Extension of arbitration agreements to third parties pursuant to group of companies doctrine in international commercial arbitration

This study focuses on extension of arbitration agreements to third parties pursuant to group of companies doctrine in international commercial arbitration. Arbitrators derive their jurisdiction from arbitration agreement between the parties. Hence, arbitration agreement is a "conditio sine qua non" for referring to arbitration. Since pursuant to the principle of privity of contracts arbitration agreement is only binding for the parties to it, those who are not parties to the arbitration agreement cannot refer their disputes to arbitration and they cannot be required to submit to arbitration any dispute. However, for some reasons arising from substantive law, persons who are not formally a party to the arbitration agreement may also need to be bound by this agreement. In instances where the main agreement containing the arbitration clause or the rights and obligations arising from this agreement are transferred voluntarily or involuntarily, the main agreement is an agreement for the benefit of a third party, or the acceptance of third parties as a party to the main agreement in accordance with the principle of good faith, it may be possible for these persons to be bound by the arbitration agreement that regulates the resolution method of disputes arising from the said legal relationship. Such cases, in which the third party is bound by the arbitration agreement, constitute the exceptions to the principle of privity of the arbitration agreement. With the development and increasing complexity of international trade, especially multinational companies have started to include different actors in different stages of commercial projects and contracts. Companies that enter into a contract and participate in the negotiation or performance of a contract are often not the same for financial, tax and commercial reasons. As a result of this, when a dispute arises from the agreement in which the arbitration clause is included, the problem arises whether companies that are not formally a party to this agreement will be bound by the arbitration clause. If it is accepted that these companies can refer to arbitration or that they can be forced to arbitration, the arbitration agreement will be extended. In this study, the conditions and conditions under which the extension of the arbitration agreement to other companies within the group of companies is possible is basically examined in five sections in the light arbitral awards and court decisions. In the first part of the study, after touching upon the general features of the arbitration agreement, it is examined whether the principle of privity of the arbitration agreement and the condition that the arbitration agreement is concluded in writing constitute an obstacle to the extension of the arbitration agreement to third parties. The fact that the arbitration agreement only creates its effects and consequences between the parties of this agreement brings about the discussions as to whether it is possible to include third parties within the scope of this agreement. It should be noted that, just like other contracts, it should be accepted that there may be some exceptions to the principle of privity of the arbitration agreement. In fact, the extension of the arbitration agreement is examining the exceptions to the principle of privity. In international conventions and national arbitration laws, it is regulated that the arbitration agreement will be concluded in writing. In cases where the extension of the arbitration agreement to third parties is discussed, there are opinions that the third party's not formally a party to this agreement may prevent the extension. However, since the extension of the arbitration agreement concerns third parties who are not formally a party to this agreement, it is quite natural for these parties not to be a formal party to a written arbitration agreement. Because if these people were parties to a written arbitration agreement, there would be no need to discuss the extension of the arbitration agreement anyway. For this reason, it has been argued that the extension of the arbitration agreement and the writing condition exclude each other. In the first part of the study, the terms "non-signatories", "third party" and "extension", which are used in the extension of the arbitration agreement to third parties, are examined in the light of the criticisms directed to them. Signing the arbitration agreement is only one of the ways to become a party to the arbitration agreement, and the signing of the arbitration agreement does not always indicate that the signatory has become a party to the agreement. For this reason, the term "non-signatory to the arbitration agreement" may lead to the impression that the merely lack of signature may lead to the invalidity of the arbitration agreement. On the other hand, although the term "third party" often does not adequately describe people who are in close contact with the main agreement in which the arbitration clause is included, it is considered appropriate in our study to make the explanations using this term. Although the term "extension" of the arbitration agreement may give the impression that the scope of the arbitration agreement has been expanded, it is actually the determination of the real parties of the arbitration agreement, which is carried out with the extension. Theories used in the extension of the arbitration agreement to third parties are explained in general terms in the first part of our study, and it has been determined that there is no uniformity in both the names and classification of these theories. Looking at the comparative law, while the extension of the arbitration agreement is generally accepted in cases related to the transfer of the contract or the rights and obligations arising from this contract (transfer of the contract, assignment of claim, assumption etc.), there are different approaches in national laws and doctrine in terms of piercing the corporate veil, estoppel and group of companies doctrine. When the arbitral awards and court decisions are evaluated, two different approaches, which can be called conservative and liberal, stand out regarding the extension of the arbitration agreement to third parties. Considering the claims resented by the authors who advocate the conservative approach, namely, the will to arbitrate should be expressed clearly and without hesitation, as well as the extension should be allowed in extremely exceptional cases since the arbitration means a waiver of the jurisdiction of the state courts, it has been evaluated whether it is possible to extend the arbitration agreement. In the second part of the study, the laws or rules applicable while deciding on the extension matter are examined. In this regard, it is of high importance to legally qualify the extension of arbitration agreements. The reason is that, the qualification of the extension as a matter of substance or procedure may alter the approach regarding applicable law. After arriving at the conclusion that the issue of extension of arbitration agreement to third parties is a matter of substance, the approaches regarding applicable law to the extension of arbitration agreement has been examined. The approach generally seen in the court decisions departs from the idea that extension should be subject to a national law. In this part of our study, different views in the traditional approach have been discussed by taking into consideration in which stage of the proceedings the issue of applicable law is brought up and whether the arbitral tribunal or national courts will decide on the matter. Another approach advocates that issue of extension of the arbitration agreement should be settled according to the implicit consent of the parties. While examining this approach, it has been discussed whether a separate and special consent for arbitration agreement is required and whether conducts directed at the main agreement have an effect for the consent for arbitration agreement. Another approach advocates that all extension theories are based on good faith rule. Apart from these approaches, "anational approach" which accepts that arbitration agreement is independent from both the main agreement and all of national laws is especially seen in the French court decisions and arbitral awards and focuses on parties' mutual consent and international commercial usage. In the second part, lastly, the view that arbitration agreement will follow the transfer of rights and obligations pursuant to the main agreement" is examined and it has been pointed out that the basis of this view is the acceptance that arbitration clause is a survival clause. Further, it has been evaluated whether this view is compatible with the principle of separability in the light of the aim of this principle. After arriving at the conclusion that arbitration agreement should follow the transfer of rights and obligations pursuant to the main agreement, in the third part of the study, groups of companies have been examined in terms of company law. In order to decide whether to extend the arbitration agreement pursuant to the group of companies doctrine, it is necessary to investigate the main relationship under the supposed extension. In this context, in the third part, the reasons for restructuring as a group of companies, the general characteristics of the group of companies and the emergence of the doctrine of group companies in arbitration law are discussed. The companies in the corporate groups are gathered under the domination of a single company, while maintaining their legal independence. The principle that companies have separate and independent legal entities results in the fact that companies in the group are not responsible for the actions and transactions of others. However, it is a factor that should not be ignored that the companies in the group are managed according to the instructions of the controlling company and by considering the group interest. For this reason, special provisions have been introduced in national laws for the protection of the subsidiary company and the creditors of this company. In the third chapter, it has been examined whether the substantive legal regulations regarding the group of companies will have the result of binding the company with the contract into which another company in the group has entered. In these examinations, the unlawful use of dominance by the controlling company, the damage to the subsidiary due to the instructions of the controlling company, and the responsibility of the controlling company arising from the trust have been discussed, and it has been determined that the controlling company is under the obligation of compensation. In the continuation of the third part, apart from the special regulations regarding the group of companies, apparent authority, representation in appearance and estoppel doctrines, which are legal constructs based on good faith, have been examined. In limited cases, it has been pointed out that the controlling or subsidiary company which is not a formal party, may be bound by the main agreement or the rights or obligations arising from this agreement pursuant to one of these theories. In line with the view that the arbitration agreement will follow the rights and obligations arising from the main relationship, it has been accepted that in cases where the controlling or subsidiary company has substantive legal liability, it should be bound by the arbitration agreement as well. In the fourth part of the study, firstly, the question of whether the person to whom the arbitration agreement is extended will be a plaintiff or a defendant in the arbitration will make a difference has been examined. According to one view, stricter conditions should be fulfilled for extension when the third party is forced to arbitration (in other words, when the defendant has no will to arbitrate in any way) compared to when the third party voluntarily resorts to arbitration. Because in the former case, the person is compelled to arbitration against his/her consent. On the other hand, the other view argues that the fact that the third party is the plaintiff or the defendant in the arbitration does not make a difference in terms of the extension of the arbitration agreement, since the importance given to the consent of the person who is already a party to the arbitration agreement should not be less than the importance given to the consent of the third party. In line with the view that the arbitral consent of the third party does not play a decisive role in the extension of the arbitration agreement, it has been concluded that the position of the third party as plaintiff or defendant in this discussion does not make any difference in terms of extension. Moreover, in this part of the study, the court decisions and arbitra awards regarding the group companies doctrine have been examined and the conditions of the group companies doctrine have been determined in the light of these decisions. Group of companies doctrine, which had started to become known after the famous Dow Chemical decision of 1982, is based on the fact that the member of the corporate group participating in the negotiation, performance or termination of the agreement in which the arbitration agreement is included, is bound by the arbitration agreement, although it is not a formal party to the arbitration agreement. The first condition spotted in court decisions and arbitral awards is that the companies that constitute the corporate group must have strong financial and organizational connections. Therefore, the mere fact that the controlling company owns most of the shares of the subsidiary will not, by itself, indicate a tight group presence. The most emphasized condition in court decisions and arbitral awards stands out as the active participation of the company, which is not a formal party to the arbitration agreement, in the negotiation, performance or termination of the main agreement. The last condition is that the parties to the contract and the third-party mother or subsidiary company have shown the will to be bound by the arbitration agreement. After examining the conditions, the approach taken in the decisions discussed in the fourth section and especially the special importance attributed to the "consent of arbitration" have been criticized, and it has been concluded that the arbitration agreement is a provision of the contract and therefore a special and separate statement of arbitral consent is not required for the formation of the arbitration agreement. In the fourth part, approaches to the doctrine of group companies have been discussed as well. The authors who argue that there is no need for the doctrine of group companies for the extension of the arbitration agreement to third parties, contend that the principles such as implicit consent and good faith rule that already exist in the law of obligations can be applied to the extend the arbitration agreement within group of companies. However, there are few authors who do not consider the group companies doctrine redundant, pointing out that it draws attention to specific fact patterns and behaviors. Moreover, it has been examined whether group of companies doctrine is accepted in national laws. It has been determined that group companies doctrine is not generally accepted except for French law and the legal systems under the influence of French law, and it has even been revealed that this doctrine is not as vigorously defended and accepted as before in the current decisions in French law. Finally, in this part of the study, group of companies doctrine has been compared with piercing the corporate veil and estoppel doctrines, and it has been concluded that many theories applied in the extension of the arbitration agreement could find application at the same time in a single event. In the last part of the study, the examination of an arbitral award given on the basis of the doctrine of group companies by the courts in the case of annulment or recognition/enforcement of the arbitral award has been discussed. It is possible that an arbitral award based on the doctrine of group companies will be subject to an action for annulment by the party against whom the decision was made, or that the recognition/enforcement action will be rejected by that party. In the decisions reviewed in this study, reasons for challenge are; there is no written arbitration agreement, the absence of a valid arbitration agreement, the fact that the arbitrators have exceeded their authority or that the decision is contrary to public order. It should be noted that the mere extension of the arbitration agreement to a company that is not a party to this agreement should not be sufficient for the annulment or denial of recognition/enforcement of the arbitral award. The reason is that, if the arbitration agreement is extended to the third party, the arbitrators accept that there is an arbitration agreement valid for the third party and thus they have authority for the person. However, in the cases examined in this study, it has been determined that the courts have decided to annul the award or reject the recognition/enforcement case without thoroughly evaluating the substantive legal dimension of the case.