22 October 2023

Group Of Companies Doctrine In Arbitration

Ozay Law Firm


Ozay Law Firm
The Economic and Social Council of the United Nations decided to arrange a conference and they created a Committee on the Enforcement of International Arbitral Awards.
Turkey Litigation, Mediation & Arbitration
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  1. Introduction

The Economic and Social Council of the United Nations decided to arrange a conference and they created a Committee on the Enforcement of International Arbitral Awards. The conference made in 1958, brought a regulation for international arbitration, which is one of the alternative dispute settlement mechanism outside of the court system, and this regulation called Convention on the Recognition and Enforcement of Foreign Arbitral Award (The New York Convention). Article 2 of The New York Convention basically announce that national courts has to recognize the competence of the arbitration if there is an agreement in writing between the parties. There must be an agreement for the courts to accept that the arbitration tribunal has jurisdiction and this agreement has also a form requirement.1 First duty of a court is to demonstrate if the parties has acquiesced to arbitrate when a dispute occur. Accordingly to this article, case law studies put down to the fact that parties must have a consent to arbitrate with one and another by an arbitration agreement or an arbitration clause added into the contract. So the consent which is mutually given by the parties to arbitrate is the rational to enforce arbitration agreement or arbitration clause for both parties, domestic courts and international arbitration tribunals.

  1. The Problem of Non-Signatories2

In the past, it was easier to lay down the requirements of arbitration as there were mostly bilateral agreements. Instead of using the local remedies parties can use arbitration mechanism for their disputes if they mutually agreed to with an written agreement that called arbitration agreement. Therefore, arbitration was possible and binding solely and exclusively for the parties of the agreement.3 Thus, contrary to domestic law of many countries, other natural or legal persons who have any legal or economic interest in the discussed matter in front of an arbitrator could not become one of the parties to the arbitration. So other third party who may have an interest from the outcome of an arbitration could not stand for his/hers interests. With the development of the concept of the globalization, certain gaps started to occur. Today, arbitration has become acknowledged by many countries and even in certain circumstances, it has become mandatory to apply in domestic law. As can be predicted from the past to the present, commerce has also developed and changed. With that change the contractual and bilateral disposition of the arbitration started to have difficulties with the contemporary business transactions which mostly associates with multinational groups of companies4. Traditionally, since arbitration is exclusive for the parties, only the company which signs the arbitration agreement can engage in arbitration, other companies of the same group will normally not be able to join arbitration process regardless of whether they involved in the aforementioned transaction. However, this understanding can't fulfill the modern-day demands that's why the problematic of non-signatories appeared. The efficiency and sufficiency of the traditional notion of arbitration where consent is mandatory is challenged and a new doctrine is trying to be created. Many legal scholars argue that, in some cases, the consent requirement stipulated by the traditional arbitration doctrine can be lifted if the non-signatories have a suitable right or obligation in arbitration. However, this situation is still controversial, there is no consolidated doctrine in application.

  1. The Problem

How will non-signatories be empowered to participate in and even intervene in the arbitration procedure for a decision regarding the dispute that concerns them, contrary to the traditional arbitration rules? After deduction for a while, the question was answered. Since the existing problem which is about non-signatories concerns a contract problem, the solution of the problem was provided through contract law doctrine. If the contract held by the parties can be applied, harmoniously with the rules of contract law doctrine, to the third party which is not a signatory then the arbitration provision within the contract can basically also be applied to non-signatory. With the transfer of the contract, the provisions included in it are naturally transferred to non-signatory. Moreover, the underlying thought of the most of the views in the doctrines is the existence of the implied consent. The importance of consent is undeniable in arbitration law as it is in international law. With the doctrine of the non-signatory, it is argued that by expanding the consent to arbitrate, which is normally required in writing, where implied consent can also be accepted because it concentrates the parties true intentions. In other words, a party who did not sign an agreement of arbitration or a contract which has an arbitration clause can be bound by arbitration if its behavior is accepted as tacit consent when the situation is examined.

  1. Group of Companies Doctrine

i. Short History: As mentioned before, there is no common regulation in the New York Convention or other legislation about non-signatories, especially for Group of Companies. The starting point of the group of companies doctrine is a French interim award given in 1982. The claimants were; Dow Chemical France (France), The Dow Chemical Company (USA), Dow Chemical A.G. (Swiss), Dow Chemical Europe (Swiss) and the defendant was Isover Saint Gobain (France).5 The arbitrators said in accordance with the intention common to all companies involved, that Dow Chemical France and Dow Chemical Company have been parties to these agreements although they did not actually sign them and that therefore the arbitration clause was applicable to them. So the competence of the arbitrators extended to non-signatory companies. As can be seen, there is a parent company “Dow Chemical Company” and subsidiary companies of that company. The arbitrators referred to veil piercing doctrine and agent doctrine as there is no decision had been taken on this matter before and there was no direct ban to this matter. In the globalizing world, the parent company has also entered into a multinational structuring and that structure subverted the bilateral structure of arbitration.

ii.Description of the doctrine: Under normal conditions, partner companies are independent and they manage their companies in line with their own interests in corporations law and legislation. However, there is one major exception to this main rule today: group of companies. The group of companies refers to companies which seems legally independent from each other but form a unique community together. Legal system basically consider two or more companies as a single group. The reason for the existence of this exception, as in everything else, is again the economy itself in the current capitalist system. Economic potential between companies is centralizing and there are obvious horizontal and vertical mergers between companies. Group of companies consists of a parent company and subsidiary companies together. Generally, fifty percent of the shares of the subsidiary companies are subject to the control of the parent company. Joint venture and consortium are the most common examples of the group of companies.

The Doctrine's main substance is to join non-signatories. It is not enough to only have a group of companies to extend arbitration clause to non-signatories. Dow Chemical case revealed the three conditions of the doctrine. First of all, there must be an tight group structure where there must be an accurate control power which is handled by a company over others. Then, the non-signatory companies must participate explicitly to all parts of the contract which contains arbitration clause. Finally, there must be a mutual intention which makes group considered as an unity bound by the arbitration clause or agreement.

a. Group structure: Parent and subsidiary companies form a larger business entity. To visualize the concept; the roof of the house is the business entity, the rooms are the subsidiary companies and the parent company is the walls and the security system. There is an intense linkage between the parent company and subsidiaries. The linkage can be either financial or organizational. Also there is a hierarchical structure between the companies. The hierarchical interaction of the companies also may shows us the links between the companies. The decision making competence and control mechanism of the parent company creates the thigh structure which is needed.

b. Participation: There are three stages for a contract; conclusion, termination and performance. Even if the company does not sign a contract, with participation in all of these stages, company who is a non-signatory can express its aim to be bound by the arbitration clause within the contract. This is an assumption which is notably logical and which creates a coordinated action. Here, the idea of the existence of consent not given by signature has been tried to be strengthened.

c. Mutual intention: Officially, there must be an obvious mutual intention of all companies to be bound by the arbitration clause . The intention must be bidirectional which means non-signatories and signatories both have to have the intention together at the time of the conclusion of the contact.

  1. The Problem of Enforcement

France law, embrace the doctrine because they don't insist form requirements of consent in the sense of the principle of freedom of contract so they believe in more liberal notions. France allows the widest application of the doctrine. Swiss Court accentuated that the doctrine can only apply to specific cases where there is a valid reflection of consent to arbitrate by non-signatory companies so Switzerland warmed up to doctrine but not much as France. Also Brazil accept the extension of an arbitration clause to non-signatory on the basis of the group of companies doctrine. On the other hand, German law has more strict understanding to form requirements but they also adopt more felixaeble understanding which means they use doctrine if there is no conflict between German law. In other words, the validity of the doctrine depends on its compliance with German law. So Germany is way behind of France, Switzerland and Brazil. If we leave aside civil jurisdiction and deal with common jurisdiction; United States are more curbed to the application of the doctrine and they believe doctrine needed to be reconsidered. On the other hand, United Kingdom totally denied the doctrine by more conservative understanding. As can be understood from the examples given briefly, and as mentioned before, there is no single international acceptance. So these different approaches to doctrine across jurisdictions create the problem of enforcement of arbitral awards. Even if the non-signatory participates in the arbitration proceedings by courtesy of the doctrine the arbitral award may not be recognized by the laws of the countries. So this problem creates an inconsistency in enforcement. Normally, enforcement is protected by the New York Convention accordingly to article2 but on the other hand article5 cites that contracting states may not recognize the award given by tribunal or may refuse to in certain circumstances. Article5 of the new york convention creates a coverage to not enforce arbitral awards which are normally binding and final. In order to not enforce the award, states first has to ask does the reason to not recognize the award fall within one one the exceptions listed under article5.

  1. Conclusion

Article 2 of The New York Convention basically announce that national courts has to recognize the competence of the arbitration if there is an agreement in writing between the parties. However, this understanding is nearly already out of date with current needs. Because of this, exceptions to the general principle of contract relativity started appearing in arbitration law. “The Group of Companies Doctrine” became one of the exceptions. As can be understood from the examples given briefly, and as mentioned before, there is no single international acceptance. This emphasizes the necessity to continue tackling the issue.



2. Definition of non-signatory: Non signatory is a party who did not signed any arbitration agreement or contract which contains arbitration clause but nevertheless who can get into the swing of discussion of the arbitration.

3. Brook, Timothy: Vermeer's Hat: The Seventeenth Century and the Dawn of the Global World

4. Definition of a multinational Company: A company called multinational corporation when it has assets elsewhere other than its home country. Nowadays, multinational group of companies have more complicated corporate structure which is not come in sight with basic parent company and its subsidiary.

5. “”

Originally published by 13 December, 2022

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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