In 2021, we are living in a world that derives its meaning from a piece of paper - a transaction, a proof, or in the most legal terms of all – a shred of evidence. Tangible evidence has become a sin quo non to the happening or non-happening of an event. Our society with the bedrock of the legal community has come far on its way of development. The importance of contracts and legal documents cannot be overstated – they are the primary poof of the very fundamental principle of ‘consent’ – they are the palpable proof of existence and hence, mandated to establish any relationship, more specifically, a commercial relationship. For such reasons, the rigid concept of ‘consent’ is established through the contractual nature of parties to a commercial relationship and thus, becomes the non-consensual type in the absence of a contract. However, with the development of society and the legal community, the rigidity of this concept of ‘consent’ has loosened and has become wide enough to include consent through the conduct of the parties, the concept of which has now been deeply established in many jurisdictions.
To act under a contract, or to suppress the obligations under a contract, the parties should be privy to the same, as is followed by the transnational principle of international law – for which, consent is primary. In the regional context, the Indian Contract Act, 1872 mandates free consent in a contract.[2] ‘Consent’ is also fundamental to the process of arbitration, i.e., as a principle, only the parties that have consented to arbitration can arbitrate.[3] For such purposes, this matter of consent has not been limited to a contract. The presence of a contract is no more a sine quo non to an arbitration process – i.e., arbitration can be held between such parties that have no written contract between them, where the intention to arbitrate is sufficient to exclude the presence of rigid contractual nature.[4]
It is given to understand that an arbitration agreement is required for arbitration to commence. However, it should not mean to be understood that such an arbitration agreement requires a defined contractual relationship. The UNCITRAL Model Law specifies that the parties must submit to arbitration in a “defined legal relationship, whether contractual or not”.[5] As a general practice, the parties enter into a contractual relationship (with free consent) and agree to submit to arbitration in case of a breach of a contract. However, with no such strict requirement, it is often argued that making a person who has not entered into a contract (a non-signatory), a party to an arbitration is non-consensual and against the very fundamental principles of arbitration. It is for this reason that arbitration can be validated with consent and contractual nature between the parties.
The non-consenting non-signatory vs. the consenting non-signatory
There exists a grey area in the understanding of consent in making a non-signatory party to an arbitration proceeding. Thus, as a clear understanding must allow – a non-signatory can be made a party to the arbitration agreement as long as the party is ‘consenting’, which is independent of the contractual nature of the parties. The aforementioned conduct establishing consent plays a vital role here as the intention of the parties takes supremacy. Consent through contracts is not the only way of establishing this intention – It is a settled position that the intention of the parties can be gathered from the correspondences exchanged between the parties[6] dividing the consent in explicit and implicit nature.[7] While explicit consent[8] would mean the presence of an agreement which would make the parties both consenting and signatory – thus posing no issue. It is the latter that is established through the conduct of the parties and is treated as ‘implied consent’[9]. It should also be noted that consent acts as an exception to the transnational principle of privity of contract.
Recently, the United States Supreme Court in GE Energy Powe Conversion France SAS, Corp. v. Outokumpu Stainless USA,[10] held that nothing in the New York Convention[11] or the domestic law (Federal Arbitration Act) prohibits courts from deciding that non-signatories may be bound by or enforce arbitration agreements based on contract, agency, equity or related principles. The Supreme Court referred to the drafting history of the New York Convention and concluded that: "Nothing in the drafting history suggests that the Convention sought to prevent contracting states from applying domestic law that permits non-signatories to enforce arbitration agreements in additional circumstances." The Court found that the New York Convention does not address whether non-signatories may enforce arbitration agreements under domestic doctrines such as equitable estopped and according held that "silence is dispositive here because nothing in the text of the Convention could be read to otherwise prohibit the application of equitable estoppel doctrines."
To make a consenting non-signatory party to an arbitration, certain principles can be relied on:
1. Officious bystander principle: An outdated principle in the present yet an obvious choice. This test laid down in Southern Foundries (1926) Ltd. v. Shirlaw[12] has been used to imply anything into a contract that has not been expressed as is so obvious of its existence. MacKinnon LJ wrote, "Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common 'Oh, of course!'".[13] The less usage of this test is because of the subjectivity of intention and thus the ‘consenting’ nature of the parties involved. Even with the obvious nature of the conduct of the parties, is still remains to be subjective because of no set or straight jacket formulae of understanding of a reasonable man.
2. Ordinary principles of contract and agency: The court of appeals of the second circuit in Thomson-CSF v. AAA[14] has observed that a non-signatory party may be bound to an arbitration agreement if so is dictated by the "ordinary principles of contract and agency" which were discussed to be the following and has been followed since:
a. Incorporation by reference: Under this principle, an indirect relationship subsists. A non-signatory may compel arbitration against a party to an arbitration agreement when that party has entered into a separate contractual relationship with the non-signatory which incorporates the existing arbitration clause.[15]
b. Assumption: Based purely on the conduct of a non-signatory may lead to an assumption of an obligation of the parties to arbitrate.The ‘intention to be bound’ is mandated under this principle.
c. Agency: The simplest, least controversial circumstance in which a non-signatory may be bound by an arbitration agreement is when an agent executes a contract on behalf of its principal. It is well-settled, under all developed legal systems, that one party (an “agent” or similar representative) may in certain circumstances legally bind another party (a “principal”) by its acts.[16]
d. Veil-piercing/alter ego: This principle binds the subsidiary with the parent due to a sufficiently close relationship which justifies lifting of the corporate veil to see the actual relationship. Authorities from virtually all jurisdictions hold that a party who has not assented to a contract containing an arbitration clause may nonetheless be bound by the clause if that party is an “alter ego” of an entity that did execute, or was otherwise a party to, the agreement. This is a significant, but exceptional, departure from he fundamental principle that each company in a group of companies (a relatively modern concept) is a separate legal entity possessed of separate legal rights and liabilities.[17] It was observed[18] that to apply the alter ego doctrine to justify the disregard of a corporate entity, the court must determine that there is such unity of interest and ownership that separate personalities of the corporations no longer exist, and that failure to disregard the corporate form would result in fraud or injustice.
e. Estoppel: Based on the conduct of the parties, this rule estops the party from running away from arbitration by claiming to be non-signatory. However, for the purposes of law and equity, a person cannot enjoy the benefits through his conduct and wiggle out of the obligations. It was observed in Tencara[19] that when a non-signatory receives direct benefits from the arbitration agreement, he is estopped from escaping from his liabilities therein. Under this doctrine, there needs to be a close relationship between the parties (the non-signatory with the signatory) and the claims are intimately founded in and intertwined with the underlying contract obligations.[20]
Other widely used principles:
1. Group of companies doctrine: An exception to the principle of privity of contract, the present doctrine binds the companies of the same group and considers them to have a single legal entity or uneréalitééconomique unique.[21]The inextricable connections between the companies makes them bound by any agreement executed by a signatory. Some commentators refers to the non-signatory, to be less than an obvious party.[22] This doctrine is akin to principles of agency or implied consent, whereby the corporate affiliations among distinct legal entities provide the foundation for concluding that they were intended to be parties to an agreement, notwithstanding their formal status as non-signatories.[23] It was first established through the case of Dow Chemical v. Isover Saint Gobai[24]and invoked in the Chloro Controls India case.[25] The Delhi High Court[26] has observed that to bind a non-signatory to an arbitration proceeding without its prior consent can be an exceptional case. The Indian Supreme Court in the Mahanagar case[27] has observed that the doctrine of a group of companies is applicable in instances of a direct relationship between the signatory and the non-signatory, direct commonality of the subject matter and the composite nature of the transaction.
India bulls was recently bound on the principles of estoppel, group of companies doctrine and alter ego, amongst others.[28]
2. Third-party beneficiary: It is generally accepted that if a third party is bound by the same obligations stipulated by a party to a contract and this contract contains an arbitration clause or, in relation to it, an arbitration agreement exists, such a third party is also bound by the arbitration clause, or an arbitration agreement, even if it did not sign it.[29] Such a non-signatory is considered a third-party beneficiary.
The Delhi High Court recently in Shapoorji Pallonji considered the question of compelling a non-signatory to and arbitration. Here, a contractor-initiated arbitration proceedings against the developer and its subsidiary on the basis of an arbitration agreement with the subsidiary. Considering the question of making the non-signatory subsidiary, it was observed that whether a non-signatory is a direct beneficiary of the contract containing the arbitration clause is material in determining whether the said beneficiary can be compelled to arbitrate even though it is not a signatory to the Agreement. However, this is coupled with the condition that such benefit should be direct and not indirect.
3. Guarantor: To bind a non-signatory under this principle, the relationship between the parties, the contractual language of the guarantee agreement has to be seen and the underlying arbitration clause will be significant in ascertaining whether the parties intended that the guarantor to be bound (and benefited) by the arbitration clause in the underlying contract.[30] The non-signatory banks are also seen to be made a party on invocation of a bank guarantee under a Section 9 petition[31]. In a very recent case, the Delhi High Court[32] compelled India bulls to arbitrate even when it was a non-signatory on the basis, inter alia, of issuance of bank guarantees.
It was observed in Kotak Mahindra Bank Ltd. v. Williamson Magor and Co. Ltd. and Another,[33]that where there is a controlling agreement and also a separate guarantee of the performance of agreed obligations, it is simply not enough to say (1) that there is no arbitration agreement; or (2) that it is for the person invoking the guarantee to demonstrate the intention to be bound. If the Chloro Controls principle is applied, as explained in Cheran Properties,[34] the task is a two-step process. First, one must assess whether the guarantee is enfolded within the umbrella, master or controlling agreement. If it is, and the guarantor seeks to escape the arbitration agreement within the master agreement, the second step is for the guarantor to show that they are not bound and did not intend to be bound.
3. Subrogation: Under many national legal systems, there are circumstances where one party may be subrogated to the contractual rights of another party. This frequently occurs in the case of insurers, who may be subrogated to the rights of insureds. In these circumstances, the insurer is typically entitled to invoke (and is bound by) the arbitration provisions of the insured’s underlying contract (from which the subrogated rights arise).[35] This arises mainly in the insurance and reinsurance in which the subrogee "stands in the shoes" of the original party to the agreement containing the arbitration clause.[36]
4. Succession: The dominant trend in case law holds that an arbitration agreement is not only valid between the parties, but can also be relied upon against their heirs, their legatees, their assignees and all those acquiring obligations. The only exceptions are cases where the arbitration agreement is drafted in such a way as to exclude successors and assignees.[37]
5. Ratification: A non-signatory to an agreement may subsequently become a party to that agreement upon ratification.[38] Ratification can occur with regard to arbitration agreements, as well as with other forms of commercial contracts. Likewise, in the case of novation, a new contract generally replaces a previous contract and one of the original parties is substituted by a new party as per the new contract. The same choice-of-law rules that apply to guarantee/guarantor relations should also apply in the context of ratification.
As has been mentioned above, making non-signatories a party to an arbitration is an exceptional circumstance that can happen with the applicability of the abovementioned principles. The Delhi High Court[39] has observed that whenever a non-signatory third-party denies liability and sets up a title in itself and such denial raises disputed questions of fact which cannot be adjudicated without trial, in such cases, Section 9[40] against third parties may not be invoked. There exists a reluctance in binding the non-signatories to arbitration because of the rigid approach to bind the parties on a contractual basis. However, as has been observed by the Hon’ble Supreme Court of India,[41] “[c]ourts have to adopt a pragmatic approach and not a pedantic or technical approach while interpreting or construing an arbitration agreement or arbitration clause”.
[1]Harshit Batra is an Advocate and RERA Consultant practicing Pan India. His areas of expertise include Dispute Resolution, RERA litigation and Criminal laws. He is also the National Coordinator of the Youth Bar Association of India (Regd.) which is involved in actively filing several Public Interest Litigations. One of the current cases is where a plea has been made before the Hon’ble Supreme Court to formulate SOP mandating Pre-Litigation Mediation across India. Harshit has pursued a five-year integrated law degree from Guru Gobind Singh Indraprastha University. He then, went on to do an LL.M in Alternate Dispute Resolution from VIPS (GGSIPU). Additionally, he holds two P.G. Diploma courses in Corporate Laws and Management from Indian Law Institute (ILI) and in International and National IPR Law from The Indian Academy of International Law & Diplomacy (Indian Society of International Law).[2] Section 10, Indian Contract Act, 1872, Section 14, Indian Contract Act, 1872[3] Benson Lim, Adriama Uson, Relooking at Consent in Arbitration, Kluwer Arbitration Blog, http://arbitrationblog.kluwerarbitration.com/2019/02/12/relooking-at-consent-in-arbitration/[4] Thomson-CSF v. AAA, 64 F.3d 773 (2d Cir. 1994)[5] UNCITRAL Model Law, art. 7.[6] Enercon (India) Ltd. & Ors.v. Enercon GMBH and Anr., (2014) 5 SCC 1 (India).[7] Award in ICC Case No. 5721, 117 J.D.I. (Clunet) 1019, 1024 (1990).[8] Section 7, Arbitration and Conciliation Act, 1996[9] Shapoorji Pallonji and Co. Pvt. Ltd. vs. Rattan India Power Ltd. and Ors. (07.04.2021 - DELHC) : MANU/DE/0645/2021[10] GE Energy Powe Conversion France SAS, Corp. v. Outokumpu Stainless USA LLC: 140 S.Ct. 1637, 1640 (2020)[11] Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958)[12] Southern Foundries (1926) Ltd. v. Shirlaw, [1939] 2 KB 206.[13] Id. [14] Thomson-CSF v. AAA, 64 F.3d 773 (2d Cir. 1994).[15] Import Export Steel Corp. v. Mississippi Valley Barge Line Co., 351 F.2d 503.[16] Final Award in ICC Case No. 6268, XVI Y.B. Comm. Arb. 119 (1991). [17] Adams v. Cape Indus. Plc, [1990] Ch 433, 532 (English Ct. App.).[18] Oriental Commercial & Shipping Co., Ltd v. Rosseel, NV, 609 F.Supp. 75, 78 (S.D.N.Y. 1985).[19] American Bureau of Shipping v. Tencara Shipyard SpA, 170 F. 3d 349 (2nd Cir. 1999).[20] Sunkist Soft Drinks, Inc. v. Sunkist Growers Inc., 10 F.3d 753, 757-58 (11th Cir. 1993).[21] Anna Kombikova, “Extension of the Arbitration Agreement to third parties based on the ‘Group of Companies’ and ‘Piercing the Corporate veil’ doctrines” available at https://www.international-arbitration-attorney.com/wp-content/uploads/arbitrationlawkombikova_anna.pdf[22] William Park, Non– Signatories and International Contracts: An Arbitrator’s Dilemma, Permanent Court of Arbitration, (2009).[23] Final Award in ICC Case No. 6519, 2(2) ICC Ct. Bull. 34, 35 (1991).[24] Dow Chemical v. Isover Saint Gobain, ICC Award No. 4131, YCA 1984, at 131 et seq.[25] Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., ( (2013) 1 SCC 641).[26] Magic Eye Developers Pvt. Ltd. v. Green Edge Infra Pvt. Ltd. & Ors., (CS(COMM) 1290/2018).[27] Mahanagar Telephone Nigam Ltd. v. Canara Bank & Ors, (2019 SCC OnLine SC 995).[28] Shapoorji Pallonji v. Rattan India Power Ltd (Delhi High Court, 07.04.2021).[29] Final Award in ICC Case No. 9762, XXIX Y.B. Comm. Arb. 26, 40 (2004).[30] W. Craig, W. Park & J. Paulsson, International Chamber of Commerce Arbitration, ¶5.10 (3d ed. 2000).[31] Section 9, Arbitration and Conciliation Act, 1996[32] Shapoorji Pallonji v. Rattan India Power Ltd., (Delhi High Court, 07.04.2021).[33] Kotak Mahindra Bank Ltd. v. Williamson Magor and Co. Ltd. and Another, 2021 SCC OnLine Bom 305.[34] Cheran properties Limited v. Kasturi and sons limited & ors CIVIL APPEAL NOS 10025-10026 OF 2017 [35]Omağ, Merih Kemal, Türk Hukukunda Sigortacının Kanuni Halefiyeti, Istanbul 2001, p. 35 [36] Smith v. Pearl Ins. Co. Ltd., [1939] 1 All E.R. 95. [37] Award in ICC Case No. 2626, 105 J.D.I. (Clunet) 980, 981 (1978).[38] Kunal Mimani & Ishan Jhingran, “Extension of Arbitration Agreements to Non-Signatories: An International Perspective” Indian Law Journal available at https://www.indialawjournal.org/archives/volume4/issue_3/article_6.html[39] Avon Healthcare Services Ltd v. Trade international, (DB, 19.04.2021).[40] Section 9, Arbitration and Conciliation Act, 1996[41] Enercon (India) Ltd. & Ors.v. Enercon GMBH and Anr., (2014) 5 SCC 1 (India).
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