NON-SIGNATORIES AND INTERNATIONAL CONTRACTS*
Nevertheless, arbitrators do hear cases involving entities and individuals that never signed an arbitration clause. Continental scholars sometimes refer to “extending” the arbitration clause. Lawyers in Anglo-American traditions tend to speak of “joining non-signatories”.3
Few expressions accurately capture what happens when arbitrators hear claims by or against a person that never signed the relevant contract. “Extension” of an arbitration clause can suggest imposing a duty beyond the circle of those who have agreed to arbitrate. Yet consent (even implied from circumstances) remains the cornerstone of arbitration, at least by arbitrators who value intellectual rigor and analytic integrity.
Likewise, “joining non-signatories” may mislead by an implication that signatures are needed to create commitments to arbitrate, when many developed legal systems recognize unsigned commitments to arbitrate.
In making the critical determination of who agreed to arbitrate, judges normally look for guidance to standards set by their own jurisdiction, whether in conflict-of-laws principles or substantive standards for determining contract validity. Either way, a court starts with the established legal system from which it draws its authority.
In cross-border arbitration, however, the genesis of decision-making power derives from no single legal system. Arbitration arises from the parties’ decision that the dispute should not be decided by national courts. Although various countries lend support to the arbitral process (recognizing agreements and awards), the litigants themselves call the arbitrators into existence, and usually fix the substantive standards to be applied.
A spectrum of approaches
Traditionally, joinder of an additional party into arbitral proceedings justifies itself on grounds such as apparent agency, veil-piercing, alter ego and estoppel.4 and can be sought by either signatories or non-signatories. Reaching for the financial resources of a large shareholder, claimants sometimes file arbitrations against a parent company. Conversely, respondents in American court action often seek arbitration as a way to escape the perceived unpredictability of jury verdicts.
For arbitrators, motions to join non-signatories create a tension between two principles: maintaining arbitration’s consensual nature, and maximizing an award’s practical effectiveness by binding related persons. Pushed to the limit of their logic, each goal points in an opposite direction. Resolving the tension usually implicates the two doctrines discussed in the following sections, implied consent and disregard of corporate personality.
Verbal formulae vary from one legal system to another. However, most explanations of joinder relate to either (i) implied consent or (ii) disregard of corporate personality.5 In each case, an agreement to arbitrate must exist. However, the effect of that agreement extends beyond the named signatories, by virtue of behavior that either suggests acceptance of the agreement by someone else or justifies going beyond the corporate form of the signatory entity.
Arbitral jurisdiction based on implied consent involves a non-signatory that should reasonably expect to be bound by (or benefit from) an arbitration agreement signed by someone else, perhaps a related party. In such circumstances, no unfairness results when arbitration rights and duties are inferred from behavior.
Implied consent focuses on the parties’ true intentions. Building on assumptions that permeate most contract law, joinder extends the basic paradigm of mutual assent to situations in which the agreement shows itself in behavior rather than words.
Disregard of corporate personality
In contrast to implied consent, disregard of corporate personality builds on factors such as fraud or undercapitalization. Regardless of the parties’ intent, the legal entity that signed the arbitration clause disappears, and a shareholder answers for its corporate obligations. In ceasing its separate legal existence (for purposes of the arbitration), the signatory company leaves its owner or affiliate to inherit arbitration rights and duties.
To illustrate, a businessman might actively negotiate a purchase agreement containing an arbitration clause, but at the last minute arrange for it to be signed by a company owned and controlled by him. An application to extend the arbitration clause to the businessman could find support in the notion that buyer and seller intended the businessman to be a party to the agreement.
Assume, however, that the businessman played no role in the contract negotiation and performance, but did misappropriate corporate assets for personal use. If the fraudulent transactions made the company an empty shell, an arbitrator might feel justified in looking beyond the corporation to its owner, irrespective of what the parties had originally intended. For jurisdictional purposes, the corporation would simply cease to exist, leaving the businessman to inherit the arbitration clause.
In practice, of course, arguments on joinder overlap. A single fact pattern might lend itself both to disregard of the corporate form and to finding implied consent. A parent company’s fraudulent manipulation of an undercapitalized subsidiary could justify disregard of the corporate form, as well as a finding that the subsidiary acted merely as agent for the parent company, which was the true contracting party.6
Such overlap can lead to a focus on “the right result” rather than analytic rigor. Good arbitrators, however, will resist the temptation to sloppy reasoning, which can bring discredit to the arbitral process.
The interrelatedness of theories affecting non-signatories might be illustrated by the following scenario, in which a parent’s involvement in contract negotiation might lead to different conclusions from those flowing from contract performance. Two engineering firms agree to work together on a construction project, one as prime contractor and the other as subcontractor. Their contract contains an arbitration clause. After the deal goes sour, the subcontractor seeks payment for work allegedly performed at the prime contractor’s direction. Arbitration is filed not only against the prime contractor (tottering on bankruptcy, it turns out) but also against its more financially stable parent shareholder.
If the prime contractor’s controlling shareholder had participated actively in negotiating the original agreement, it might be argued that the parties’ true intent (albeit implied) had always been that the parent should be responsible to pay for any extra work. This argument would be buttressed if the subcontractor could show that it justifiably relied on the availability of the parent company’s financial resources when concluding the agreement.
Let us change the timing slightly, with the parent of the prime contractor coming on the scene only after the contract has been signed, having purchased the signatory subsidiary pursuant to an arm’s length corporate acquisition. Assertions of the parties’ true intent can no longer be founded on participation in contract negotiation or justifiable reliance.
Now let us develop the facts a bit further. During contract performance, the parent entity assists the subsidiary in completion of management and technical services that fell to it in the role of prime contractor. Depending on the facts, this might indicate that the two sides had reached an understanding that the parent would become a party to the earlier contract and its arbitration clause.
Implied consent would not be the only conclusion, however. The parent might well be performing the services on a fee basis, as any unrelated party could do. In such event, arguments would be weak that involvement in the project indicated implied consent.
As discussed later in this chapter, no magic formula tells arbitrators what legal principles apply in determining when to join non-signatories. Allegations of implied consent implicate a different legal framework from arguments asserting lack of corporate personality. National law can come into play, particularly the place of incorporation of a signatory company. In addition, arbitrators often look to transnational norms established in other arbitral awards, as well as the law at the arbitral situs and the enforcement forum.
In some instances, questions arise with respect to the interaction of state and federal law, particularly when an arbitrator’s decision is challenged in court.7 For example, the U.S. Supreme Court requires application of “ordinary state-law principles” that govern contract formation.8 This should not be surprising, since for almost seventy years no general federal contract law has existed in the United States.9 Nevertheless, federal principles do come into play with respect to matters governed by the Federal Arbitration Act.10
The term “non-signatory” remains useful for what might be called “less-than-obvious” parties to an arbitration clause: individuals and entities that never put pen to paper, but still should be part of the arbitration under the circumstances of the relevant business relationship. The label does little harm if invoked merely for ease of expression, to designate someone whose right or obligation to arbitrate may not be self-evident. Nevertheless, the expression remains potentially misleading, suggesting that a lack of signature in itself reduces the validity of an arbitration agreement. In fact, however, many legal systems impose no requirement that agreements to arbitrate must take the form of signed documents. Some countries enforce arbitration agreements made orally.11 National arbitration statutes often recognize consent memorialized in unsigned written provisions,12 as does the UNCITRAL Model Law.13 The New York Convention covers agreements to arbitrate concluded through unsigned exchanges of letters and telegrams,14 and some courts have read the Convention to permit arbitral jurisdiction derived from unsigned contracts such as purchase orders.15
Most significantly, the fact that a “non-signatory” might be bound to arbitrate does not dispense with the need for an arbitration agreement. Rather, it means only that the agreement takes its binding force through some circumstance other than the formality of signature. The legal framework for normal commercial arbitration (whether statute, treaty or institutional rules) continues to require some assent to arbitrate, whether express, implied or incorporated by reference to other documents or transactions.16
The proverbial devil in the detail lurks in the complex fact patterns underlying most situations that might justify extension of arbitration clauses. The criteria most relevant to joinder do not yield to facile identification or application, in part because arbitrators often consider and apply overlapping theories. Often, the decision to join a non-signatory rests on more than one factor, bringing to mind the Continental expression un faisceau d’indices—“a bundle of criteria”.
Nevertheless, several factors do emerge from a distillation of significant elements in a sample of relevant arbitral awards. The following fact patterns appear not infrequently in cases where arbitrators join non-signatories, and seem to comport with the reasonable expectations of most business managers. The enumeration carries no pretension of being either exhaustive or clever, but may nevertheless commend itself as a set of mental pegs on which to hang practical analysis of requests for joinder in cross-border commercial arbitration.
At least five common scenarios are often present in cases where an arbitrator’s analysis leads to joinder of a non-signatory. These might be listed as follows: (i) non-signatory participation in contract formation,17 sometimes linked to confusion created by mention of the non-signatory in contract documents;18