Perhaps the most interesting situation related to arbitration clause non-signatories arises when a respondent wants its subcontractor (henceforth “third party”) to join an ongoing arbitration although the latter party has not signed the relevant arbitration agreement. Generally, in order for such a request for a third party joinder to be successful, two conditions must be met.
Firstly, the third party’s consent must be supplemented because “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit” (AT & T Technologies Inc. v. Communications Workers of Am., 475 U.S. 643 (1986)) This stems from the principle that the arbitration agreement binds only the ones who entered into it. Under the USA federal substantive law of arbitrability, for example, non-signatories may be bound to an arbitration agreement under ordinary principles of contract and agency law (D. E. Williams, Binding Nonsignatories to Arbitration Agreements, Franchise Law Journal, p. 175). A similar approach had been taken in Chloro Controls (Chloro Controls (I) P. Ltd. (Appellant) v. Severn Trent Water Purification Inc. & Ors. (Respondent), Civil Appeal nos. 7135-7136 (2012)), where the Supreme Court of India held that that the expression “person claiming through or under” the arbitration agreement pursuant to the Arbitration Law of India includes multiple and multi-party agreements and hence third parties can be referred to arbitration (Ibid., par. 167). As a result, legal practice had developed six theories that can bind third parties to arbitrations arising out of a contract between two distinct parties: incorporation by reference, assumption, agency, alter ego, estoppel and third party beneficiary. Some authors, however, suggested that these methods undermine the consent of the third party (B. Hanotiau, Problems Raised by Complex Arbitrations Involving Multiple Contracts-Parties-Issues – An Analysis, Journal of International Arbitration Vol. 18 No. 3, p. 10). Moreover, the mentioned theories are not codified in instruments such as the UNCITRAL Model Law on International Commercial Arbitration or the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Fears of successful enforcement of an award against a third party are therefore justified.
Secondly, the relevant arbitration rules must allow party joinders; otherwise the arbitrators may look at a joinder skeptically. Party joinder is contained in most of the developed and commonly used arbitration rules such as the 2012 ICC Rules of Arbitration (art. 7 of the rules), 2010 UNCITRAL Arbitration Rules (art.17(5) of the rules) or the 2014 LCIA Arbitration Rules (art.22.1(viii) of the rules). However, the old 2012 CIETAC Arbitration Rules did not contain for party joinders and the parties were left to rely on the general art. 33(1), which provides that the tribunal can conduct the hearing as it deems fit. This omission, therefore, left the parties in a state of significant legal uncertainty regarding party joinders. Not surprisingly, therefore, party joinders are included in art. 18 of the new CIETAC Arbitration Rules effective from 1 January 2015.
I will now address two methods of widening the personal scope of an arbitration agreement, which allow third party joinder: Incorporation by Reference (a) and Estoppel (b). The former is very commonly used and usually accepted even in more conservative enforcement courts while the latter is perhaps the most significant in potentially undermining the consent of third parties.
a. Third Party Joinder Based on Incorporation by Reference
The basic premise of the theory is that a third party may be bound to arbitrate with a signatory to an arbitration agreement when it signs a separate agreement with that signatory expressly incorporating the other contract (Thomson-CSF, S.A. v. Am. Arbitration Ass’n, 64 F.3d 773, 777 (2d Cir. 1995)). In Upstate Shredding, LLC v. Carloss Well Supply Co., the US Supreme Court held that a two-step test is required: “First the court must determine whether the agreement allegedly incorporating the arbitration clause contains the requisite words of incorporation; and second, the court must determine whether the arbitration clause is broad enough to encompass the nonsignatory.” This test, therefore, requires a detailed textual analysis of the requisite clauses in two distinct contracts.
This method is accepted even in conservative civil law courts in the Central European region such as Slovakia. Nevertheless, there is a decision of the Slovak Supreme Court (Decision No. 2 Cdo 245/2010 (2011)) invalidating an arbitration clause incorporated by reference, which was followed by lower instance courts several times. The new Slovak Arbitration Act applicable from January 2015, however, expressly establishes that even an arbitration clause incorporated by reference (from general business conditions and similar documents) is presumed to be “written” and thus valid. Chinese lex arbitri, in comparison, is also open to this method of widening the personal scope of the arbitration agreement. Moreover, “[although debatable,] it appears likely from the wording of the [Supreme People’s Court] Interpretation 2006 that a general reference to the other contract or document is sufficient” (F-B. Weigand, Practitioner’s Handbook on International Commercial Arbitration, 2009, p. 250).
b. Third Party Joinder Based on Estoppel
Equitable estoppel is violated when party A, having induced party B to adopt and act upon an assumption, acts inconsistently with the assumption without taking steps to ensure that party B is not harmed as a result of that action (A. Robertson, Reliance, Conscience and the New Equitable Estoppel, 24 Melbourne University Law Review, 2000, p. 227). Naturally, equitable estoppel is a common law principle but it is included in the 2010 UNIDROIT Principles of International Commercial Contracts, which is considered to be lex mercatoria accepted throughout the world. Art. 1.8 of the UNIDROIT Principles provides for “Inconsistent behavior” as follows: “A party cannot act inconsistently with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment.“ Therefore, and practically, if the third party causes the signatory of the arbitration clause to believe that it would participate in an arbitration based on that clause, it is then precluded (estopped) from denying its consent to arbitration.
The best case that exemplifies estoppel I found in the US and it is Mcbro v. Triangle (Mcbro Planning and Development Company and Mccarthy Brothers Company, A Joint Venture, Plaintiffs-Appellees v. Triangle Electrical Construction Company, Inc., Defendant-Appellant, 741 F.2d 342 (1984)). Both Mcbro and Triangle did construction work in the St. Margaret’s Hospital, whereas Triangle performed electrical works and Mcbro acted as the construction manager. Both Mcbro and Triangle had a contract including an arbitration clause with St Margaret’s Hospital but never had a written agreement between themselves. The contract between the Hospital and Triangle even contained a clause noting that “[n]othing contained in the Contract Documents shall create any contractual relationship between [Mcbro] and [Triangle]”. A dispute arose, in which Triangle claimed that Mcbro hampered its electrical works in the Hospital and brought a suit in the US courts. Mcbro wanted to compel Triangle to arbitration. And although there was no arbitration agreement between the parties, the Court ruled that based on the “close relationship” of the contracts, Triangle is estopped from bringing a dispute to courts instead of arbitration (Ibid., par. 7). Consequently the Court ruled, “the contractor’s claims are intimately founded in and intertwined with the underlying contract obligations” (Ibid., par. 8) and hence allowed arbitration pursuant to the arbitration clause between Mcbro and the Hospital.
In light of the above-mentioned, it is clear that even if a party does not sign an arbitration agreement, it can be compelled to arbitrate a dispute. Legally, the personal scope of the tribunal’s jurisdiction and the arbitration agreement is widened to encompass the consent of the third party. Moreover, if the arbitration rules provide for party joinders, a third party can be joined during an ongoing arbitration.
!!! Since this is one of the most interesting issues in arbitration, please let me know in comments of decisions from other jurisdictions that address it. Thank you!
written by Peter Plachy