The extension of arbitration agreements to third parties is a complex but rigid area of English law. In light of the ever-growing prevalence of intricate multi-party and multi-jurisdiction disputes, courts and arbitral tribunals have found themselves balancing principles of privity of contract with public policy to determine when, why, and how arbitration agreements should be extended to non-signatories.
This note examines the legal principles applicable to the practice of extending arbitration agreements to third parties in England, while identifying the key challenges in this area of law.
Consent to Arbitrate
Arbitrations are, first and foremost, creatures of contract. This is to say that they derive their power and their form from an underlying arbitration agreement and the consent of its signatories.
contractual nature gives arbitration flexibility and allows parties to tailor proceedings to their specific needs. However, it stands to reason that a third party will typically not have put its mind to the terms of an arbitration agreement and cannot, therefore, be said to have consented to its terms.
In light of this, extending arbitration agreements to third parties runs the risk of unfairly prejudicing non-signatories by forcing them to comply with contractual obligations which they have not agreed to, including potentially giving up their right to seek redress in national courts.
As noted by the Commercial Court in Renaissance Securities:
[R]equiring a third party who is a stranger to the contract to arbitrate against its will at significant cost and in a foreign seated arbitration is something that should be approached with great caution, particularly given the asymmetry of such an arrangement [...].1
Thus, the starting point is great reluctance from the courts of England to extend arbitration agreements to third parties. Awards rendered against third parties even run the risk of being annulled unless they are carefully supported by one or more of the limited legal grounds identified below.2
The Dallah Saga: Diverging Approaches in England and France
The story of Dallah v Government of Pakistan provides a useful illustration of what Pierre Mayer calls the "classical" position of English courts in relation to the extension of arbitration agreements.3 The facts of the case are briefly summarised below.
On 24 July 1995, Dallah and the government of Pakistan (the "Government") entered into a memorandum of understanding contemplating that Dallah would build accommodation in Mecca for pilgrims undertaking the Hajj and Umrah pilgrimages.4 Following this, on 10 September 1996, Dallah entered into a contract with a trust created by the Government for the purposes of this agreement.5
However, on 19 May 1998, after the trust had lapsed, Dallah initiated arbitration against the Government directly, invoking Clause 23 of its contract with the trust, which read:
Any dispute or difference of any kind whatsoever between the Trust and Dallah arising out of or in connection with this Agreement shall be settled by arbitration held under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, by three arbitrators appointed under such Rules.6
For all intents and purposes, the contract was between Dallah and the trust alone. Nevertheless, the arbitral tribunal upheld its jurisdiction and, on 23 June 2006, issued a final award in Dallah's favour.7
When leave was granted to Dallah to enforce the award in the United Kingdom, the Government made an application for an order to set aside this leave on the basis that it was allegedly inconsistent with French law, the governing law of the dispute, which the Government argued did not allow the arbitration agreement to be extended in this way.8
On 1 August 2008, the Commercial Court allowed the Government's application, setting aside Dallah's leave to enforce the arbitration award.9 This decision was then affirmed by the Court of Appeal on 20 July 2009 and the Supreme Court on 3 November 2010.10 And yet, on 17 February 2011, the French cour d'appel came to an entirely different conclusion, while applying the same principles of French law to the same set of facts, and allowed Dallah to enforce its award against the Government.11
Comparison of the decisions of the English courts and the French cour d'appel reveals that the French court opted for a more holistic approach, taking into consideration the relationship between the trust and the Government, as well as the role played by the Government in negotiating, executing, and terminating the contract.12 English courts, however, took a stricter, more traditional approach to the requirement of consent to arbitrate.13 As the Government had not signed the arbitration agreement, it could simply not be bound to its terms.
Joinder by Consent and Consolidation
A straightforward way to extend arbitration agreements to third parties is to join them to an arbitration. Whether or not this is an option depends on the precise wording of the relevant arbitration agreement.
In the absence of express language permitting the joinder of third parties, references to arbitral institutions whose rules allow this may suffice. Article 22.1(x) of the London Court of International Arbitration's Rules of Arbitration 2020, for example, gives arbitral tribunals the power to join third parties to arbitral proceedings:
22.1 The Arbitral Tribunal shall have the power [...]
(x) to allow one or more third persons to be joined in the arbitration as a party provided any such third person and the applicant party have consented expressly to such joinder in writing following the Commencement Date or (if earlier) in the Arbitration Agreement; and thereafter to make a single final award, or separate awards, in respect of all parties so implicated in the arbitration;
A similar provision is contained in Article 7 of the International Chamber of Commerce's Rules of Arbitration 2021.
Nevertheless, because the joinder process requires the consent of all parties involved, including the third party's, its usefulness will tend to be limited. Where joinder is attempted, third parties wishing to avoid arbitration (or other parties to an arbitration wishing to prevent the third party's joinder) can simply refuse to consent.
Another route to extending an arbitration agreement is by consolidating several ongoing arbitrations into one single procedure. An arbitral tribunal's power to consolidate is only available if the parties agree to it, either directly or indirectly, under Section 35 of the Arbitration Act 1996.
In practice, arbitral tribunals primarily tend to consolidate proceedings where this would lead to a gain in efficiency, such as when multiple parallel proceedings are being held in relation to a similar matter. Nevertheless, this can sometimes have the practical effect of extending an arbitration agreement, though, once again, it requires the consent of all parties involved.
Joinder and consolidation are also limited by the fact that they require an extant arbitration to add the third party.
The Contracts (Rights of Third Parties) Act 1999: Overview
The Contracts (Rights of Third Parties) Act 1999 (the "1999 Act") establishes a statutory framework governing the contractual rights of third parties and related arbitration agreements (so long as it has not been excluded by the terms of a contract).
Section 1(1) of the 1999 Act allows a third party to a contract to enforce a term if it confers a benefit upon it or if the contract expressly provides that it may.
Consequently, Section 8(1) of the 1999 Act provides that if a Section 1(1) right to enforce a term is subject to an arbitration agreement, then the third party "shall be treated [...] as a party to the arbitration agreement":
(1) Where –
(a) a right under section 1 to enforce a term ("the substantive term") is subject to a term providing for the submission of disputes to arbitration ("the arbitration agreement"), and
(b) the arbitration agreement is an agreement in writing for the purposes of Part I of the Arbitration Act 1996,
the third party shall be treated for the purposes of that Act as a party to the arbitration agreement as regards disputes between himself and the promisor relating to the enforcement of the substantive term by the third party.
Crucially, Section 8(1) only applies "relating to the enforcement of the substantive term by the third party." In practice, this means that an arbitration agreement will only extend to third parties in so far as it relates to the enforcement of a right conferred by the Act.
It is, therefore, only a partial extension. Third parties which benefit from a right under the 1999 Act must use the overlying contract's arbitration agreement to enforce their right, but they cannot use its provisions to force signatory claimants to arbitrate against it (e.g., through anti-suit injunctions).
Toulson LJ, when considering an application by a benefiting third party to a contract for an anti-suit injunction against a signatory, held, in Fortress v Blue Skye, that Section 8(1) of the 1999 Act conferred "a conditional benefit on a third party [...] that is, a substantive benefit, subject to a procedural condition that [the third party] may enforce it only by a particular process, i.e. arbitration."14
Alternatively, if a contract expressly provides that third parties are entitled to the full benefit of an arbitration agreement, this provision can have a binding effect under Section 8(2) of the 1999 Act instead.
The Contracts (Rights of Third Parties) Act 1999: Arbitration of Trust Disputes
Section 6 of the 1999 Act contains several classes of contracts which are exempted from its effects. Whilst they are not included in Section 6, trust disputes have historically been considered the exclusive domain of the courts.15 A discussion paper submitted to the Executive Committee of the Trust Law Committee, for example, previously suggested that arbitration of trust disputes was "plainly impossible under English law".16 Therefore, the Section 1(1) rights of a third-party beneficiary under a trust would not have been arbitrable through Section 8.
However, the Commercial Court's decision in Grosskopf v Grosskopf appears to have opened the door to the arbitrability of trust disputes. The court's statement that "there is no statutory prohibition or policy rule against trust disputes being resolved out of court" seems to indicate that trust disputes may now be arbitrable and, therefore, that arbitration agreements may be extended to third-party beneficiaries under a trust.17 However, the true impact of this decision remains to be seen.
The extension of arbitration agreements is of particular importance in trust disputes as trusts frequently involve third party beneficiaries (who are sometimes unborn). In this respect, Section 1(3) of the 1999 Act provides that, in order for a third party to benefit from its Section 1(1) right to enforce a benefit under a contract, it must be expressly identified in the contract "by name, as a member of a class or as answering to a particular description but need not be in existence when the contract is entered into."
Agency, Assignment and Novation
Arbitration agreements can also be extended to third parties through agency, assignment, or novation.
In cases of agency, a principal whose agent has signed an arbitration agreement on its behalf will be bound by the arbitration agreement.
In assignment scenarios, one party has assigned its benefit under a contract to a third party. This does not require the consent of that third party and does not affect the existence of the initial contract.18 It has been said that the assignee "takes the assigned right with both the benefit and the burden of the arbitration clause", which is binding upon it.19
Broadly speaking, assignment is held to be permitted by Section 82(2) of the Arbitration Act 1996, which provides that "[r]eferences in this Part to a party to an arbitration agreement include any person claiming under or through a party to the agreement."
Conversely, novation involves the replacement of a contract with an entirely new one, requiring the consent of all parties involved. As such, it allows the transfer of all contractual obligations to a third party, including arbitration agreements.20
It is important to be aware of a contract's procedural requirements for amendment and/or termination (for example, whether there is a "no oral modification" clause), as a non-compliant novation will be found void.
Similarly, assignments in violation of an anti-assignment clause will typically be void.
However, if the facts permit it, it may be open to one party to argue that the other should be estopped from insisting on such clauses if it has behaved in a manner which is inconsistent with them.21
Statutory Operation
Arbitration agreements can also be extended to third parties through statutory operation.
Section 8(1) of the Arbitration Act 1996, for example, provides that "[u]nless otherwise agreed by the parties, an arbitration agreement is not discharged by the death of a party and may be enforced by or against the personal representatives of that party." This provision, therefore, will extend an arbitration agreement to include a deceased party's personal representative, a third party.
Similarly, Section 349A of the Insolvency Act 1986 stipulates that, if a trustee in bankruptcy adopts a contract, an arbitration agreement entered into before bankruptcy proceedings are commenced "is enforceable by or against the trustee in relation to matters arising from or connected with the contract." The arbitration agreement will thus be extended to include a bankrupt party's third-party trustee in bankruptcy.
However, we note that the Court of Appeal's decision in Dassault Aviation appears to indicate that assignments by statutory operation can also be excluded if the wording of an anti-assignment provision sufficiently clearly demonstrates an intention to this effect.22
The Group of Companies Doctrine: A Missed Opportunity?
Some jurisdictions recognise a "group of companies" doctrine (occasionally called implied consent) which allows arbitration agreements to be extended to third parties which form part of the same group of companies as a signatory.
Dow Chemical France v Isover is generally considered to be the source of this principle. In this case, the arbitral tribunal looked at aspects of negotiation, execution, and termination of the contract containing the arbitration clause to determine what role the third party had had in the parties' contractual relationship and whether the arbitration agreement should be extended to it.23 This is essentially the same approach as that taken by the French cour d'appel in Dallah, mentioned above.24
At any rate, English courts have firmly rejected this doctrine and show no sign of reversing course. In Peterson Farms, the Commercial Court plainly held that the group of companies doctrine "forms no part of English law."25
Piercing the Corporate Veil
Instead of applying the group of companies doctrine, English courts have the power to "pierce the corporate veil". This practice allows a court to disregard a third party's distinct legal personality where it is being used to deliberately frustrate or avoid the effects of the law.
In practice, a third party may be seen as having the same legal personality as a party to the arbitration agreement, thereby extending the arbitration agreement to include it. This process of piercing the corporate veil is said to bind the party's "alter ego".
Whilst this principle is undoubtedly recognised, it is seldom applied because a legal relationship will typically exist between the controlling party and its alter ego, which will allow the controller to be held accountable without discounting its legal personality.26 As such, according to Lord Sumption, "the principle has been recognised far more often than it has been applied."27
Still, piercing the corporate veil remains a valid option for extending an arbitration agreement to a third party.
Conclusion
In summary, the circumstances where an arbitration agreement can be extended to third parties are limited. Due to the importance placed by English courts on consent to arbitrate, they are typically reluctant to extend arbitration agreements.
That being said, should the facts of a case allow it, those wishing to extend an arbitration agreement to include third parties are not wholly out of options. Joinder, consolidation, agency, assignment, novation, and corporate veil piercing are accepted means of extending arbitration agreements, although their true utility will depend on the specific facts of any given case.
Footnotes
1 Renaissance Securities (Cyprus) Limited v ILLC Chlodwig Enterprises [2024] EWHC 2843
2 See Vale S.A. v Benjamin Steinmetz [2021] EWCA Civ 1087, [31] ("It is elementary that an arbitrator cannot make an award which is binding on third parties who have not agreed to be bound by his decision").
3 P. Mayer, The Extension of the Arbitration Clause to Non-Signatories – the Irreconcilable Positions of French and English Courts, (2012) 27(4) American University International Law Review 831, p. 832.
4 Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2008] EWHC 1901 (Comm), [3], [11].
5 Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, [4-7].
6 Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, [7] (emphasis added).
7 Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, [9-10].
8 Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, [10], [11], [14].
9 Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2008] EWHC 1901 (Comm), [154-157].
10 Dallah Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2009] EWCA Civ 755, [62]; Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, [70].
11 Gouvernement du Pakistan, Ministère des Affaires Religieuses c. Société Dallah Real Estate and Tourism Holding Company, CA Paris, 1-1, 16 Février 2011, RG n° 09/28533, p. 9.
12 Gouvernement du Pakistan, Ministère des Affaires Religieuses c. Société Dallah Real Estate and Tourism Holding Company, CA Paris, 1-1, 16 Février 2011, RG n° 09/28533, pp. 5-9.
13 P. Mayer, The Extension of the Arbitration Clause to Non-Signatories – the Irreconcilable Positions of French and English Courts, 27(4) American University International Law Review 831, p. 836.
14 Fortress Value Recovery Fund I LLC v Blue Skye Special Opportunities Fund LP [2013] EWCA Civ 367, [42].
15 See, e.g., In Re Raven (1914) 1 Ch 673, 678 ("Here the authority which the testator desires to vest in his executors is one which the law entrusts to Her Majesty's Courts, which must be freely open to all her subjects.").
16 Executive Committee of the Trust Law Committee, Arbitration of Trust Disputes, (2012) 1 Trust Quarterly Review.
17 Chaim Saul Grosskopf v Yechiel Grosskopf [2024] EWHC 291 (Ch), [61].
18 The Argo Fund Limited v Essar Steel Limited [2005] EWHC 600 (Comm), [61].
19 Schiffahrtsgesellschaft Detlef Von Appen GmbH v Wiener Allianz Versichrungs AG [1997] EWCA Civ 1420, p. 8.
20 The Argo Fund Limited v Essar Steel Limited [2005] EWHC 600 (Comm), [61].
21 Kabab-Ji SAL v Kout Food Group [2021] UKSC 48, [67].
22 Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2024] EWCA Civ 5, [21].
23 Dow Chemical France v. Isover Saint Gobain, ICC Case No. 4131, Interim Award, 23 September 1982, paras. 7, 27.
24 Gouvernement du Pakistan, Ministère des Affaires Religieuses c. Société Dallah Real Estate and Tourism Holding Company, CA Paris, 1-1, 16 Février 2011, RG n° 09/28533, p. 9.
25 Peterson Farms Inc v C & M Farming Limited [2002] EWHC 121 (Comm), [62]; see also Caparo Group Ltd. v Fagor Arrasate Sociedad Cooperative [1998] 8 WLUK 75, 10.
26 Prest v Petrodel Resources Limited and others [2013] UKSC 34, [35].
27 Prest v Petrodel Resources Limited and others [2013] UKSC 34, [35].
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