| :Commercial Arbitration 2008

Arbitration unlimited

Author: Axel H Baum and Marc-Olivier Langlois, Hughes Hubbard & Reed, Paris

Whether and to what extent a non-signatory third party can be bound by a contractual arbitration clause has for many years been the subject of controversy, commentary, and jurisprudence.

The starting point for any consideration of this issue is the bedrock principle that arbitration is a consensual procedure, requiring the consent, real or implied, of the parties. Nonetheless, the evolving jurisprudence, in both common law and civil law jurisdictions, has recognized an ever-expanding number of legal concepts under which a non-signatory third-party may be deemed to be bound by an arbitration clause. Among these concepts are theories of piercing a corporate veil, alter ego or identity, agency, succession or substitution, and third-party beneficiary.

French jurisprudence and legal doctrine have been prominent in expanding the scope and nature of some of these concepts, and in introducing new ones. More than twenty years ago, the Dow Chemical case introduced the so-called group of companies doctrine, whereby one member of an identified group of companies might be bound by an arbitration clause in a contract signed by another member simply by virtue of its role in the conclusion, performance or termination of the contract that contained the arbitration clause. This doctrine provoked opposition outside France and was rejected by courts in England, Switzerland, and the US.

After that, in 2005, the French Cour de Cassation applied a chain of contracts theory in the Peavey case, whereby different parties to contracts comprising a chain of homogeneous contracts – for example, successive contracts of sale and resale of the same product – might be bound by an arbitration clause in one of the preceding contracts. The Cour reasoned that the arbitration clause constituted one of the rights attached to the product transferred down the chain of owners pursuant to essentially similar sales contracts.

Recently, in a March 27 2007 decision in the Société ABS case, the French Cour de Cassation has seemingly gone even one step further. The Cour upheld a court of appeals decision finding that a French party (ABS), which had not signed any arbitration clause itself, was bound by an arbitration clause contained in a fabrication contract signed by an affiliated Belgian company (AME) with an American contractor, which in turn had entered into a sub-contract with a Korean company for the fabrication of purpose-built electronic chips. The sub-contract between the American contractor and the Korean subcontractor contained another, somewhat different arbitration clause. The Korean subcontractor delivered the chips directly to AME, which encapsulated the chips and transferred them to ABS. When ABS and its partly subrogated insurer brought suit before the French commercial court against the American contractor, its two French subsidiaries, and the Korean subcontractor, the defendants successfully applied to have the dispute dismissed in favour of arbitration, relying on the arbitration clause contained in the contract between AME and the American contractor.

At first blush, the decision of the Cour de Cassation is neither surprising nor particularly controversial. The relationship between ABS, the ultimate recipient of the manufactured and encapsulated chips, and its Belgian affiliate (AME), is never clearly stated. Whether there was a formal contract for the supply of the chips or some other form of cooperation, there apparently was no separate arbitration clause between them. Nonetheless, a French court might well have applied the group of companies doctrine to bind ABS along with its Belgian affiliate under the arbitration clause. Or, if the matter had been submitted to a common-law jurisdiction, a court might have found ABS to be bound under theories of agency or third-party beneficiary.

But the Cour de Cassation did neither. Instead, the Cour adapted and significantly expanded the chain of contracts theory, applying it in this case to a series of heterogeneous contracts – not back-to-back sale/resale contracts, but different types of related contracts for the manufacture and supply of specific products from one contractor to the next. In doing so, the Cour emphasized the sales aspects of the transaction, whereby the Korean subcontractor sold to the American contractor, who in turn sold to AME. The Cour found that the arbitration clause was an accessory to the basic legal rights attached to the products, all of which rights were transferred automatically as part of the successive transfers of ownership, regardless of whether the contracts were viewed as homogeneous or heterogeneous.

With respect to the two French subsidiaries of the American contractor, who were not involved in the chain of transfers as such, the Cour found, without citing authority, that the effect of the arbitration clause applied to any entity directly involved in the performance of the contract and in any resulting disputes. Because the two subsidiaries had participated in the finishing work of the Belgian intermediate, they too could rely on the arbitration clause existing between their parent company and the Belgian company.

It is notable that the Cour de Cassation did not rely on the group of companies doctrine in reaching its decision. This is so with respect to the impact of the arbitration clause on ABS, whose precise position in the chain of contracts is left unclear, and also with respect to the two French subsidiaries of the American contractor. The Cour also apparently ignored the site selection in the second arbitration clause.

But perhaps most importantly, the Cour de Cassation did not consider at all the intention or knowledge, whether express or implied, of the parties with respect to the arbitration clause. Moreover, in contrast to the Peavey decision, the Cour mentioned no possible exception based on lack of knowledge. In so doing, the Cour de Cassation moved a significant distance away from one of the traditional cornerstones of arbitral jurisdiction.

The Cour de Cassation's decision in Société ABS unquestionably pushes outward the boundaries within which non-signatories can be ensnared in the web of arbitration. It reinforces the perception of French courts as being strongly favourable to arbitration. Whether courts in other jurisdiction will go as far remains open to question.

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