Party to an Arbitration Agreement

Case of Non Signatory

‘Group of Companies Doctrine’

Mohit Saraf
Partner

Luthra & Luthra Law Offices

India
 Framework

Section I : Evolution of the doctrine

Section II : Status of the doctrine in

different jurisdictions

Section III: Submissions

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

 Used to justify extending the scope and

effects of a tribunal’s jurisdiction to non-
signatory companies of the corporate group
to which the signatory company belongs
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 Formulation of the Doctrine
 Dow Chemical v. Isover Saint Gobain (ICC Award,
1982)
– Contractual arrangements between two Dow subsidiaries and
Saint Gobain
– Contracts entered into between the parties permitted any Dow
subsidiaries to make deliveries contemplated under the
contracts
» In practice only one claimant was making deliveries
– Claimants were four Dow entities connected with the contracts
– Contracts were governed by French law and provided for
arbitration under the ICC rules
– Contracts silent about law governing arbitration agreement
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 Formulation of the Doctrine
 Autonomy of arbitration clause - tribunal separated arbitration
agreement & main contract

 Distinguished between ‘merits’ of the dispute & ‘scope & effect’

of arbitration clause

 Applied French law to merits of the dispute

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

 Article 8, 1975 Rules - tribunal can decide upon its own

jurisdiction without referring to national law, unless expressly
agreed otherwise
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 Dow Arbitration Award
 Arbitration clause signed by two of the companies was
also intended by the parties to be available to other Dow
entities

 The non-signatory parent exercised absolute power over

its signatory subsidiaries and the non signatory
subsidiaries “effectively and individually participated in
the conclusion, performance and termination of the
contracts”

 Even though distinct juridical identity, a group of

companies constitutes “one and the same economic
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reality”
 Dow Arbitration Award
 Tribunal took into account

– That the contractual relationship could not have been

formed without the approval of the parent company
– “Common intent of parties”- Law governing Arbitration
agreement
– French case laws dealing with international arbitration
– “Usages conforming to needs of international commerce”
– Enforceability of award in France (Article 26- 1975 rules)
– International public policy

 Paris Court of Appeals affirmed Dow 7

 Section II

Status of the Doctrine

 Not followed consistently in ICC awards

 Recognized by French courts

 Rejected in UK in Peterson case

 USA follows ‘alter ego’ & also applies other

doctrines to achieve similar results

 Indian courts normally guided by common law

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 Subsequent ICC Awards
 ICC case no. 7626 of 1985
– 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.
Did not interpret ‘common intent of the parties instead applied proper
law.
 ICC case no. 4504 of 1985
– Tribunal concluded though interference by parent in performance of the
agreement, but on facts not enough to construe ratification of arbitration
agreement
 ICC case no. 6519 of 1991
– Only to group entities which effectively took part in the negotiations
which led to the contract or those directly concerned by it, to the
exclusion of those which were only instruments of a financial transaction
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in the hands of a majority shareholder
 Subsequent ICC Awards
 Extended to companies that participated in
negotiation, conclusion, or termination of contract

 Incipient poof required that if signatory to contract it

would have accepted the arbitration agreement

 Degree required for proving ‘intention to arbitrate’ is

not uniform

 Expansive application of ‘common intention of

parties’
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 France- Terra Firma
 ‘Group of companies’ recognized under French law
– Where parties directly implicated in the performance of
the contract
– Provided, it is possible to infer a presumption of
awareness of arbitration agreement
 ‘Common intention of parties’ for determining law
of arbitration agreement as touchstone provided no
mandatory provision of French law or international
public policy violated
– Liberal interpretation given by French courts
– ‘Full Autonomy’ of arbitration agreement
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 USA- Alternate Approaches
 Courts determine ‘party’
 Doctrine not explicitly recognized
 Doctrine of ‘alter ego’ applied with similar results
 Alternate approach followed in some decisions
– Where the charges against a parent company and its subsidiary are
inherently inseparable, the court may refer claims against the non-
signatory parent for arbitration
– If the parent corporation is forced to try the case in court, the
arbitration proceedings would be rendered meaningless
– Approach is to further the federal ‘pro-arbitration policy’
 Application of other principles
– Equitable estoppel
– Agency
– Third Party Beneficiary etc 12
 USA- Doctrine of Alter Ego
 Ordinary contract law principles for determining
alter ego status
– Standard extremely difficult to satisfy
– Strong presumption of separate legal entity
 Compelling evidence that one entity dominated
another’s day to day actions
 This power was exercised to work fraud or gross
injustice upon a third party
 As a result separate legal personality gets blurred
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 United Kingdom
 Peterson Farms Inc. v. C & M Farming Ltd.
(February, 2004)

– Proper law of contract- Arkansas law

– ICC Tribunal did not apply Arkansas law principles
to determine ‘Law governing arbitration
agreement’
– Applied Dow/ French Principle of ‘common intent
of parties’
– Tribunal cited ICC ‘precedents’ & applied ‘Group
of Companies Doctrine’

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 United Kingdom

 Peterson Farms Inc. v. C & M Farming Ltd.

– S. 2(1),English Arbitration Act applicable – ‘Seat’
– Agreement between parties that as to the applicability
of “Group of Companies”, Arkansas law same as
English law
– In English law, ‘Law governing Arbitration
Agreement’ usually follows ‘Proper Law of Contract’
– Court held that the doctrine was not recognized in
English law.
» Separate legal entity cornerstone of English company law
» Limited exceptions recognized
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 UK- Alternate Approaches
 “….any person claiming under or through a party to the
agreement” (S. 82 (2), Eng. Arbitration Act, 1996)
» Entities closely related to establish that non-signatory
within the purview of arbitration clause

 Third party beneficiary [Contracts (RTP) Act, 1999]

– 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
the remedies which are available to the parties
– S 8: deems a third party to be a party to the arbitration
agreement

 Agency, Assignment, Subrogation, Promissory estoppel etc.

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 India- Untested Waters
 Group of Companies’ not tested in Indian courts yet

 ‘Arbitration & Conciliation Act, 1996

– ‘Party’ means party to an arbitration agreement (S. 2.(1) (h) )
– Power of court to refer parties to arbitration (S. 8 )

 Sukanya Holdings v. Jayesh Panda (2003 SC)

– 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 Waters
 Indian courts generally not sympathetic to third party
rights

 Strong English common law traditions

 Decision in ONGC v. SAW Pipes (2003 SC)

– Expanded the definition of ‘Public Policy’ under s. 34, A&C Act, 1996
– If award is ‘patently illegal’ it may be set aside
– In contravention of the terms of the contract
– Decision undermines ‘finality’ of arbitral awards
– Applicable to ‘international commercial arbitration’ held in India
– Not applicable to awards from New York & Geneva Convention
countries
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 Group of Companies: Is it ‘law’?
 Dow cited previous ICC awards and noted that arbitral awards
progressively create ‘case law’
 Fouchard’s Test – Autonomy, Consistency & Publication
– Applies law determined by parties & limited authority independent of
arbitration agreement
– Arbitration institutions independent and isolated
– Awards often not consistent
– Generally not published (exception - ICC)
– Full publication goes against requirement of confidentiality
 Other Considerations
– Proceedings being open to public is an essential requirement
– Arbitrator’s authority is derived from consent of parties whereas
Court’s mandate flows from a constitutional document
– A Private body may not set precedent for public body like court
– Tribunal becomes ‘functus officio’ after the award is given 19
 Section III

Submissions
 ‘Group of companies’ - fact specific application
 Where ‘Law governing arbitration agreement’ is silent
the status of third parties may be determined by
reference to proper law of contract
 Expansive interpretation of ‘common intent of parties’
to determine law governing arbitration agreement
 Implications of the Peterson case
– Parties’ choice of governing law
– Parties’ choice of seat of arbitration
» May give rise to forum shopping
– Implications for ICC governed arbitrations
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 Submissions

 ‘Consent’ as touchstone to determine third party

rights
 Extension to non-signatories may be based on
other doctrinally sound principles and rules
 Care should be taken at the time of drafting of
contract
– Parties should clearly specify governing law of the
arbitration agreement
– Foresee potential third parties issues
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Luthra & Luthra Law Offices

New Delhi . Mumbai

msaraf@luthra.com