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.
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 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.’
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.
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. InEurosteel Ltd v Stinnes AG, the High Court considered what the effect of a merger of a 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).
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.