Extension of Arbitration to non-signatory parties to the Arbitration Agreement

One of the fundamental principles of international arbitration is the idea that arbitration is a creature of contract[1]. This idea is shared by international doctrine and case law. Consent to arbitration has always been presented as a dogma, being the founding principle of any arbitration that allows parties to arbitration, to voluntary assume the effects and consequences of the arbitration.[2]

However, the increasing complexity of international trade in areas such as construction, banking, reinsurance, transactions with multinational corporations and the involvement of sovereign states through national entities or agencies in an increasingly sophisticated manner, makes the principles of contract and company law ineffective for the resolution of disputes involving third parties who are not signatories to the arbitration agreement but who have an interest in the arbitration proceedings[3].

The following questions must therefore be answered:

1. To what extent should a non-signatory party with an interest in the subject matter of the arbitration be allowed to intervene in the arbitration agreed exclusively inter partes?

2. Is it fair to extend the effects of the arbitration agreement to a non-signatory party as a chosen method of dispute resolution inter partes?

International Commercial practice in complex arbitrations such as those mentioned above has overcome the apparent breach of privity of contract´s principle by constructing theories and doctrines based on contractual and corporate law´s principles. The aim of those theories is to provide evidence of the non-signatory´s “implicit consent” to arbitration. The presumption of the non-signatory party´s consent, allows courts and tribunals to identify “common will” of both the signatory and the non-signatory to arbitrate on the basis of unanimous consensus among all the relevant parties, including the third party[4] by the application of the doctrine of group of companies, lifting of the corporate veil, incorporation by reference, representation and apparent authority, etc.

However, such theories do not prevent certain limitations and inconsistencies, such as:

1.The separability and autonomy of the arbitration clause from the main contract.

Inconsistency evidenced in the following scenario: If the third party to be bound by arbitration has not even signed the substantive or main contract, how is it even justified to bind the non-signatory to the arbitration clause?; Is it necessary for the non-signatory party to consents also to the arbitration agreement?

2.The persistent issue of the application of non-harmonized national´s systems of “Conflict of Norms“[5]

Inconsistency evidenced when identifying the law applicable to the arbitration agreement by the application of any of the contractual theories that justify the third party’s consent (implied or express).

Professor S. Brekoulakis proposes to use an alternative criterion to justify the intervention of non-signatory parties in arbitration. This alternative criterion to the exclusively application of contract law principles, is based on the concept of “dispute” or “subject matter” taking into account the “inherent” jurisdiction component in any arbitration.  In this new jurisdictional approach, what is relevant is not the proof of the third party’s consent to be bound by arbitration, but whether the third party is “intrinsically linked” to the subject matter of the dispute that has given rise to the arbitration.

In conclusion, the increasing complexity of international trade and high sophisticated commercial uses in complex transactions such as construction, finance, reinsurance, etc., has shown that traditional ideas of extending  contract law´s principles to arbitration, are unable to respond to the interests of third parties who are not signatories to arbitration agreements, but who have an interest in the resolution of the arbitration dispute between the signatory parties.

However, the new approach proposed by Professor Brekoulakis focusing on the concept of “dispute” as intrinsically linked to the object of controversy, could not be exempt from potential risks of resisting the enforcement of the award or even the potential annulment of it. These actions could be taken by the non-signatory third party, in the understanding it should not be bound by the arbitration agreement inter parties.

In the light of these potential risks to enforce an arbitral award with extended effects to third parties, Prof. Brekoulakis advocates for the harmonisation of the applicable criterion when binding non-signatory parties. The required international harmonization could be carried out by means of the introductions of two measures, namely by:

1. An effective harmonization and coordination of the rules on the choice of law applicable to the arbitration agreement;
2. International coordination of domestic “conflict of law” rules.

Autor: Silvia Cabrera Rosendo

[1] Bernard Hanotiau, “Consent to Arbitration: Do We Share a Common Vision?”, Arbitration International, Vol. 27, Nº 4, LCIA 2011, pag. 539.

[2] Redfern and Hunter, “International Arbitration”, Oxford University Press, Sixth version, 2015, pág. 71.

[3] Stavros L. Brekoulakis, “Third Parties in International Commercial Arbitration”, Oxford International

Arbitration Series, 2010, pág. 3.

[4] Stavros L. Brekoulakis, “Third Parties in International Commercial Arbitration”, Oxford International

Arbitration Series, 2010.

[5] Ibid, pág. 13.