Extension of the Arbitration Clause to Group Companies

Contact: Ezgi Babur; Erdem & Erdem (Turkey)

The extension of the arbitration agreement to third parties has become a subject of interest in recent years. The extension of the arbitration agreement, which is signed by a company taking part in the same group of companies as the parent company, which is economically stronger, is preferable. Additionally, the extension is favorable for the claimant in recognition and enforcement proceedings, since it gives the opportunity to initiate recognition and enforcement proceedings against the parent company taking part in the same group of companies.

 

The acceptance of the extension in arbitration proceedings and arbitral awards given as a result of such proceedings may cause issues, especially in recognition and enforcement proceedings. Similarly, for arbitration proceedings during which the extension of the arbitration agreement was not granted but which are subject to recognition and enforcement proceedings, the extension of the arbitration agreement may be subject to debate. At this point, the extension of the arbitration agreement, signed by a member of a group of companies, to another company within the same group of companies is a topic worth analyzing.

In General

As is known, the declaration of intent concerning the resolution of disputes through arbitration is the essential element of the arbitration agreement. For a valid arbitration agreement, the parties should declare their intent concerning the resolution of disputes through arbitration in a clear manner and without giving rise to confusion[1]. The fact that arbitration has both contractual and judicial characteristics emphasizes that the arbitration intent should be clarified without giving rise to any confusion. Also, the exceptional character of arbitration as a dispute resolution mechanism indicates the importance of the arbitration intent. The extension of the arbitration agreement to companies taking part in the same group of companies is a subject which should be analyzed.

The extension of the arbitration agreement to third parties is the name given to cases in which third parties are affected by the arbitration agreement, by having the quality of claimant or respondent. In terms of groups of companies, the extension of the arbitration agreement may be paraphrased as the application of the arbitration agreement to parties involved in the performance of the agreement or in disputes arising therefrom, on the condition that they prove that they were aware of the arbitration agreement based on their position[2].

Importance of the Extension in terms of Recognition and Enforcement Proceedings

The importance of the extension of the arbitration agreement in terms of recognition and enforcement proceedings arises from the fact that a valid arbitration agreement is among the conditions for the recognition and enforcement of arbitral awards. Indeed, the presence of a valid arbitration agreement is analyzed in recognition and enforcement proceedings conducted both according to the International Private and Procedural Law No. 5718 and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards dated June 10th, 1958 (the “New York Convention”).  The extension of the arbitration agreement is of great importance in terms of recognition and enforcement.

Analysis under Turkish Law

As is known, all companies taking part in a group of companies have a legal entity distinct and independent from the other companies in the group of companies. However, in some cases, based on intra-group relations, the parties signing and performing the arbitration agreement may be different companies.

Considering the actual trend in Turkish law, the practice of forming a group of companies is quite frequent. Accordingly, the group of companies has been regulated under the Turkish Commercial Code No. 6102 (“TCC”). Setting aside the new provisions under the TCC concerning the extension of the arbitration agreement to groups of companies, within the framework of legal provisions and precedents of the courts, it is stated that the extension is not possible based on the group of companies’ theory[3].

In terms of the precedents of the Court of Appeals, it may be seen that the Court of Appeals attaches great importance to the notion of “party” in the recognition and enforcement of arbitral awards. In a decision that indirectly concerns this issue, the Court of Appeals rejected an enforcement suit directed at the parent company based on an arbitration agreement signed by the subsidiary[4]. Based on the fact that the parent company and the subsidiary are distinct legal entities, it is clear that an arbitral award obtained against the subsidiary may not be subject to recognition against the parent company[5]. In any case, in the arbitration proceeding concerning the aforementioned recognition suit, the extension of the arbitration agreement to the parent company was not accepted.

In addition to the precedents of the courts, Turkish doctrine follows the view that the extension of the arbitration agreement to a separate legal entity which did not declare its intent to arbitrate based on its taking part in the same group of companies may be accepted for only exceptional cases[6].

Analysis under Comparative Law

In terms of international arbitration practice, among arbitrators taking part in ICC arbitration, there is a strong tendency that the arbitration agreement signed by a company taking part in a group of companies would be extended to other companies in the group, on the condition that they fulfill certain conditions[7]. On the other hand, it should not be neglected that there are many ICC awards in which the extension was rejected[8].

An important award in which the extension of the arbitration agreement to group of companies was rendered was in the Dow Chemical arbitration proceeding[9]. In this proceeding, the arbitrator decided that the group of companies involved in the arbitration form a single economic entity, and that all the companies in the group of companies intended to be bound by the arbitration agreement. At this point, the elements such as the group of companies’ acting as party to the agreement, the fact that the buyer had dealings with the group and not the individual companies and that it took an active role in the conclusion of the arbitration agreement have been considered by the arbitrator. The Paris Court of Cassation rejected the request of cancellation concerning said award. Consequently, the decision on the extension was not considered grounds for cancellation by the French courts. In parallel with this decision, it was recently asserted under French law that international arbitration agreements shall be extended to all disputes directly related to the performance of the agreement[10].

Similarly, in the United States of America, in accordance with the arbitration-friendly tendency which aims to sustain the validity of arbitration agreements, it is deemed possible that the arbitration agreement would be extended to the parent company within the same group of companies[11].

Conclusion

The extension of the arbitration agreement to companies within the same group of companies is an issue subject to much debate in practice. On one hand, the significant increase in the practice among groups of companies, and the TCC answering to said increase with new provisions, indicates the importance of this issue. Within this framework, the need to follow a practice by taking into consideration the characteristics of groups of companies and the importance of the parties’ intent to arbitrate in the arbitration proceedings. On the other hand, generally, it is not possible to conclude that the extension of the arbitration agreement to third parties, more specifically to companies within the same group of companies, is a widely accepted practice. Concerning this issue, it would be preferable to conduct an analysis concerning the cases in which the extension is possible, and reaching a definite conclusion with regard to the cases where extension would be a far-reaching interpretation[12]. This issue will remain within the realm of debate given the extensive group of companies practice in the commercial arena.

 
[1] Ziya AKINCI, Milletlerarası Tahkim, Ankara 2007, p. 82.

[2] Emre ESEN, Uluslararası Ticari Tahkimde Tahkim Anlaşmasının Üçüncü Kişilere Teşmili, İstanbul 2008, s. 100.

[3] ESEN, p. 101.

[4] Decision numbered 1990/2931 E. and 1990/6828 K. of the 11th Civil Chamber of the Court of Appeals. Source: Cemal ŞANLI, Uluslararası Ticari Akitlerin Hazırlanması ve Uyuşmazlıkların Çözüm Yolları, İstanbul 2011, p. 323.

[5] Banu (ŞİT) KÖŞGEROĞLU, Yabancı Hakem Kararlarının Üçüncü Kişilere Karşı Tenfizi, Gazi Üniversitesi Hukuk Fakültesi Dergisi, C. XV, Y. 2011, Sa.3, p. 4.

[6] KÖŞGEROĞLU, p. 7.

[7] ESEN, p. 99.

[8] Please see ESEN p. 116 and following pages.

[9] Dow Chemical France v. ISOVER Saint Gobain ICC Award no. 4131/1982.

Pierre MAYER, The Extension of the Arbitration Clause to Non-Signatories, the Irreconcilable Positions of French and English Courts. Source:http://www.auilr.org/pdf/27/27.4.7.pdf.

[11] ESEN, p. 106.

[12] KÖŞGEROĞLU, p. 6.