Friday, 23 April 2021

When can the court compel a non-signatory to the arbitration agreement to arbitrate?

  According to Gary B. Born, the principal legal basis for holding that a non-signatory be bound by an arbitration agreement is to "include both purely consensual theories (Eg. agency, assumption, assignment)  and non-consensual theories (Eg. estoppel, alter ego)". (see International Commercial Arbitration, Volume I, (Third Edition), p. 1531).{Para 24}

25. In several cases, implied consent is used as a basis to hold that non-signatories are bound by the arbitration agreement. It is well settled that in cases where the signatory is an agent of the principal (non- signatory), the principal can be compelled to arbitrate even though it is not a party to the agreement. This rests on the principle that the arbitration agreement may not have been signed by the non-signatory but was executed on its behalf. This principle is applied, essentially, in cases where the agent-principal relationship is established between the signatory and non-signatory and it is established that the signatories had acted under the authority of the principal. There are several cases where the Courts have found the conduct of the signatory and its principal to be sufficient evidence of their relationship.

26. The Courts/Arbitral Tribunals have also in some cases imputed implied consent on the part of the non-signatory and held the non- signatory to be bound by the arbitration agreement. These are typically cases where the Courts/Arbitral Tribunals have found that the non- signatories have played an active role in negotiations and are directly involved in the contract. In Gvozdenovic v. United Air Lines, Inc.,: 933 F.2d 1100, 1105 (2d. Cir. 1991) the Court held that "where a party conducts itself as it were a party to a commercial contract, by playing a substantial role in negotiations and/or performance of the contract, it may be held to have the impliedly consented to be bound by the contract".

27. There are also cases where third party beneficiaries of a contract may be compelled to arbitrate. Similarly, in cases such as assignment or succession, the assignees or successors interest may be compelled to arbitrate although, they were not original signatories to the arbitration agreement.

28. There exists another set of cases where the Courts have compelled non-signatories to arbitrate by disregarding their corporate facade or where the Courts have found the signatory to be an alter ego of the non- signatory or vice versa. In Barcelona Traction, Light and Power Company Ltd.: (1970) ICJ Rep. 3, the International Courts of Justice had explained the doctrine of piercing the corporate veil in the following words:

"the process of 'lifting the corporate veil' or 'disregarding the legal entity' has been found justified and equitable in certain circumstances or for certain purposes. The wealth of practice already accumulated on the subject in municipal law indicates that the veil is lifted, for instance, to prevent misuse of the privileges of legal personality, as in certain cases of fraud or malfeasance, to protect third persons such as creditor or purchaser, or to prevent the evasion of legal requirements or of obligations."

29. Gary B. Born in his book, International Commercial Arbitration, Volume I, (Third Edition), p. 1546, had explained the concept of alter ego as under:

 "Definitions of "alter ego" vary materially in different legal systems, and are applied in a number of different contexts. Nonetheless, the essential theory of the "alter ego" doctrine in most jurisdictions is that one party so thoroughly dominates the affairs of another party, and has sufficiently misused such control, that it is appropriate to disregard the two companies' separate legal forms, and to treat them as a single entity. In the context of arbitration agreements, demonstrating an "alter ego" relationship under most developed legal systems requires convincing evidence that one entity dominated the day-to-day actions of another and/or that it exercised this power to work fraud or other injustice or inequality on a third party or to evade statutory or other legal obligations.

The "alter ego" doctrine differs from principles of agency or implied consent in that the parties' intentions are not decisive; rather, the doctrine rests on overriding considerations of equity and fairness, which mandate disregarding an entity's separate legal identity in specified circumstances."

30. Courts in several jurisdictions have drawn heavily on the principle of estoppel and have compelled non-signatories to arbitrate.

Delhi High Court
Shapoorji Pallonji And Co. Pvt. ... vs Rattan India Power Ltd & Anr. on 7 April, 2021

   ARB. P. 716/2019 and I. A. No. 7836/2020
CORAM:  HON'BLE MR JUSTICE VIBHU BAKHRU
Read full Judgment here: Click here
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