Who is bound by arbitration agreements in enforcement by and against non-signatories




This article is written by Nabira Farman who is pursuing a Certificate Course in International Commercial Arbitration and Mediation from LawSikho.

Introduction

The law is evolving every day to cope with the latest requirements of the modern world and its complex business transactions. Often, these transactions include numerou coatings of agreements effectuated through several implicit and precise agreements prior to the main contract. A business transaction could be with a group of business, all of whom may not be a signatory to the underlying contract but the circumstances of contract formation may show the intention of parties to bind all of them to the contract.

There are numerous principles in international business arbitration that have established the fact that non-signatories can also be bound by the terms of an agreement including the dispute resolution clause signed between the signatories. Similarly, an arbitral honor can also be made applicable on non-signatories and hence, enforced. Often such a idea is criticised for being against the sacrosanct rule of party autonomy in arbitration. However, it is germane to understand that these principles do not circumvent the independence of the parties, instead, they promote the true intention of parties with respect to the obligations they must fulfil according to the agreement.

These doctrines aim to protect the rights of the parties by stopping the breaching party from escaping liability. In this article, the author attempts to breakdown the issue into two heads. First, under what principles can non-signatories be bound by arbitration agreements? And second, can an arbitral give be imposed on non-signatories?

Extension of arbitration convention to bind non-signatories

Some principles universally is still in international commercial-grade arbitrations various regions of the world recommend the postponement of arbitration agreements to gatherings that has not been able to plainly signed the agreement.

Doctrine of Group of firms

An fiscal entity that includes two or more fellowships that form part of the same group by a mother or sister excitement, it is known as a’ Group of Companies’. It is important to take into consideration certain factors before covering a non-signatory to an arbitration convention. Some of these factors are the relationship between the non-signatory and a party who has signed the agreement if the subject matter is common to the non-signatory and the signatory and the nature of the agreement. The’ Group of Fellowship Doctrine’ basically aims to uphold the mutual planned between the parties and their indication that of attaching both signatories and non-signatories.

Professor Gary B. Born, a renowned scribe in International Commercial Arbitration, writes that the doctrine is applicable when the non-signatory has taken a crucial role in the negotiation or significantly taken part in the performance of the contract. Most importantly, it is the intention of the non-signatory party who is involved in the agreement in a manner that indicates active participation. Sometimes this belief is invoked to strike the corporate shroud and find out the true party in interest. It is to be used to bind the defaulting party into the arbitration agreement.

Evolved in the Dow Chemicals case in the English Law, the Hon’ble State supreme court of India has recognized this principle in the case of Cheran Assets Limited v Kasturi And Sons Limited. It propounded a test in this case laying down that where a company which is one among the group of firms had entered into an arbitration convention, its sister or mother companionship can also be bound by the arbitration agreement if the circumstances suggest that all the parties mutually intended to bind both the signatory and non-signatory affiliates.

Thus, the intention is the testing factor for justifying that an arbitration agreement is also applicable to non-signatories. Reinforcing the same position, the Apex Court in the case of Chloro Controls India( P) Ltd. v. Severn Trent Water Purification Inc. held that the two quintessential elements for invoking this belief are, firstly, the intention of the parties and furthermore, the active participation of non-signatories in performance of the contract.

Doctrine of Agency

Akin to the above doctrine, the principles of Agency, Implied Consent and Estoppel come into play when determined whether the non-signatory affiliate will be bound by the arbitration agreement. Corporate affiliations may have a formal status of being a non-signatory but under these principles, their intention to be parties to an agreement can be established.

A principal and agent affair procreates rights and drawbacks the hell is reciprocal to both entities. A principal is one who authorises the worker to act on its behalf and thus, it is based on the consent given by the Principal to the agent to act in accordance and under its restraint. The approval can be in explicit paroles or by implicit impart. In general, the principal will be bound by the arbitration agreement entered into by the agent on its behalf. The consequence of this theory is essential when a subsidiary company is carrying out the business of the parent company according to the latter’s direction and control. However, it must also be determined whether the subsidiary is running the business for the holding company’s benefit or its own.

In Smith, Stone& Knight Ltd. v. Birmingham Corp ., the English Court laid down that if the mother corporation establishes the employees in the subsidiary, acts as the heading and psyche of the subsidiary and deduces profit from the subsidiary’s business, the agency can be established.

Doctrine of Piercing the Corporate Veil or Alter Ego

The arbitration panel may perforate the corporate voile under the appropriate circumstances to submit a non-partner to the arbitration process and decision. Piercing the corporate curtain is like revealing the identity of the puppeteer who is responsible for pulling the fibres of the puppets by propagandizing digression the drapery. This principle forms the basis for the corporate shroud piercing process.

It gives a company and its owners as identical. In the case of Aloe Vera of America, Inc. v. Asianic Food( S) Pte Ltd and Anr, the law basis of applying this principle to arbitration proceedings was first insured. In this case, an application was entered for the enforcement of the Arbitral award against Asian Foods Ltd.’s stockholder and lead with the grind that the Arbitration Agreement was signed on behalf of Asian Foods and now acts as a company’s alt ego. The Hon’ble Supreme court in Singapore upheld the Court’s ruling, thereby acknowledging the alter ego doctrine and bracing the stockholder in arbitration as a party which later led to its enforcement.

In Canada Life Assurance Co ., the Canadian Court adjudicated on a similar edition when an affiliated Canadian bank carried on the business of an American bank as its negotiator. To adjudicate authority and pierce the corporate curtain, the court looked into the nature of the corporate relationship between the two entities, both mother and subsidiary, the capitalization of the subsidiary, and the level of the ownership interest of the parent in the subsidiary.

arbitration

Doctrine of Implied Consent

As a general rule, when the non-signatory actively participates in the performance of the agreement, it is a testament of its permit returned impliedly to honour the agreement including the arbitration clause. Thus, it will be bound to arbitrate in the event of any dispute arising out of the agreement. Unless the non-signatory explicitly takes steps to make known to the signatories that it does not wish to be a part of the agreement, it shall be estopped from refuting its involvement in the contract. Consent is, therefore, deemed to exist if not otherwise dissented by the non-signatory party.

The Supreme Court of Switzerland in the case of X. v. Y Engineering S.P.A. is of the view that the conclusive acts of a third party involved in the’ performance of the contract’ which contained the arbitration agreement are deemed to have adhered to the clause as it can be inferred from its involvement that it had the willingness to be bound by the arbitration clause. A strong and close relationship between the signing and non-signing party corroborate that arbitration convention can bind the non-signatories as well. The determining factor are, hence, the level of involvement in the performance of the contract and the awareness of the existing arbitral clause to the non-signatory.

Doctrine of Estoppel

The party may not be a signatory, but it is not allowed to refuse to intercede. This is because the doctrine of estoppel avoids person or persons from rejecting anything contrary to the truth, whether by his actions, deeds, or images. Estoppel may be defined as a disability is of a party in a legal proceeding that is prevented from alleging or have confirmed that a happening is not the same as it appears and which has in the case lead to this disability.

Numerous authorities have recognised Estoppel as a basis on which a non-signatory is obligated by an arbitration convention, particularly within common law jurisdictions. These officials is of the view that if a non-signatory Party as a Party under any contract, containing an arbitration rider, tries to claim or practises claims, then a non-signatory Party are generally be devoid of refusal to be a party to the arbitration clause.

A non-signatory who wilfully accepts the significant benefits of an arbitration agreement can be forced by a signatory to adjudicate. The landmark decision on that point is the American Bureau of Shipping, where the Court viewed the non-signatory to be obliged to arbitrate since the benefits derived from the contract between the signatory gatherings have been granted to the non-signatory. Thus, they were prevented from claim that they were not covered by the arbitration provision.

When questions which are to be resolved are inseparable from each other or inextricably linked to the agreement, the non-signatory can be held responsible. In McBro Planning and McCarthy Friend, the Court strengthened the position of that motivation that, because their claims were intimately located and interconnected with the contract of the signatory, the party to an agreement shall not be allowed to partake in the arbitration proceedings.




In JJ. Ryan& Sons, the court noted that arbitration against the respondent may take place when the claimant alleged that the respondent is inherently inseparable from the parent or subsidiary company, even if this is not part of the Arbitration Agreement.

In GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, the State supreme court of United Position is of the view that a non-signatory to an international arbitration agreement could depend on the principles of equitable estoppel to urge arbitration against a signatory to such agreement. The Court has thus pointed out that, as regards domestic and international arbitration agreements, the United Mood Federal Arbitration Act( FAA) is not discriminate the rules of State principle for purposes of determining whether non-signatories can push arbitration or be obliged to arbitrate and it will apply in the domestic and international arbitration agreement similarly.

Extension to Non-Signatories under the New York Convention

Article II of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards states that there must be an arbitration agreement in writing which must enormously show that the parties intend to submit their disputes to arbitration. Nonetheless, the arbitration agreement need not rigorously be a separate agreement. It can be in the form of a clause or text exchanged via characters, telegrams or emails. In the presence of such an agreement,

In a key decision, the Swiss Supreme Court held that where a non-signatory party is involved in the execution of an agreement and substantiates its handling representing itself as a party to the arbitration agreement or clause, it can be bound by the arbitration clause despite being a non-signatory under Article II of the NYC. It was the only channel in which an arbitration rider would be applicable. Besides, the Supreme Court found that Article II( 2) formal those provisions of the NYC did not prevent the tacit postponement of the Agreement and the arbitration provisions contained in the Agreement.

Again, in GE Energy Power Conversion France SAS v. Outokompu Stainless USA, LLC( GE Energy) discussed above, the US Supreme Court on 1 June 2020, is of the view that the arbitration agreement is open to non-signers who may compel the arbitration of agreements residence reliance on equitable principles subject to the New York Convention.

Conclusion

In light of the international concepts and specimen discussed in this article, we can conclude that non-signatories can be bound by the arbitration agreement. Interpretation of the New York convention has also favoured the involvement of non-signing parties to the arbitration and the enforcement of allotments for/ against them. The only crucial factor to be present is the intention of the working party which can be expressed directly or by conduct. Either way, once it is established by the performance of parties that they intend to be a part of the agreement, they can be compelled to arbitrate such disputes regarding the agreement as mentioned in the arbitration clause. By relying on the intention of parties, it ensures that neither party flees liability by refusing to participate in the dispute resolution process when it has acted in accordance with the agreement.

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