W5: Arbitration Agreements III - Challenging AAs, Extension to Non-Signatories

Question 1

Tribunal’s Jurisidiction and Power to Decide Arbitrability

Answer 1

1. Sub: to any provisions of the relevant applicable law, the terms of an arbitrator’s jurisdiction and powers in a case depend on a PROPER CONSTRUCTION OF THE AA
2. The tribunal must consider the dispute in Q. and then elicit from the AA whether or not the parties intended it to be arbitrable (resolved by arb.)

Question 2

Arbitrability: Subject Matter Capable of Settlement by Arbitration

Answer 2

1. Arbitrability involves determining which types of disputes may be resolved by arbitration, and which belong exclusively to the courts’ domain.
   - NYC and Model Law ltd. to disputes that are ‘capable of settlement by arb.’
2. In principle, ANY dispute should be as capable of being resolved by a pvt. arb. tribunal as by the judge of a national court.
   - HOWEVER, b/c arb. is a pvt. proceedings w public consequences - some types of disputes reserved for national courts (proceedings in public domain) - NOT arbitrable
   - National laws est. the domain of arb. v/s that of the local courts - wrt its own political, social, and economic policy

Question 3

Parties to an AA: Capacity

Answer 3

1. Parties to a contract must have legal capacity to enter into that contract, otherwise, it = INVALID
   - General Rule: Any natural/legal person who has the capacity to enter into a valid contract has the capacity to enter into an AA; incl.:
   i. Individuals
   ii. Partnerships
   iii. Corps.
   iv. States and their Agencies
2. If an AA is entered into by a party who does NOT have capacity, provisions of the NYC (or ML where applicable) may be brought into operation - either at the beginning or the end of the arbitral process
   i. @ BEGINNING: requesting party asks the competent court to STOP the arb. on the basis that the AA = Void, Inoperative, or Incpable of Being Performed
   ii. @ END: The requesting party asks the competent court to REFUSE R and E of the Award on the basis that one of the AA parties is ‘u/some incapacity’ u/the applicable law
3. Rules governing capacity to contract found in standard textbooks on contract law - vary from state to state
   - wrt AA: generally necessary to have regard to more than 1 system of law
   - In practice: issue of capacity = rarely arises

Question 4

Capacity: Natural Persons

Answer 4

1. NYC and ML: Where applicable, require parties to an AA to have capacity ‘u/the law(s) applicable to them’
   i. Domestic Contract: Law of State
   ii. Int’l Contract: Also Law of the Contract
   - E.g., If a transaction went sour, a party who lacks capacity u/one or two systems of law might rely upon that as a reason for non-performance (of contract of AA u/it)
   - Applicable Rule of Law to Defeat: Rome I Regulation Art. 13 (applies to EU member states) - Invoking Incapacity, only IF other party:
   a) was AWARE of incapacity @ time of concluding contract
   b) was NOT aware due to NEGLIGENCE

Question 5

Capacity: Corporations

Answer 5

1. Governed primarily by its constitution, and law of place of incorporation
2. Corp. is reqd to act thru its directors and officers wrt its constitution and own governing law
3. If a corp. enters into a transaction that exceeds its power (transaction = ultra vires) , and the transactions turns out badly, it would beopen to the corp. to content that the agreement was NOT binding on it and it was NOT obliged to arbitrate any dispute
   - Guard Against: Some states have specific rules of law to restrict/abrogate the Doctrine of Ultra Vires, to protect persons dealing in good faith w corps.
4. In addition to issues of corp. governances laws of some states may restrict a corp. from initiating arb. in certain circumstances wrt STATUS of the corp. entity itself.
   - E.g., US States have statutes restricting a corp. that is NOT ‘in good standing’ u/laws of that state from initiating ANY type of legal proceeding, incl. arb.
   - Thus, failure to maintain ‘good standing’ could be basis of an application (or motion) to STAY/DISMISS an int’l arb. filed by such corp.

Question 6

Capacity: States and State Agencies

Answer 6

STATE LAWS:

i. FRENCH LAW - Civil Code Art. 2060: Disputes concerning public collectives and establishments, and all matters involving public policy may NOT be referred to domestic arb.
- HOWEVER, certain industrial and commercial public entities may be AUTHORISED BY DECREE to enter into AAs
- MOREOVER, such disputes may be referred to INT’L ARB.

ii. BELGIAN LAW: Public law entities were at one time prohibited from concluding AAs - now ABOLISHED save for some restrictions
iii. BRAZILAIN LAW: Higher Courts have consistently rules that a state body is NOT prohibited from concluding AAs and are bound by such agreements.
iv. OTHER COUNTRIES: State/Agency must obtain the APPROVAL of the relevant authorities BEFORE entering into an ICA agreement

2. ADVICE:
   Before entering into AA w/foreign state or entity, it is advisable to check that
   i. the agents of the state have the necessary authority to do so.
   ii. any necessary procedures for obtaining consent to an AA have bee followed (include a statement to this effect in the contract)
3. Unsatisfactory that a State/Agency to be entitled to rely on its OWN law to defeat an agreement it has entered into freely
   - Deal w the problem:
   i. European Convention 1961:
   a) Persons considered by law applicable to them to be ‘legal persons of public law’ SHOULD have the right to conclude valid AAs
   b) If a state wished to limit its facility - it should SAY SO on signing/ratifying/acceding the convention
4. Growing int’l consensus: Where a state entity has agreed to resolve disputes by Int’l Arb., it CANNOT rely on its own domestic laws in order to avoid submitting to the arbitral process
   - CRITIQUE:
   i. Restrictions imposed by a state on its capacity to enter into an AA should NOT be qualified as issues of CAPACITY, but rather, as issues of ARBITRABILITY
   ii. The restriction is Sel-imposed and could be WAIVED at any time by the concerned state.
   iii. Not a TRUE LIMITATION on capacity, such as protections of persons u/mental disability - thus, to be treated as a matter of ‘SUBJECTIVE ARBITRABILITY’, rather than as a matter of capacity

Question 7

Capacity: Third Parties to the AA

Answer 7

1. Third parties to an AA have been held to be bound by/entitled to rely on such an agreement in a variety of ways:
   i. by operation of the ‘Group of Co.’s’ Doctrine: Benefits and Duties arising from an AA may, in certain circumstances, be EXTENDED to other members of the same group of Co.’s
   ii. by operation of General Rules of Pvt. Law, principally those governing Assignment, Agency, and Succession
2. Examples:
   i. Affiliate of a Signatory to an Arb. Clause = Co-Respondent
   ii. Assignee of Insurance Contract = commence arb. against the insurer of the original insured party
   iii. Principal = bound by an AA signed by its Agent
   iv. Merged Entity = continue to prosecute arb. proceedings commenced by one of its original constituent entities

Question 8

Third Parties: ‘Group of Companies’ Doctrine

Answer 8

1. No. of arb. tribunals and national courts have been asked to consider - Whether an AA concluded by a Co. may be binding on its group affiliates, due to group being a ‘SINGLE ECONOMIC ENTITY’
   - AIMS:
   i. Finding the ‘true’ party in interest
   ii. Targeting a more creditworthy member of the relevant group of Co.’s
2. OBJECTION: Corp. personality is created precisely to contain liability w/in a particular corp. entity
   - In Practice: depends on the
   i. construction of the AA in Q
   ii. circumstances surrounding entry into, and performance of the underlying contract
3. Where a court/tribunal tasked w determining whether a third party is bound by an AA, it will focus on the parties’ common intention - may consider variety of factors, i.e., whether non-signatory:
   i. ACTIVELY PARTICIPATED in the conclusion of the contract containing AA
   ii. has a CLEAR INTEREST in dispute outcome
   iii. is PARTY TO CONTRACT that is ‘intrinsically intertwined’ w/the contract u/which dispute has arisen

Question 9

‘Group of Companies Doctrine’: Dow Chemicals case

Answer 9

1. Claim successfully brought before an ICC Tribunal not only by the Co.’s that had signed the relevant agreements, but also by their Parent Co. (a US Corp.) and a French Subsidiary in the same group
2. Subsequent ICC Tribunal Rules: There is no general rule in French int’l arb. law that would provide that non-signatory parties members of the same group of Co.’s would be bound by an arb. clause
3. FOUND: The arb. clause expressly accepted by certain Co.’s of the group should bind the other companies, which have been veritable parties to these contracts/to have been principally concerned by them and the disputes to which they may give rise:
   i. ‘by virtue of their role in the conclusion performance or termination of the contracts’ contains said clauses
   ii. ‘in accordance w the mutual intention of all parties’ to the proceedings
4. Tribunal ref: the relevant group of Co.’s as ‘one and the same economic reality (une réalité économique unique)’
5. Decision reached on basis of ‘intention common to all Co.’s involved’, ref: only ‘subsidiarily’ to the portion of ‘group of companies’
   - Best characterised as authority for the proposition: conduct can be an expression of consent and that among all the factual elements… the existence of a group of Co.’s may be relevant

[Swiss and English courts have also refused to accept that a third party may be bound by an AA merely because it has a legal/commercial connection to one of the parties]

Question 10

Third Parties: ‘Piercing the Corporate Veil’

Answer 10

1. A court/tribunal may conclude that a third party is bound by an AA where there is EVIDENCE that the party t the agreement is being used as a ‘DEVICE/FAÇADE’ to avoid/conceal liability
   - Party may also seek ‘alter ego’ principle
2. ‘ALTER EGO’ PRINCIPLE: A corp. is considered as the ALTER EGO of its shareholders/directors/officers when any business transaction is carried out by them
   - Granted immunity from individual liability for any act carried out for business purposes
   - AKA: Instrumentality Rule

Question 11

Third Party: Assignment, Agency, and Succession

Answer 11

1. ASSIGNMENT: The effect of an assignment of a contract on an arbitration, clause contained therein will be determined principally by ref: law governing:
   i. the assignment in Q.
   ii. the AA
   - If AA assignable u/relevant laws = further Q. as to the particular FORM (if any) which the assignment must take
   - Not to be confused w writing requirement applicable to the AA itself