1. INTRODUCTION
Having to deal with the subject of arbitration and third parties feels like the Herculean task of dealing with Lernaean Hydra, the mythical beast that had several heads, and for each head cut off it grew two more. This is because third-party claims often relate to many aspects of commercial life and types of contracts, as different as construction contracts, guarantees, and maritime and reinsurance transactions. Third-party claims may also implicate different laws and theories, including agency or assignment, third-party beneficiary, incorporation-by-reference, ratification, even corporate law and ‘group of companies’ theories. Each one of these theories and laws requires different types of inquiries from different standpoints.
Even worse: very often in practice a single set of facts will involve the application of several overlapping theories at once. A third-party parent of a wholly owned signatory subsidiary will provide a guarantee for the obligations of the subsidiary, and also will be actively involved in the performance of the contract. In addition, the officer that negotiates and signs a contract containing an arbitration clause will usually be acting as a representative of both the parent and the subsidiary.
To refer to a characteristic example in the case of Bridas et alia v Government of Turkmenistan et alia, 345 F.3d 347 (5th Cir 2003) the claimant relied alternatively upon several third-party theories, including agency, instrumentality, apparent authority, alter ego, third-party beneficiary, theory of equitable estoppel, to prove that the government of Turkmenistan was bound by an arbitration clause signed by Turkmenneft, formed and owned by the government of Turkmenistan.
The importance of the topic is further increased in practice with the number of arbitration disputes involving third parties continuously growing. Typically, claimants will try all inventive ways to reach to non-signatory parties with an interest in the dispute, and more crucially to non-signatory parties with the necessary funds to recover the damages which the tribunal may award; whereas respondents will try to find ways to avoid the prospect of being brought before an international tribunal and the prospect of being held liable for a transaction in which they have an interest but for which they want to avoid accountability altogether.
For all the above issues, the subject of international arbitration process with third parties has become one of the most pervasive problems in current international arbitration. This post attempts to first, give a very brief overview of all the different legal theories relating to third-party claims and second, raise the issue of whether the current arbitration doctrine is well-equipped to deal with this complex matter, or commercial practice has started to outgrow the doctrine.
2. LEGAL THEORIES ON THIRD-PARTIES
Overall, there are four different groups of legal bases that a party can rely upon to bring a claim against a non-signatory, and vice versa. These are:
- General theories of contact law
- Two or more compatible arbitration clauses
- Applicable arbitration rules or arbitration laws allowing for third-party claims
- Theories of implied consent
The common denominator for all third-party legal bases is of course consent. Thus the above theories are the legal constructs, allowing courts and tribunals to identify ‘common will’ of both the signatory and the non-signatory to arbitrate. More specifically, a non-signatory may be introduced in arbitration through the following general theories of contract law:
- Representation and apparent authority
- Assignment and transfer
- Alter ego
- Incorporation by reference
- Third-party beneficiary
Equally, third-party claims will be possible where several parties have signed different arbitration clauses in interrelated substantive contracts, on the condition that all the arbitration clauses are first, identical (or at least compatible) in their basic terms and, second, contain cross-references expressly allowing for multiparty proceedings or third-party claims. If the several arbitration clauses fail to meet either of the above conditions, consent for third-party claims might be problematic to infer.
Further, tribunals may allow third-party claims pursuant to certain institutional rules or arbitration laws that expressly allow for a third party to be joined or intervene in arbitration proceedings between to signatory parties. Here, however there are very few national laws that provide for third-party claims, and when they do they largely state the obvious allowing third-party claims on the basis of unanimous consensus among all the relevant parties, including the third party (e.g. the English Arbitration Act, s.35). On the other hand, a number of institutional rules expressly provide for third-party or multiparty disputes. Most of them though will allow third-party claims only on the condition of unanimous consent of all the relevant parties, including the original and the third parties (see for example, the 2010 UNCITRAL Arbitration Rules Art.17(5)). There are only a few progressive sets of institutional rules, such as the LCIA (Art. 22.1(h)), Vienna Rules (Art. 4(2)), and most notably the Swiss Rules (Art. 4(2)) that give tribunals wide power to decide on the matter, allowing for joinder and intervention of a third party even if some of the relevant parties disagree. Finally, third-party claims may still be introduced even under institutional rules that contain no express provision to that effect. This is the case under the ICC rules, for example, where the ICC Court, under its current practice, will allow third-party claims to proceed before a tribunal, if they prima facie meet the threshold of a particular theory of contract law including the theories of agency, transfer and assignment, alter ego, and lifting the corporate veil. Of course, the ICC will be introducing in 2012 new Arbitration Rules, which -as is safely expected- will contain express provisions on third party claims.
Finally, third-party claims may be introduced on the basis of the theory of implied consent. Here the idea is that a party that has not signed an arbitration clause may nevertheless be found to have actually consented to it, if the non-signatory has been actively involved in the negotiation, participation or termination of the main contract that contains the arbitration clause. The most prominent versions of the theory of implied consent are the doctrine of arbitration estoppel developed in the US and the famous, some would say infamous, group of companies doctrine developed in the European continent.
3. CONCLUSION AND NEW CHALLENGES FOR THE FUTURE
All the above theories –firmly based on the fundamental principle of consent- work in the majority of the cases well. However there are marginal cases of third parties that cannot fit in any of the above legal theories, notwithstanding the fact that –from a business point of view- they are obviously implicated in the commercial transaction, which is the subject matter of arbitration between two other parties.
Originally, it was exactly those cases that the theory of implied consent and the doctrine of group of companies in particular were developed to address. These theories were designed to allow tribunals to assume jurisdiction over non-signatories that were crucially implicated in the dispute before the tribunal. The problem with all these theories is that sometimes tribunals find “common intention” of the signatories and the non-signatories on the basis of tenuous evidence or facts. Here, common intention to arbitration is sometimes forced out of factual circumstances that may not allow normally for it. And when tribunals do that, there is always the danger that some national courts -that is other than French national courts- will refuse to accept that implied -some times even presumed- intention to arbitrate, and will either annul or resist the enforcement of the ensuing award.
This was clearly the case in the famous Dallah v Government of Pakistan, [2010] UKSC 46 and previously in the Peterson Farms v C&M Farming, [2004] 1 Lloyd’s Rep. 603. Indeed, English courts, in Dallah, refused to accept that the non-signatory Government of Pakistan had consented to arbitration because, for example, one of its Ministers wrote a letter to Dallah on stationary with the Pakistani Government paper-head; or because the Government of Pakistan had agreed to act as the guarantor of the signatory Trust in its the financial transaction with Dallah. The English Court of Appeal and then the Supreme Court found that these too weak evidence to prove that the non-signatory had implicitly consented to arbitration, as the ICC tribunal had found. Lord Collins for the Supreme Court concluded that “there was no material sufficient to justify the tribunal’s conclusion that the Government’s behaviour showed and proved that the Government had always been, and considered itself to be, a true party to the Agreement and therefore to the arbitration agreement. On the contrary […] on the face of the Agreement the parties and the signatories were Dallah and the Trust”
Yet, for those that have read the case it is obvious that the Government of Pakistan was unmistakably implicated in the whole business transaction from the beginning to the end. This is why the Paris Cour d’appel a couple of months after the decision of the UK Supreme Court reached the opposite conclusion upholding the award on the basis that: “[The Government] behaved as if the Contract was its own;[…] this involvement of [the Government], in the absence of evidence that the Trust took any actions, as well as [the Government’s] behaviour during the pre-contractual negotiations, confirm that the creation of the Trust was purely formal and that [the Government] was in fact the true Pakistani party in the course of the economic transaction”.
And this is exactly the weakness of all the above theories and the theory of implied consent in particular: they look into the issue of third parties from a contractual point of view exclusively. However, arbitration is not only an advanced theory of contract law. It has serious jurisdictional aspects that are overlooked. From a contractual point of view, the issue of third parties is often reduced into an issue of evidence of consent, which misses the point. And the point here might be not whether a tribunal may find enough evidence that the non-signatory party has consented to the arbitration clause, but whether and how closely the non-signatory party is implicated in the main dispute before a tribunal. Thus the crucial question here is: if a third party is strongly implicated in a dispute, should a tribunal assume jurisdiction over this party on grounds that this equitable and fair to do so in order to accomplish its main goad, namely to effectively dispose of the dispute before it?
International commerce becomes increasingly complicated and companies are organized on the basis of previously unknown forms. In order to remain commercially pertinent and effective, arbitration must be able to take the new developments in international commerce into account, especially for jurisdictional purposes. We need to think that the commercial reality might soon outgrow the current contractual doctrine. Otherwise, parties with an important role in the commercial aspect of the dispute might be left outside the scope of arbitration for lack of sufficient evidence of consent.
This is a very brief overview of some of main issues concerning third parties, explored in detail in S. Brekoulakis, Third Parties in International Commercial Arbitration, (Oxford University Press 2010) (see http://ukcatalogue.oup.com/product/9780199572083.do)
Stavros L. Brekoulakis
Attorney-at-Law and Senior Lecturer in International Dispute Resolution and Private International Law at the School of International Arbitration, Queen Mary, University of London.