Arbitration agreements
Becoming involved despite not being a party
Jim James and Ben Ridgeon
There are instances where parties have been bound by
arbitration agreements to which they were not originally party.
We give an overview of some of the more common scenarios
and examples including the ‘group of companies’ doctrine,
assignment, universal succession and rights of third parties
statutory provisions.
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International arbitration report 2014 – issue 3
The usual rule is that only parties who have executed an
arbitration agreement are bound to resolve their disputes by
way of arbitration. Arbitration is a consensual process and the
arbitration agreement acts to waive a party’s right to invoke
the jurisdiction of otherwise competent courts in favour of
arbitration.
But there are cases where parties have been allowed recourse
to or have been bound by arbitration agreements to which they
were not originally party. Even in the context of an arbitration
agreement, it is not always the case that the concepts of
separate legal personality of corporate entities and privity of
contract are sacrosanct.
The ‘group of companies’ doctrine
As a general rule, the English courts have shown great
reluctance to lift the corporate veil (i.e. to treat two related
separate corporate entities as one legal entity) unless
exceptional circumstances exist.
One rare example was the 1978 decision in Roussel-Uclaf v GD
Searle & Co Limited and GD Searle & Co in which a stay of court
proceedings in favour of arbitration was granted under section
1 of the Arbitration Act concerning a subsidiary company
whose parent was party to an arbitration agreement. In 2008
this decision was overturned in City of London v Sancheti by
the English Court of Appeal, which held that Roussel-Uclaf was
wrongly decided.
In some other jurisdictions the corporate veil has been lifted
in the arbitration context in what has become known as the
‘group of companies’ doctrine following the ICC decision in
Dow Chemical v Isover Saint Gobain, which was subsequently
approved by the Paris Court of Appeal. A feature of the claim in
that case was that the third party parent company effectively
and individually participated in the conclusion, performance
and termination of the relevant contract containing the
arbitration agreement.
The doctrine has been applied in cases involving arbitrations
in Singapore, Egypt, Brazil and Switzerland.
The group of companies doctrine is seen to have no place
in English law. This was confirmed in Peterson Farms Inc
v C&M Farming Ltd, in which the English High Court was
asked to consider an application to set aside an ICC tribunal’s
award. The tribunal had decided it did have jurisdiction, by
application of the group of companies doctrine. Langley J in
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‘Even in the context of an arbitration
agreement it is not always the case
that the concepts of separate legal
personality of corporate entities and
privity of contract are sacrosanct.’
his judgment held: ‘English law treats the issue as one subject
to the chosen proper law of the Agreement and that excludes
the doctrine which forms no part of English law.’
Assignment
The benefit of contracts may be assigned for various reasons
as security for loans, as part of a corporate restructuring or
acquisition or in settlement of a claim. A common question
that arises is whether the assignee thereby becomes bound by
an arbitration clause contained in the contract and what rights
are assigned to them as they were not an original contracting
party.
The Court of Appeal case of Shayler v Woolf established that
arbitration agreements and agreements containing arbitration
agreements were capable of assignment. Section 82(2) of the
English Arbitration Act 1996 provides that references to a party
to an arbitration agreement include any persons ‘claiming
under or through a party to the agreement’, which allows
an assignee to pursue a claim under an assigned arbitration
agreement.
Universal succession
In some civil law jurisdictions, it is common for mergers and
reorganisations to take place by means of universal succession
which results in the full assignment of all assets, rights and
liabilities from one entity to another entity by operation of law.
This may be carried out without requiring the participation of
the transferor entity’s creditors or counterparties.
Whilst universal succession cannot occur under English law,
English law does recognise the effect of merger by universal
succession with respect to foreign companies domiciled in
jurisdictions that apply the concept. In Eurosteel Ltd v Stinnes
AG, the High Court considered what the effect of a merger of a
Arbitration agreements
German party by universal succession would be on arbitration
proceedings that were current at the time. It was upheld that
as a matter of English law, all matters relating to the rights and
obligations of a new merged company were governed by the
law of the country of domicile and, if the law of the domicile
clothed the new company with the rights and liabilities of
the old company, that part of the status of the new company
should be recognised by the English court.
Rights of third parties in the United Kingdom
The Contract (Rights of Third Parties) Act 1999 abolished the
long-standing doctrine of privity of contract (that only a party
to a contract can enforce its terms). Under the Act, a third party
can enforce a term of the contract if the contract provides that
the third party can do so (section 1(a)), or if the term provides a
benefit to the third party (section 1(b)).
Section 8 of the Act makes limited provision for arbitration
agreements to have a binding effect upon third party claims.
A third party is required to bring a claim by way of arbitration
to enforce the obligations owed to it by a party to the contract.
However, where the third party is a defendant it is entitled to
elect whether to submit to the jurisdiction of an arbitration
tribunal or that of the court. The application of the Act to
third parties in the context of contracts containing arbitration
provisions was confirmed in Nisshin Shipping Co Ltd v Cleaves
& Co Ltd and others.
Ironically, it is now quite common for commercial contracts
in the UK to exclude the applicability of the Act. Several other
common law jurisdictions, including Australia, New Zealand
and Singapore, have introduced similar legislation restricting
the ambit of the doctrine of privity of contract.
Rights of third parties in Hong Kong
In Hong Kong, the Contracts (Rights of Third Parties) Bill was
gazetted on February 28, 2014 and will be introduced into the
Legislative Council this year. It is proposed that if a third party
and the promisor have a dispute regarding the enforcement of
a term in a contract, the third party is to be treated as a party
to the arbitration agreement for the purposes of the Arbitration
Ordinance (Cap 609), unless the third party is not intended to
be so treated according to the contract (section 12 of the Bill).
Shareholder disputes
In Fulham Football Club (1987) Ltd v Richards the English
Court of Appeal confirmed that the unfair prejudice remedy
for shareholders is not an unalienable statutory right and that
shareholders and companies themselves can agree to refer
disputes which might otherwise support unfair prejudice
petitions to arbitration provided that third parties are not
bound by the award and that the relief sought is of a type that
an arbitrator can grant. The Court of Appeal upheld the lower
court’s decision that the unfair prejudice proceeding should be
stayed in favour of arbitration.
An interesting feature of the case was that the arbitration
agreement in question was not contained in a shareholder
agreement to which the shareholder was a party but was
included in the Football Association rules which applied to the
club by virtue of its membership of the league.
Jim James is a partner and Ben Ridgeon is a senior associate in the
Hong Kong office of Norton Rose Fulbright.
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