Binding Non-Signatories to International Commercial Arbitration Agreements: An Arbitrator’s Dilemma

Ashwin Sasikumar and Husain Attar *

Introduction

One of the main goals of International Commercial Arbitration is to provide a measure of certainty with respect to the resolution of international commercial disputes; in terms of the governing laws, procedures, and forum. Yet with arbitration becoming ubiquitous in international commercial practice, difficult legal questions increasingly arise before domestic courts. One for instance is the Group of Companies Doctrine (“The Doctrine”). This Doctrine in particular was developed by a number of International Chamber of Commerce (ICC) Arbitration Tribunals & French Courts. This doctrine states that “when an arbitration agreement is signed by a company member of a group of companies, the same agreement is then also binding upon & entitles other non-signatory members of that group of companies”.

The main problem regarding the Doctrine is in relation to its contractual nature of arbitration. An arbitration agreement is a contract. Whether a company that has not yet consented to the agreement, yet is a party to it, is a question to be determined, though not exclusively, by the proper law of contract. Indian courts have been called upon several times to consider this issue. Since companies are separate individual legal entities, it is  arduous to persuade the court that one or more separate legal entities be treated as a single legal entity under the Doctrine, for the purposes of jurisdiction. This article attempts to analyze the different takes adopted by various Courts, Indian as well as International while dealing with this controversial issue. 

Making a Case for the GOC Doctrine through a Multi-Jurisdictional Analysis

Consent is the bedrock of international arbitration. Given that Arbitration is the route adopted to seek recourse from the lengthy process of courts; the concept rests fundamentally on the consent of both the parties to the agreement in refraining from approaching the court and consenting towards Arbitration.  International treaties and national laws have invariably called for consent as a requisite precondition to arbitration. The New York Convention & The UNCITRAL Model Law on International Commercial Arbitration require a written arbitration agreement for the purpose of recording consent of parties to the agreement, for an arbitral award to be enforceable.

However, on some occasions, an arbitration agreement is extended towards Non-Signatories whenever it’s deemed necessary for that particular party to be a part of the proceedings. It is in this context that the Doctrine comes into picture.

Despite seeing eye to eye on the determination of consent, countries still don’t have a unified stand when it comes to the form of arbitral consent that is deemed valid.

Switzerland

Courts in Switzerland, generally, do not stress upon the condition of consent, propounding the probability of accepting non-signatories into arbitration. The Supreme Court of Switzerland has expressed that a Non-Signatory to an Arbitration Agreement can only be admissible in certain circumstances because it deviates from the principle of “Privity of Contracts” and that such circumstances may arise when the non-signatory expresses by any such conduct of its own, its willingness to be bound by the arbitration agreement by repeatedly participating  in the performance of the agreement. This indicates that the Courts in Switzerland are not completely against the Doctrine as long as it incorporates the common intent of both the parties.

USA

The Courts of the United States, usually tend to adopt a more liberal approach when it comes to the acceptance of non-signatories into arbitration agreements. This is because, according to the public policy of the United States, arbitration agreements are treated as contracts & the US judiciary has long used the equitable estoppel doctrine to enforce contracts. This same doctrine has been used by American Courts to compel arbitration by or against non-signatories under the Federal Arbitration Act (FAA) so often that the doctrine has become known as “arbitral estoppel” in this context.

 

The Need to be Wary while Applying the GOC Doctrine- An International Experience

United Kingdom

The UK Courts have a rather conventional approach towards the Doctrine and have completely rejected its application. One of the reasons which is attributed to the outright rejection of the Doctrine in the English Law is due to the paramount importance given to the doctrine of privity of contract. For instance, the Queen’s Bench division of the High Court of England and Wales in the case of Arsanovia Ltd. & Ors. v. Cruz City 1 Mauritius Holdings, said that “English law requires that an intention to enter into an arbitration clause must be clearly shown and is not readily inferred”. English law does not take the implied consent to arbitrate into consideration or the pre-contractual negotiations/agreements while interpreting the meaning of the written terms of contracts. Thus, there have been no instances where an English Court has agreed to extend an arbitration agreement to a non-signatory on the basis of implied consent, largely due to the fact that it places paramount importance on the doctrine of privity of contract. 

With legislative developments having taken place all over the world which makes it easier to bind non signatories to an arbitration agreement (For e.g., The recent development of Article 11 (bis) of the Spanish Act 60/2003 of 23 December 2003.), a blanket exclusion of the Doctrine by the English Courts is problematic. A balance must be struck between the interpretation of arbitration agreements & misinterpreting consent where there is none.

USA

The United States finds place in both the positive & negative aspects on the application of the Doctrine, due to the absence of uniformity throughout the country when it comes to the application of the Doctrine.

Due to the absence of a clear and uniform federal rule in relation to “arbitration estoppel” some courts like the Ninth and Eleventh Circuits have rejected the application of the said doctrine to international arbitration agreements not because of a principled rationale or public policy, but rather on the basis of a reading of Article II of “The New York Convention” that requires an agreement to be in writing and to be signed by the concerned parties; while The Supreme Court and all the other circuit courts have recognized that domestic arbitration agreements may be invoked by or against non-signatories on the basis of equitable estoppel in certain circumstances, pursuant to cither state or federal law. Thus, the approach of the United States in relation to the Doctrine requires some serious review and uniformity throughout the Country.

The Application & Interpretation of the Group of Companies Doctrine by the Indian Courts

In India, the Doctrine was recognized by the Supreme Court in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. wherein it was found that, companies which were not signatories to an arbitration agreement were only to be held liable in the case of composite transactions. Later, it was exemplified by the apex court in MTNL v. Canara Bank when the proposition was applied to include a non-signatory to an arbitration agreement. No common rule, nonetheless, was provided which would tie all the Non-Signatory group companies to an arbitration agreement. Thus, common ownership and autonomy were not proven to be found adequate to bind non-signatory group companies. Instead, the Apex Court considered certain additional components whose presence would tie non-signatory group companies. Those components are a common intention, negotiation or execution of the contract being referred to by non-signatory group companies.  The Apex Court concluded that any non-signatory group company which stands to gain from the contract should likewise be pledged by the arbitration agreement it contains.

The MTNL and Chloro Controls decisions has strengthened India’s pro-arbitration interpretation and at the same time elucidated the framework to apply the Doctrine to arbitration agreements.

Attempting to Solve the Arbitrator’s Dilemma with Proper Utilisation of the Doctrine.

Despite the constant criticism of the doctrine, it doesn’t easily dismiss the corporate structure and is just applicable in conditions where the evidence unbiasedly focuses on the non-signatories intent to be bound. Similarly, whilst the doctrine is criticized on the point that it can be abused and can be misappropriated, principally, the doctrine cannot be challenged on the point of shunning the intent of the parties, as intention of the party is the criterion of the doctrine. The doctrine demonstrates the “Principle of Implied Consent”.

In essence, the Doctrine merely seeks to determine whether or not the non-signatories, signatories & the parties, meant for the non-signatory to be bound by the agreement based on the actions of the parties. The company which is the non-signatory, belonging to the same group company with the signatory, is just one perspective signifying the presence of an intent. Indian courts in their pronouncements while accepting the doctrine have upheld the Implementation of the Doctrine by quoting the expression “party and any person claiming through or under him” u/s 8, 35 & 45 of “The Arbitration & Conciliation Act, 1996”.

Considering the International Application & Interpretation of the Doctrine, Indian courts while applying the doctrine should avoid the due process risk of non-signatories to the agreements being bound by awards solely on the premise that they are non-signatories who are a part of a same group company, bound by the agreement. Indian Judiciary ought to likewise reconsider the “Test of Intent” and reformulate it in a more rigid way so that the fact of a principal agreement and intertwined auxiliary agreements doesn’t give a premise to bind a non-signatory. The “Test of Intent” ought to rather look more carefully at the reasoning behind the forms of activities & any intent on parties to differentiate the activities and responsibility among group establishments.

Conclusion

Arbitration has become the most preferred mode of dispute resolution in the commercial world. Almost, all the commercial disputes have arbitral clauses envisaged in their agreements and more and more businesses prefer to resolve their disputes through arbitration as it provides party autonomy.  The Doctrine might be a step towards the right direction as it ensures that there are no multiple proceedings taking place. This situation often arises in domestic as well as international arbitrations. The main object of the arbitration is to decide the disputes efficiently and within a quick & efficient time span, this object can be achieved only when the disputes are resolved as far as possible in a single arbitral proceeding. However, it is likewise significant that the Legislature in a revivalist mode doesn’t invalidate the foundation of Arbitration, that is consent, because it is consent which gives the Arbitration process its legitimacy.


* Ashwin is a fourth-year student at Government Law College, Mumbai and Husain is a forth-year student at Maharashtra National Law University, Aurangabad


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