, arising in virtue of the Group of Companies Doctrine. In other words –
- A non-signatory party has been involved in the enforcement and performance of the contract.
- A non-signatory party has been a beneficiary or shall benefit in future from such involvement.
The doctrine is found to disregard the principle of Privity of Contract as one of the founding factors of any commercial contract. In addition, it fails to recognise the paramountcy of Free Consent in legal contractual relationships. In instances, this doctrine has been used arbitrarily to establish jurisdiction over a non-signatory merely based on their association to a corporate body. One may observe this doctrine as a manifestation of the principle of implied consent and corresponding to the conduct of the parties.
In India, the Arbitration and Conciliation Act,1996 does not expressly acknowledge the doctrine. However, the doctrine has garnered snowballing momentum in axiomatic attempts to evade fragmentation of disputes when dealing with multi-party contractual relations or composite transactions.
Dow Chemical vs. Isover-Saint- Gobain (1982); the Doctrine finds its roots in the prototype case of Dow Chemical V. Isover-Saint-Gobain –
In this case, a number of companies constituted a group of Companies under the title of Dow Chemical Group. In a dispute arising out of several distributions’ agreement between Dow Chemical subsidiaries and Isover-Saint-Gobain, an action was brought up that eventually settled through arbitration. However, the parent company of Dow Chemical was not a signatory. It was held that the arbitration agreement cannot be considered exclusive to the two parties to agreement, as each of the franchises of Dow Chemical – Dow Chemical Venezuela, Dow Chemical AG, Dow Chemical Europe, and Dow Chemical France – are incorporated groups of companies recognised as Dow Chemical Group.
This case is an ideal epitome where obligation to arbitrate is extended to a non-signatory party who was initially not intended to be part of the arbitration. The principle contract granted permission to any subsidiary of Dow Chemical group to perform the terms of the contract, according to which they can facilitate delivery and distribution. Isover, displeased with the quality of products procured from Dow Chemical, brought legal action against them before the French Court on the grounds of violation of contract on Dow Chemicals’ part. Dow Chemical upheld the presence of a valid and enforceable arbitration agreement that was part of the principal contract. Therefore, Dow Chemical filed a request for an ICC-administered arbitration against Isover. The plea was granted by the parent Company Dow Chemical USA; Dow Chemical AG and Dow Chemical Europe that were also subsidiaries like Dow Chemical France. Isover raised objection on the participating of the parent Dow Chemical on the grounds that it was not party to the distribution agreement that included an arbitration clause, or simply a non-signatory, therefore its intent to arbitrate any claim against it is non-cognizable.
The tribunal sustained the objection by rendering an interim award that primarily concluded – that the non-signatory party in this dispute are of equal significance as the signatory company since they have an effective role in ‘conclusion, performance and termination’ of the various distribution agreements that the subsidiary companies have entered into. An implied consent to be privy to arbitration may be enough grounds to acknowledge the participation of a non-signatory to the arbitration.
Sukanya Holdings Pvt. Ltd. vs. Jayesh H. Pandya and Ors. (2003) In the case of Sukanya Holdings, disputes arose between several parties regarding the same transaction that was fraudulently executed several times. These parties are not signatories to the agreement therefore cannot be bound to arbitrate under the arbitration clause contained in the principal agreement. The Apex Court was pleased that any non-signatory party cannot be considered privy to arbitration, upholding the essence of Section 8 of Arbitration and Conciliation Act,1996. It also highlighted that cause of action cannot be subject of bifurcation, hence arbitration should be restricted to the parties that have executed an agreement and involvement of third parties are to be sternly contemplated.
Chloro Controls vs. Severn Trent (2013) The plaintiff and the respondent executed a shareholder’s agreement (SHA) containing a dispute resolution clause. It is the primary agreement that gives form to the parties’ relationship. The parties have involved multiple inter-linked agreements in the natural course of business. During dispute redressal, the position of parties to the multiple inter-linked agreements in context of the present case was ambiguous: Since they were non-signatory to the SHA containing arbitration clause, whether or not these adjoining parties could be brought within the ambit of a single arbitration.
In the case of Chloro Controls v. Severn Trent (2013) 1 SCC 641 (Chloro Controls), the tri-judge bench was of the opinion that an arbitration agreement executed by a company that is within the group of corporate entities, can extend to its non-signatory affiliates invoking the Group of Companies doctrine. Therefore, the SC upheld a judgement affirming the engagement of non-signatories to a single international arbitration, based on the existence of an arbitration clause in the principal agreement/mother agreement.
Cheran Properties Ltd. vs. Kasturi & Sons Ltd. & Ors. (2018) The judgement of Chloro Controls Pvt Ltd v. Severn Trent Water Purifications Inc. which relied upon the doctrine of Group of Companies, found precedence in the Cheran Properties judgement. In this case the contracting parties were Sports Pastime India Limited [“SPIL” – a subsidiary of Kasturi & Sons Limited & Ors] and KC Palaniswamy [“KCP”] and Hindcorp Resorts Pvt. Ltd., where the SPIL agreed to transfer their shares to KCP and their nominee, Cheran Properties Limited [“Cheran”]. The Section 35 of the Arbitration and Conciliation Act, 1996 makes arbitral awards binding upon parties and their relatives, therefore the arbitration agreement between the signatories becomes binding on Cheran by referring to the share-transfer agreement between KCP and Cheran.
Mechanisms for binding a non-signatory to arbitration
- Joinder:
Joinder or Extension is a means for third-party inclusion ratified by an original party to a pending arbitration proceeding or post-commencement of proceedings. The third-party may be joined as a supplementary respondent at a later stage of arbitral proceeding. On assenting to a bi-party arbitration, the third-party presence synthesises the arbitration into a multi-party proceeding. Joinder is a mechanism coherent to the Group of Companies Doctrine. Joinder is also permitted under the principle of Equitable Estoppel.
Arbitrators analyse leads to joinder of a non-signatory to arbitration when these scenarios are present:
- Participation of a non-signatory during the formation of a contract, and how their role influences the contract.
- A multi-document constituted an arbitration agreement.
- Non-signatory’s implied or expressed consent to arbitrate, in relation to the contract at hand.
- When a signatory corporate personality is non-existent.
- Fraudulent and tortuous abuse of corporate form.
Joinder effectuates when the all-signatory parties to arbitration have assented unanimously. Furthermore, where the third-party has consensually submitted to be bound vide joinder, the intervention which otherwise has ability to volatilize the arbitration process, ceases to jeopardise the enforceability of the arbitral award; whereas a joinder that does not have approval of either any of the signatory or the third-party may produce contradicting outcomes.
- Consolidation:
Alternative dispute resolution process is pivoted in delivering speed redressal; therefore, it deploys procedural tools to dismiss parallel or successive fragmented arbitrations in attempts to achieve redressal and decide claims collectively. Consolidation is a way of compiling interrelated two-party, one-claim cases into one conglomerate case. The union is conferred only after the cases have been filed separately.
The process of consolidation is perceived to be cost effective and an excellent mechanism to evade contradictory results. Factors like the governing law of the specific seat of arbitration, the prerequisites in the arbitration clause accorded by both the parties, and the rules of the arbitral institution – influence the consolidation of arbitration.
- Intervention:
The prevalence of multi-party transactions and their associated complex discrepancies have made third-party intervention inevitable. Such intervention is unorthodox in the general course of litigation. In extraordinary circumstances, a third-party may be given limited right of intervention, provided said right is expressly permitted. A willing-non-signatory shall appeal for joinder to arbitration on their own, either prior commencement or post-commencement of proceedings. Contrary to joinder, the third-party consensually asserts to be part of arbitration.
Conclusion
Third-party involvement may be inexorable in the constitution of an arbitral tribunal. For instance, where signatories seeking arbitration have failed to appoint a tribunal, there may be instances to resort to third-party for appointment of tribunal. The alarming issue raised in this regard is the status of control signatories hold over the arbitral proceeding, as we know that party-autonomy is the crux of arbitration. Insurgence of third-party in constituting the ruling tribunal intoxicates the contractually accorded dispute resolution clause, thereby threatening the commitment towards and integrity of contractual terms. If the practice of third-party intervention becomes prevalent, it exposes all future probabilities for parties to bend the law to suit their convenience and substantive remedy cannot be conferred to the aggrieved due to the volatile nature of the arbitration. Furthermore, binding non-signatories to arbitration by virtue of exceptions is directly opposed to the voluntariness of parties submitting to arbitration.
References
- https://www.mondaq.com/india/arbitration-dispute-resolution/868694/binding-non-signatories-to-an-arbitration–charting-the-shifting-paradigms.
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