Friday, May 28, 2010

Binding non-signatories to arbitration

Binding non-signatories to an arbitration agreement to arbitral proceedings has always been an unsettled issue in several countries of the world. Here, we take a look at the Indian law on third parties to arbitration agreement.

Leaving aside the fundamental principle of privity of contract, an arbitration agreement is bound by the consent of the parties and must fulfill the requirements of an arbitration agreement defined in Article 7 of the UNCITRAL Model Law on International Commercial Arbitration, embodied in section 7 of the Indian Arbitration and Conciliation Act, 1996. This provision has been incorporated into legislation of most major jurisdictions of the world.

There are several theories for binding a non-signatory to an arbitration agreement in international arbitral practice. These include the ‘group of companies’ doctrine, lifting the corporate veil, equitable estoppel, agency and the alter ego doctrine. The tests for these often overlap, thus, in fact, more than one justification can be found for binding a non-signatory to an arbitration agreement.

Not all theories are accepted in all jurisdictions. The usual justification for looking beyond the signatories to the agreement is that consent is implied in those circumstances. Moreover, Article 7 of the Model Law although requiring an arbitration agreement to be in writing, does not mandate signature of the parties. Moreover, the standard for binding non-signatories is higher in common law countries than the civil law ones. This is because privity is an essentially common law concept and civil law jurisdictions stress on the principles of good faith and equity.

Under English law, thus, we can see that the ‘group of companies’ doctrine has been rejected [Peterson Farms v. C & M Farming]; the corporate veil is pierced only in exceptional circumstances such as when the company in question is a fa├žade or sham [see Adams v Cape Industries Plc.] and, together with control over the signatory company, there existed a degree of impropriety [see Hashem v. Shayif].

The corporate veil has been lifted on several occasions by the Indian judiciary, however, those have been in context of taxation, contract or company law [see New Horizons Ltd. v Union of India, Delhi Development Authority v Skipper Construction Co., State of U.P. & Ors. v Renusagar Power Co. & Ors., Life Insurance Corporation of India v Escorts Ltd.]. Arguably, if rights or liabilities under a contract can be extended to non-signatories, the same may be extended to arbitration clauses as well. Moreover, Indian courts have been known to follow English common law decisions, especially where (as in this case) statutory provisions are almost identical.

In the recent Supreme Court decision Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr. [discussed at the Indian Corporate Law Blog], the analysis of the Court centred around the textual interpretation of section 7 of the Arbitration and Conciliation Act, 1996. The Court undertook a “plain, simple and normal reading of section 7 of the Act”. Further, it held that­ if the signatories to the arbitration agreement had intended that a third party would be bound by the agreement, they would have so specified while signing the agreement.

None of the documents exchanged between the appellant and first respondent referred to the arbitration agreement entered into between the two respondents. U.S. decisions relied on by first respondent were rejected since the statutory provision in India was substantially different from that in the United States. Admittedly, the cases cited by first respondent were only from the United States and no decisions upholding a similar point of law from England were cited by respondent. However, this should not have stopped the Court from relying on English decisions on this point, especially since statutory provisions in England and India are both lifted from the UNCITRAL Model Law.


Until this decision on April 27, 2010, one could have safely assumed that non-signatories could be bound to an arbitration agreement in India by lifting the corporate veil, albeit, in extraordinary circumstances. This decision goes against the general international trend and yet again proves that arbitrating in India is becoming less and less predictable.

2 comments:

  1. Thanks for the good post.. A few comments:

    I am not sure how this decision (Indowind) has made arbitrating in India less predictable than it was pre-Indowind. Is the decision, for example, against settled principles of law?

    Secondly, what precisely is the "general international trend" in lifting the corporate veil to extend the arbitration agreement to a non-signatory. Is corporate veil lifted and arbitration agreement extended to non-signatories in UK, for example? What are the grounds on which it is done so?

    It would be nice if you could elaborate on these aspects

    Thirdly, I am shocked for the reason that the counsel chose to cite only two American cases on the point. I am sure in some jurisdictions like France, such questions arose and courts have even lifted the corporate veil and extended arbitration clauses to non-signatories.

    Often, the Bar does not cite decisions of other jurisdictions which expound the law on many pertinent issues (this is especially the case in disputes in tribunals and High Courts). This kind of bizarre behaviour is supplemented by judges who choose to look at foreign decisions only if similar statutory provisions are involved, as was done in this case.

    Yaraslau Kryvoi's Piercing the Corporate Veil in International Arbitration seems to be a good article on this issue. (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572634) The practical advice which Kryvoi gives may be a lesson for all of us when we draft arbitration clauses for contracts where the performance under the contract would be by a joint venture/ affiliates of the signatory

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  2. Thank you for your comments.
    First, I said that this decision makes arbitration less predictable since it deviates from widespread international practice which permits binding of non-signatories to an arbitration agreement. This is prevalent in both common law and civil law jurisdictions.
    Second, the corporate veil is lifted in the UK in case there was control of the signatory party by the non-signatory and there was impropriety involved. This can be more clearly understood from the case I have already mentioned above - Hashem v. Shayif. A good commentary of the case can be found at the Indian Corporate Law Blog.
    It is, of course, debatable if applying the law in UK, the non-signatory could be bound in the Indowind case, however, the approach of the Court has been entirely different from that of the UK courts.
    Third, I am in complete agreement with you regarding the cases cited by the Counsel. There were a large number of cases he could have cited, which he did not.

    All these controversies could, of course, be avoided if arbitration clauses are drafted more carefully.

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