Francisco Gonzalez Andrés Germain October 8 2015 Arbitration without privity? Barros Letelier & González | Arbitration & ADR - Chile Francisco Gonzalez, Andrés Germain Arbitration & ADR IntroductionCasesCommentIntroductionTwenty years ago, Jan Paulsson coined the phrase "Arbitration without privity" to express a paradigm shift in the nature of arbitral consent. Although arbitration is always consensual, the typical model – in which the parties agree to arbitrate their disputes – now coexists with other models in which consent is established through a complex, multi-stepped process. Under these models, arbitral proceedings are available to litigants that are not directly contracted, especially in the context of investment arbitration. Inspired by Paulsson's phrase, this update comments on two cases decided by the courts in which the arbitration agreement was extended to litigants that, in principle, were not parties to the underlying contract.CasesPerut Bozzolo v Barros AldunateThe first case involved a lease agreement entered into between:Roberto Perut Bozzolo and members of his family as lessors;Exportadora Aconcagua Limitada as lessee; andFernando Barros Freire as personal guarantor of the lessee's obligations.The lessors sued the successors of Barros Freire before a civil court for payment of outstanding rent under the contract. The defendants rejected the jurisdiction of the court on the basis that the lease agreement included an arbitration clause, which purportedly applied to all disputes arising from the contract. The court accepted this argument and declared its lack of jurisdiction. The claimants challenged the decision, alleging that the defendants were not party to the lease agreement and thus were unable to invoke the arbitration clause.The case finally came before the Supreme Court, which upheld the defendants' position. The most notable aspect of the judgment was that the defendants, as the successors of the guarantor, had to be deemed party to the agreement. As a result, the court considered that the arbitration clause was not extended to a third party to the contract.Altis v Grupo Casa SabaThe second case involved a stock purchase agreement for an important pharmacy chain between Chilean businessman Jose Codner and Mexican holding Grupo Casa Saba. The agreement included a brief clause in which the buyer undertook the commitment to pay the fees of two firms that had provided financial advice. One of the firms, Altis, invoked the arbitration mechanism provided for in the agreement and sued Grupo Casa Saba for payment of its fees. The defendant objected to the arbitrator's jurisdiction, alleging that Altis was not a party to the agreement.The arbitrator, seated in Chile, upheld the claimant's position and declared his competence to rule on the dispute. His decision was based on the broad text of the arbitration clause and particularly on the fact that the substantive right invoked by Altis was established in the same contract that contained the arbitration clause. Although Altis was not a direct party to the agreement, it was the beneficiary of an enforceable entitlement – a stipulation for another – that could not be exercised outside the scope of that contract. Therefore, the contractual benefit gave Altis access to the same dispute resolution mechanism guaranteed to the defendant under the agreement.Grupo Casa Saba challenged the arbitrator's decision, which was revised by the president of the Santiago Court of Appeal according to the International Commercial Arbitration Act. The tribunal confirmed the decision, declaring that although Altis was not a party to the agreement, it was affected by its provisions, including the arbitration clause.CommentThese decisions appear to have expanded the scope of application of arbitration agreements to third parties outside an underlying contract. Nonetheless, a deeper analysis demonstrates that the cases involved different legal situations.In Perut the Supreme Court was right to qualify the defendants as party to the arbitration agreement. Under Chilean law, a successor generally assumes all of the decedent's rights and obligations. Therefore, although the defendants were not signatories to the arbitration clause, following the guarantor's death they assumed his position in the lease, including the right to arbitrate.The facts in Altis were different. Under Chilean law, as well as in other jurisdictions with a similar legal tradition, a stipulation for a third-party beneficiary is generally deemed to be an exception to the privity of contract, because the contract is concluded between the promisee and the promisor for the benefit of a third party which, by acceptance of that benefit, acquires an enforceable right against the promisor. Following this pattern, the arbitrator and the Santiago Court of Appeal decided that the claimant was not the beneficiary only of a substantive right under the contract, but also of the arbitration clause, which was characterised as the procedural vehicle to exercise such a right. Consequently, it was correct to conclude that the arbitration agreement should be extended to a third party.Although the decisions are based on different legal situations, they provide examples of the multiple effects that an arbitration agreement can have in connection with non-signatory parties. In the meantime, the privity of arbitration agreements to be enforced before Chilean courts remains an open question.For further information on this topic please contact Francisco Gonzalez or Andrés Germain at Barros Letelier & González by telephone (+56 2 431 2700) or email ([email protected] or [email protected]). The Barros Letelier & González website can be accessed at www.blg.cl.