In November 2008 in the City of London v. Sancheti, the English Court of Appeal overturned the decision in Roussel-Uclaf v. G.D. Searle, where the English High Court had held that a subsidiary claiming the benefit of an arbitration agreement to which it was not a party was entitled to a stay of court proceedings in favour of arbitration. The Sancheti decision affirms the restrictive approach of the English courts to determination of the parties to international arbitration agreements and confirms the divide between English and a number of other jurisdictions on the topic.
Roussel-Uclaf was decided under the former English Arbitration Act 1975. In Roussel-Uclaf, the claimants held a licensing agreement with Searle (US), the second defendant, granting the claimants an exclusive licence for the whole of the world, except the U.S., for the manufacture and use of a life-saving compound. All disputes under the licensing agreement were to be settled by arbitration.
Searle (US) also used its wholly owned subsidiary, Searle (UK) – the first defendant in the action but not a party to the licensing agreement – for the sale and distribution of its products in the U.K., including the phosphate element of the life-saving compound. A dispute arose as to the scope of the licensing agreement and which products it covered (whether it covered the base of the compound, or the phosphate as well), in relation to which the claimant initiated proceedings against Searle (UK) and Searle (US) in the English court.
Both defendants applied for a stay of the action under section 1 of the Arbitration Act 1975 (section 9 of the Arbitration Act 1996) – Searle (UK) claiming not as a party to the arbitration agreement, but as a party claiming “through or under” Searle (US) (what is now section 82(2) of the Arbitration Act 1996). The stay was granted on the basis that the two defendants and their actions were “so closely related on the facts in this case that it would be right to hold that the subsidiary can establish that it is within the purview of the arbitration clause.” (The English court would also have granted the stay on the basis of its inherent jurisdiction, on the basis that the proceedings were “frivolous and vexatious.”)
Some authorities have questioned the specific finding in Roussel-Uclaf v. G.D. Searle as improperly importing the so-called “group of companies doctrine” into English law, particularly following decisions such as Peterson Farms v. C & M Farming and Caparo v. Fagor which had rejected that doctrine for England. The so-called “group of companies doctrine” – broadly accepted in other jurisdictions, most notably France following the decision in an ICC arbitration in Dow Chemical v. Isover-Saint Gobain (confirmed by the Paris Court of Appeals) – provides that two separate legal entities in the same group may be regarded as “one and the same economic reality (une réalité économique unique).” This doctrine has found expression in various forms in a substantial body of arbitral awards and decisions of national courts.
English courts have taken a different approach. There can be little doubt, following Peterson Farms and Caparo v. Fagor, that the group of companies doctrine “forms no part of English law.” Nonetheless, at least until Sancheti, Roussel-Uclaf left open the possibility under English law of reaching results not dissimilar from the group of companies doctrine by concluding that the non-signatory to an arbitration agreement was claiming “through or under” that agreement.
Until now, that is: the English Court of Appeal has ruled in City of London v. Sancheti that Roussel-Uclaf was “wrongly decided on this point and should not be followed.” Specifically, the English Court of Appeal determined that Sancheti – who brought various claims arising in relation to a lease agreement against the City of London under the arbitration agreement in the India/United Kingdom BIT – was not entitled to a stay of English court proceedings initiated by the City of London for rent arrears because the City of London was not a party to the arbitration agreement contained in the BIT.
Relying on Roussel-Uclaf, Sancheti argued that the City of London was a person claiming “through or under” the United Kingdom (section 82(2) Arbitration Act 1996). The Court of Appeal disagreed and, overturning Roussel-Uclaf on this point, has now held that “a mere legal or commercial connection” to the relevant agreements “is not sufficient” to bind a non-party, claiming “through or under” a party to an arbitration agreement.
The Court of Appeal left unclear what, beyond “a mere legal or commercial connection,” might qualify as claiming “through or under” a party. Thus, in circumstances where a parent company abuses its control over the subsidiary for illegitimate purposes or otherwise uses the corporate structure to conceal a legal impropriety (Adams v. Cape Industries Inc.) or where there is evidence of fraud (Jones v. Lipman; BCCI v. Adham; Glencore v. Dalby), a non-signatory to the arbitration agreement may nonetheless be able to invoke (or may be bound by) that agreement. Recognizing that “the application involved a point of some general importance, namely whether [Roussel-Uclaf] was correctly decided,” the Court of Appeal gave leave to appeal the decision.
In many jurisdictions, the effects of an arbitration agreement are extended to non-signatories through a variety of means, all motivated by the basic objective of ensuring that the parties’ agreement to arbitrate is given a sensible, commercial effect, not obstructed by jurisdictional disputes and parallel litigation. In some jurisdictions, this is accomplished through the group of companies doctrine; in others, through more traditional principles, such as veil piercing, alter ego, agency, estoppel, ratification or third party beneficiary arguments. While the application of some of these principles has been rejected under English law, others remain at least potentially available (for example, English principles of agency and estoppel). It may also be possible for a non-signatory party to be bound by an arbitration agreement where the contract in which the arbitration agreement appears confers on that party a substantive right (by virtue of the Contracts (Rights of Third Parties) Act 1999, §8, relied on successfully in Nisshin Shipping v. Cleaves). More generally, one must wonder whether the narrow approach of English courts – assessed by international standards – conforms either to the expectations of commercial parties in agreeing to arbitrate or to the 1996 Act’s aspirations to ensure England’s attractiveness as a seat for international arbitration.
Kate Davies and Gary Born
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A brief comment on your thougtful post.
Another interesting aspect of the judgement of Collins LJ is his emphatic rejection of the notion that because section 9 of the 1996 Act refers only a “party to an arbitration agreement against whom legal proceedings are brought … in respect of a matter which under the agreement is to be referred to arbitration” it obviates the need for the claimant also to be a party (to the agreement). In his view, it is not sufficient that there simply be “a matter” which is to be referred to arbitration. He posits that such an interpretation would be “wholly inconsistent with the purpose and structure of the 1996 Act in general, and of section 9 in particular” without further elaboration which perhaps is dissapointing.
To my mind this question is perhaps of more central importance than Roussel-Uclaf on which, as you note, Sancheti relied, which involved private parties in a very different context to that arising in the Sancheti case.
The Sancheti case seemed to fall four square on a literal construction of section 9 within its provisions. Sancheti was a party to an arbitration agreement (in the BIT) against whom a “counterclaim” (for rent) was made by way of legal proceedings. It is not clear to me whether the UNCITRAL tribunal has found jurisdiction in the BIT arbitration in respect of the subject matter of the claim relating to the lease (and indeed the acts of London Corp complained of), but if it has, the counterclaim would arguably also fall within the arbitration agreement. If no jurisdictional finding has been reached, then it might have been appropriate for the court to grant a stay pending determination by the tribunal on that issue. Finally, it is notable that while section 9 refers to the party to the arbitration agreement the only other reference is the other parties “to the proceedings”, not the arbitration agreement.
In conclusion, the decision not only has implications for English law, but also I imagine for the issue of counterclaims in investment treaty arbitration. This gives something of an intersting twist to the concept of “arbitration without privity”!
PS: Sancheti might have considered a section 44 application (in aid of the BIT arbitration) to have the “counterclaim” stayed, such that it might be determined in the BIT arbtration, but one suspects that it would be difficult to say the least to convince a court that such an application could be shoe-horned under section 44(2)(a)-(e)…
Kate, Gary and John,
While you legal eagles are thoughtfully picking arbitral nits, an activist judge in the High Court of Construction and Technology just threw the Arbitration Act of 1996 under the bus.
In the case of British Telecommunications plc v SAE Group, Inc. February 5, 2009, (see Approved Judgment para 74 Summary), the Hon. Justice Ramsey found himself unable to effectively support his preconceived desire to obviate a duly appointed Arbitrator’s jurisdiction. S.32, s.73 and s.7 kept getting in the way. To make matters worse, the silly plaintiff inconveniently brought his Part-8 claim under s.32.
Not to be thwarted by the pesky Act, the innovative judge invoked the Doctrine of Inherent Jurisdiction. Under his interpretation of the Doctrine, his discretion is unlimited (or at least not limited by the rule of law). So he expressly concludes that the Act is irrelevant and rules in favor of the plaintiff. He also preemptively denies the defendant permission to appeal (he already had his pen out – why not?).
The Defendant appeals anyway. The Court of Appeal declines to hear it – simply stating that “the appeal has no prospect of success on any of the grounds alleged” (probably because the retired justice that it was assigned to didn’t bother to read it). One would think that 3 instances of failing to apply the law and material revision of common law doctrine from the 15th Century would count for something.
Check it out – it’s a real hoot.