Ziad Obeid Dalal Al Houti May 24 2012 When does an arbitration agreement extend to third parties? Obeid & Partners | Arbitration & ADR - Lebanon Ziad Obeid, Dalal Al Houti Arbitration & ADR A fundamental principle of arbitration is that it is chosen by consensus between the contracting parties. The required consent is generally evidenced in an agreement to arbitrate, concluded in writing by the parties, which typically forms the foundation of the arbitration. Nevertheless, the requirement of a signed agreement in writing does not entirely eliminate the possibility of third parties being bound, by arbitral tribunals and national courts, to an arbitration agreement that has been concluded in valid form by two or more contracting parties. This raises the question of whether a third party can be bound by an arbitration clause and, if so, when.Under Lebanese law, a third party may find itself bound by an arbitration agreement on the basis of universal succession or succession by title,(1) subrogation,(2) corporate merger,(3) transfer of rights,(4) transfer of contracts(5) and third-party beneficiary contracts.(6) A third party may also be bound because of the nature of its relationship with one of the signatories to the arbitration clause - for example, where a number of contracts form a chain and constitute a single economic entity with the same objectiveIn some cases the arbitration clause may be extended to a party that is a member of a group of companies, where its parents or other subsidiaries have been involved in the commercial transaction underlying the relevant contract. However, the 'group of companies' doctrine and the concept of piercing the corporate veil are not explicitly recognised under Lebanese law, as there is no jurisprudence dealing directly with these issues. On a number of occasions the Lebanese courts have considered a chain of contracts and extended an arbitration clause in the main contract to other contracts in the chain by reference to the economic unity of operation between them.(7) Some experts maintain that there is nothing to prevent the courts from extending such analysis to groups of companies.Careful consideration must be given when selecting a choice of law clause, as the circumstances in which an arbitration agreement can bind a third party differ from jurisdiction to jurisdiction. An accurate appreciation of such circumstances depends on the facts of the case; nonetheless, it is essential to be diligent in drafting an arbitration clause in order to ensure that the conduct of a third party, under the jurisdiction of choice, could not be construed in such a way that it is considered to be bound by the agreement to arbitrate.For further information on this topic please contact Ziad Obeid or Dalal al-Houti at Obeid Law Firm by telephone (+961 1 395 163), fax (+961 1 393 906) or email ([email protected] or [email protected]). Endnotes(1) Article 225 of the Lebanese Code of Obligations and Contracts (COC).(2) Articles 313 and 315 of the COC.(3) Also applicable to mergers of banks (see Article 4(1) of Law 192/1993).(4) Article 285 of the COC.(5) Beirut Court of Appeal, Third Chamber, Decision 763, April 2 2004; Beirut Court of Appeal, 10th Chamber, Societe UFFI v Companie de development des bâtiments, December 28 2000.(6) Article 230 of the COC.(7) Lebanese Review of Arabic and International Arbitration No 56 (2010), pp 18-19; Beirut Court of Appeal, First Chamber, Decision 294/2009, July 21 2010; Beirut Court of Appeal, Third Chamber, Decision 192/2008, February 5 2008. See also Journal of Arab Arbitration (Arabic edition) No 1 (2009), p 97.