UNDERSTANDING ARBITRATION BASICS
Arbitration is a widely recognized alternative dispute resolution method based on the consent of the involved parties. Unlike court litigation, arbitration requires voluntary agreement, meaning parties cannot be forced into arbitration without their consent. This consent is usually demonstrated through an arbitration clause or agreement, highlighting the parties' intention to resolve disputes through arbitration. This principle aligns with the doctrine of privity of contract, which states that only those who are parties to a contract can enforce or be bound by it. According to the Arbitration and Mediation Act 2023 (AMA), only parties bound by the arbitration agreement can be joined to the arbitration.1
Initially, it was assumed that only signatories to an arbitration agreement were bound by its terms. However, over time, various statutes, legal theories, and principles have expanded the scope of those who may be considered bound by an arbitration agreement, even if they did not sign it. These individuals or entities are referred to as "non-signatory parties" throughout this article. These theories, rooted in common law contract principles, have been applied in arbitration to address the inclusion of third parties in arbitration proceedings.
This article aims to analyze these theories and their relevance in Nigeria in the context of the AMA. By understanding these concepts, parties can better navigate the complexities of arbitration and ensure that their interests are adequately protected.
LEGAL THEORIES ON 'NON-SIGNATORY PARTIES' TO AN ARBITRATION
Despite arbitration's consensual nature, arbitrators increasingly face requests involving either signatories seeking to join non-signatories to the arbitration proceedings or non-signatories seeking to invoke an arbitration clause. These applications are usually based on the following legal theories:
Agency
The agency theory stems from contract law and binds a principal to actions, including contracts executed by their agent. In arbitration, a non-signatory can be joined as a party if their agent, acting on their behalf, is a signatory to the arbitration agreement. While there is limited local case law on this theory's application to non-signatories in arbitration, the Court of Appeal implicitly supported this theory in Mekwunye v. LOTUS Capital Ltd & Ors.2 The court suggested that agents and privies of signatories to an arbitration clause are deemed signatories to the arbitration agreement. This means they can be considered eligible to participate in arbitration proceedings. Additionally, the court dismissed the argument that a third party cannot be part of the agreement, indicating that multiple parties can be involved in arbitration under one contract if there is mutual consent to arbitration.3
This decision indicates that the agency theory can justify the inclusion of non-signatories in arbitration proceedings, provided there is sufficient consent and agency relationship.
Assignment and Novation
Through assignment and novation, rights and obligations under a contract can be transferred to a third party without needing the original counter-party's consent. This concept serves as an exception to the doctrine of privity of contract, allowing the assignee to enforce the contract's terms against the original counterparty. Choses in action, which can be assigned, include debts, shares, negotiable instruments, insurance policies, bills of lading, patents, and copyrights. The Court of Appeal in Julius Berger (Nig) Plc & Anor v. Toki Rainbow Community Bank Ltd4 defined assignment as transferring rights, property, or title to someone else for their benefit.
Generally, at common law, contract obligations cannot be transferred to a third party without novation, which requires the consent of all parties involved. Executing an arbitration agreement is usually considered a legal obligation rather than a right, meaning it cannot be transferred without consent.
For example, if a creditor with an arbitration clause in a debt agreement assigns the right to debt repayments to a third party, the third-party assignee does not inherit the obligation to refer disputes to arbitration. The assignee only receives the rights and benefits from the original contract. However, if a dispute arises and the original debtor chooses to pursue the third-party assignee, the debtor must submit the dispute to arbitration if the original contract includes an arbitration clause. In this scenario, the third-party assignee has the discretion to choose whether to participate in arbitration and cannot be compelled to do so.
Single Economic Unit
The Single Economic Unit (SEU) theory, also known as the "group of companies doctrine," was first established in the French case Dow Chemical v Isover Saint Gobain5. In this case, the claimant's parent company and another subsidiary were allowed to join the arbitration proceedings despite not being signatories to the arbitration agreement and the defendant's objection. The International Chamber of Commerce's tribunal permitted the joinder based on the grounds that the claimant and the parties sought to be joined constituted "one and the same economic entity" despite their distinct corporate personalities.
The tribunal set out three conditions for applying the SEU doctrine:
- Group Structure: There must be a tightly-knit group of companies, regardless of their distinct corporate personalities.
- Active Role: The non-signatory must have played an active role in the conclusion, performance, and termination of the contract containing the arbitration clause.
- Mutual Intention: There must be evidence of mutual intention or understanding among the parties that the group of companies is considered a "unity bound by the arbitration agreement."
While there is no reported case in Nigeria where the SEU doctrine has been applied, the legal rationale behind it is similar to the alter ego doctrine used in piercing the corporate veil, which is applicable in Nigeria. This similarity suggests that the SEU doctrine could potentially be applicable in Nigeria. However, criticisms against the doctrine persist, mainly due to concerns that parent companies might become susceptible to being joined in arbitration proceedings because of commercial contracts executed by their subsidiaries.
BEYOND SIGNATURES: INCLUSIVE ARBITRATION PRACTICES
Arbitration relies heavily on the consent of the involved parties, traditionally shown by their signatures on an arbitration agreement. However, as highlighted in this article, there are several legally recognized ways to establish consent. The Arbitration and Mediation Act (AMA) takes a broad and inclusive stance on the joinder of parties, allowing those proven to be bound by the arbitration agreement to join the proceedings. This approach means that not only signatories, but also other entities or individuals shown to be bound by the agreement may be included, embracing the legal doctrines discussed.
Moreover, entities or individuals who consent to join the arbitration with the original signatories' agreement are also bound by the arbitration agreement and can participate in the proceedings. It's essential to note that for arbitration conducted outside Nigeria, if a non-signatory is joined against their will, enforcing the award against them in Nigeria might face challenges in local courts. Therefore, it's crucial for all parties to seek adequate legal advice to navigate these complexities effectively.
PRACTICAL GUIDELINES FOR MANAGING THE INCLUSION OF NON-SIGNATORY PARTIES IN ARBITRATION
Understanding how to effectively manage the inclusion of non-signatory parties in arbitration is crucial for businesses and individuals involved in contractual agreements.
a. Contract Drafting and Review: It is essential to draft arbitration clauses with precise language that specifies the parties and their roles. This helps prevent future disputes. Including provisions that address the potential inclusion of non-signatory parties adds clarity and reduces ambiguity.
b. Risk Management: Consider the wider implications of contractual agreements and prepare for possible arbitration with entities beyond the immediate signatories. This helps in assessing and managing potential risks effectively.
c. Dispute Resolution Strategy
- Clear Strategies: Developing a clear and comprehensive dispute resolution plan that considers various scenarios, including the involvement of third parties, is beneficial.
- Unified Approach: For those involved in groups or networks, aligning dispute resolution strategies ensures a cohesive approach to arbitration. This reduces the risk of conflicting outcomes and enhances the effectiveness of the arbitration process.
By focusing on these practical guidelines, all parties involved in arbitration can better navigate the complexities of involving non-signatory parties. This proactive approach helps in minimizing conflicts and ensuring efficient dispute resolution.
SIMPLIFYING ARBITRATION COMPLEXITIES
Navigating the complexities of arbitration, especially regarding the inclusion of non-signatory parties, can be challenging. At SimmonsCooper Partners, we understand these challenges and offer comprehensive advisory services, including conducting contract audits to ensure that arbitration clauses and agreements are clear, up-to-date, and reflective of current structures. For further legal advice, please contact Olayinka Alao or Daniel Adegbamigbe.
Footnotes
1 See Section 40 of the Arbitration and Mediation Act 2023
2 (2018) LPELR-45546 (CA)
3 Per Abubakar JCA (Pp. 34-36 paras F-D)
4 (2009) LPELR-4381(CA)
5 Dow Chemical France & Ors v Isover Saint Gobain, ICC Case No. 4131, Interim Award of 23 September 1982
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.