The ‘Twilight issues’ series: Determination of applicable law on the status of non-signatories in international commercial arbitration

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In furtherance to “The ‘Twilight issues’ series: which law governs res judicata issues in arbitration proceedings?”, in this blog I am dealing with the issue of non-signatories and the law applicable for determining their status in international commercial arbitration.

The term “non-signatories” remains useful shorthand to describe persons whose relationship to the arbitration is unclear at first blush. The term can be misleading, however, in its implication that a duty to arbitrate must derive from signed documents.[1]

Over the period of time tribunals and authors have elaborated different  theories  which make  it  possible  for  them  to  oblige  a  third  party  that  did  not  sign  the  agreement to arbitrate. The most important ones are estoppel, third party beneficiary, incorporation by reference, subrogation, veil piercing, group of companies, alter ego, assumption and agency. However, I have not discussed the above theories as the subject relates to determination of applicable law on non-signatories. There seems to be two major approaches in this regard discussed below

Principles of Transnational Law or the ‘mercatorian’ approach

As per this approach, since parties have chosen the powers of the arbitral tribunals, therefore, the tribunal need not apply any specific national law(s). Instead the tribunal should apply transnational principles of law to determine the subjective scope of an arbitration agreement. In ICC Case No. 8385[2], the tribunal while applying the principles of international law on the status of non-signatories stated that “[i]n international relations, the tribunal considers that it is preferable to apply rules adapted to the conditions of the international market and which provide a reasonable balance between the company’s confidence in its distinct legal status and the protection of entities which may fall victim to the manipulations of a company controlling its subsidiary to deprive a creditor of the benefits to which it is entitled.”

In this regard Philipp Habegger[3], observed that the Arbitral Tribunal will not examine this delicate question [of the status of a non-signatory under veil piercing analysis] only on the basis of the law applicable to the merits of the dispute, Egyptian law, …[as] the Tribunal is justified in referring to the lex mercatoria (rules of international law). The principle of autonomy of arbitration clauses, now widely recognized, justifies this reference to a non-national rule construed from international commercial usage alone. In particular, it is justified to separate the merits from the validity and scope of the arbitration clause. The Arbitral Tribunal will thus rule on the basis of general notions of good faith in business transaction and international commercial usage.”

William W. Park[4], in his work stated such principles as ‘transnational norms’ and recommended their application with regard to non-signatories. He stated that “[s]tandards articulated in published arbitral awards, supplemented by scholarly comment, often provide intellectual coherence and practical merit for arbitrators seeking guidance on questions related to non-signatories. Such “transnational norms” reach for common sense notions of contract distinct from a governing law whose relevance depends on the story told by one side to the dispute. Their intelligent application can enhance the procedural predictability of international arbitration.”

He further stated that the transnational norms can legitimize themselves as the best practice for deciding reasonable expectations of parties from differing legal jurisdictions. In fitting conditions, they apply not on account of any authority says they should, but rather faute de mieux, for need of any better method to advance fair dispute resolution worldwide where no single national law can be uniformly applied to ever entity.

National Laws

Despite all the benefits of application of international law on this scenario, several national courts across the world defy their authority and continue to apply domestic law. In the case of Peterson Farms Inc. v. C&M Farming Ltd [2004] EWHC 121, 45, the English Commercial High Court, while determining the applicable law on the status of non-signatories noted that “The identification of the parties to an agreement is a question of substantive not procedural law.…There [is] no basis for the tribunal to apply any other law [than that selected by the parties].”

In an ad hoc award in Zurich[5], Italian law applied to determine whether partner in Italian partnership is bound by arbitration agreement entered into by partnership. In Motorola Credit Corp. v. Uzan[6], Swiss law applied which was selected by parties in choice-of-law clause). In FR8 Singapore Pte Ltd v. Albacore Maritime Inc.[7], English law was applied as it was selected by choice-of-law clause, rather than federal common law, to determine whether to pierce corporate veil. In CCP Sys. AG v. Samsung Elecs. Corp. Ltd[8], the Software Agreement contained a choice of law provision requiring the application of Swiss law. It was held that Swiss law governs the issue concerning whether a non-signatory to the Software Agreement.

To provide a glimpse of the actuality, below is a table provided by Dr. Bernd Ehle[9] which shows how tribunals have applied a particular law on this subject.

1

What to do

In words of Dr. Bernd Ehle, as there is no straightjacket formula on this subject, I would suggest that the tribunals should consider the factual matrix of the case, the prevailing norms under the substantive law governing the arbitration agreement, and the overriding transnational principles and trade usages utilized in the context of international arbitration to draw a balanced outcome.

Recommendations

Based on the commentary of Mr. Gary B. Born[10], I would like to make following suggestions:

S.no. Issues on which law governing the arbitration agreement should apply (Col. 1) Issues on which National Law should apply (Col.2)
1. Implied consent alter ego status
2. Assumption apparent authority
3. Ratification estoppel
4. Third party beneficiary status
5. Joint venture relations
6. The group of companies doctrine

The reasoning behind Col.1, above as adopted by Mr. Born is that it is appropriate to apply the rules prescribed by the law governing the original arbitration agreement because, where actions by third parties (e.g., assignees, guarantors) purportedly impact the substantive rights of the original parties to the arbitration agreement, those original parties’ ability to arbitrate disputes concerning those rights should not be altered by a “foreign law” (e.g., the law of an agency, assignment, or subrogation agreement which they had no role in selecting). Rather, the law governing the arbitration agreement should be available to preserve the original parties’ ability to arbitrate concerning their substantive rights. Conversely, a “foreign” law, selected in a new agreement (of assignment, guarantee, or the like), should not be permitted to intrude and affect the rights and obligations of the original parties to the arbitration agreement, who did not agree to application of the new law.

The reasoning behind Col.2, above as adopted by Mr. Born, is that each of these doctrines rests on non-contractual theories, and doctrines based on general principles of equity and justice, as to which there is ordinarily little principled basis in an international setting for choosing a particular national law and where international principles of good faith have particular applicability. In the context of international arbitration agreements, principles of apparent authority, veil-piercing and estoppel, which are formulated to take into account the transnational character of the parties and their international dealings, are more appropriate than application of one state’s domestic law.

The next blog in this series is available at below mentioned link

The ‘Twilight issues’ series: Interest on Award and the possible way to determine it in absence of any uniformly applicable law

[1] William W. Park, The Arbitrator’s Jurisdiction to Determine Jurisdiction, ICCA Congress, Montréal 2006

13 ICCA Congress Series 55

[2] In J.-J. Arnaldez, Y. Derains & D. Hascher (eds.), Collection of ICC Arbitral Awards 1996-2000 474 (2003)

[3] Philipp Habegger, Extension of Arbitration Agreements to Non-signatories and Requirements of Form, 22(2) ASA BULLETIN 398, 399 (2004).

[4] William W. Park, Non-Signatories and International Arbitration at http://www.williamwpark.com/documents/Non-signatories.pdf

[5] 15 September 1989, 8 ASA Bull. 270, 273-74 (1990)

[6] 388 F.3d 39, 51-53 (2d Cir. 2004)

[7] 794 F.Supp.2d 449, 458 (S.D.N.Y. 2011)

[8] 2010 WL 2546074, at *7-8 (D. N.J.)

[9] Law Applicable to the Extension of  Arbitration Agreements, YAAP Anniversary Program Featuring ASA  Below 40

[10] Chapter 10: Parties to International Arbitration Agreements in Gary B. Born , International Commercial Arbitration (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 1496-97

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