BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1165
The Relevance of the Interests of Third
Parties in Arbitration: Taking a Closer Look
at the Elephant in the Room
Dr. Stavros Brekoulakis *
Table of Contents
I.
INTRODUCTION.........................................................................1165
II. THE INTERESTS OF THIRD PARTIES..........................................1167
III. SHOULD ARBITRATION ALLOW FOR THE INTERESTS OF
THIRD PARTIES?.......................................................................1171
A. The Interests of the Parties to Arbitration........................1172
B. Maximizing the Efficiency of Arbitration..........................1175
1. Regulating Overlapping Proceedings..........................1176
2. Increasing the Material Scope of Arbitration..............1177
C. The Need for a Functional Equilibrium Between
Arbitration Proceedings and the Multiparty Substantive
Background of the Arbitration Proceedings.....................1179
1. Discrepancy Arising From Cross-Contract
Arrangements of Several Parties.................................1179
2. Discrepancy Arising from a Statute............................1181
3. Discrepancy Arising from the Conduct of a Third
Party............................................................................1181
IV. CONCLUSION............................................................................1186
I. I
NTRODUCTION
This paper examines the interests of third parties in arbitration and
discusses their relevance to proceedings between parties bound by an
* Lecturer in International Dispute Resolution, Centre of Commercial Law
Studies, Queen Mary, University London. I would like to thank Mr. John Ribeiro for his
valuable linguistic comments.
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1166 PENN STATE LAW REVIEW [Vol. 113:4
arbitration agreement.
1
The consensual nature of arbitration lies at the
heart of this discussion: only those persons that have clearly consented
to an arbitration agreement may participate in arbitration proceedings.
2
This constitutes the fundamental difference between litigation and
arbitration. In litigation, the parties to court proceedings are determined
on the basis of interest(s). Any legal or natural person is entitled to
commence court proceedings to protect its legal or financial interests.
3
By contrast, parties to arbitration proceedings are exclusively
determined on a contractual basis.
4
Entering into an arbitration
agreement is the indispensable requirement for a person to participate in
arbitration proceedings and to be bound by the ensuing arbitral award.
The principle of “procedural party autonomy” provides parties with
the freedom to contractually determine the circle of persons entitled to
participate in the arbitration proceedings. Thus, the principle of
procedural party autonomy and the contractual foundations of arbitration
make arbitration a flexible dispute resolution mechanism, allowing
parties to design a system of dispute resolution in accordance with their
commercial needs.
This ability has proved to be a significant advantage of arbitration
over litigation, and it has contributed to the increasing popularity of the
former amongst members of the international commercial community,
particularly in the last thirty years. By the same token, however, the
1. The term “third party” is used in this paper as referring to a person who never
consented to an arbitration agreement concluded between two other parties. The term
“third party” is preferred over the term “non-signatory party,” often used in legal
discourse, albeit not always accurately or consistently. A non-signatory party should be
distinguished from a third party, as, strictly speaking, the former is a person that has
consented to an arbitration agreement and thus is bound by it, notwithstanding the fact
that the person failed to sign it.
2. See J.
LEW ET AL., COMPARATIVE INTERNATIONAL COMMERICIAL ARBITRATION
141 (Kluwer Law Int’l 2003); P.
FOUCHARD ET AL., ON INTERNATIONAL COMMERCIAL
ARBITRATION 298 (Emmanuel Gaillard & John Savage eds., Kluwer Law Int’l 1999).
3. Consider, for example, the United States Federal Rules of Civil Procedure
(“FRCP”). Rule 17 in part states:
Parties Plaintiff and Defendant; Capacity
(a) Real Party in Interest. Every action shall be prosecuted in the name of the
real party in interest.
F
ED. R. CIV. P. 17 (emphasis added). Cf. English Civil Procedure Rules (“CPR”) Rule
19.6:
Representative parties with same interest
(1) Where more than one person has the same interest in a claim -
(a) the claim may be begun; or
(b) the court may order that the claim be continued,
by or against one or more of the persons who have the same interest as
representatives of any other persons who have that interest.
Eng. Civ. P. R. 19.6 (emphasis added).
4. See F
RANCIS RUSSELL, ON ARBITRATION ¶ 3-002 (D. Sutton et al. eds., Sweet &
Maxwell 2007).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1167
contractual and thus relative nature of arbitration frequently leads to
unfavourable results. This is particularly the situation in the context of
multiparty commercial relationships, where the consensual limitations of
arbitration preclude any person not bound by an arbitration agreement
from taking part in arbitration proceedings. Third parties are altogether
excluded from the arbitration process, notwithstanding legal or financial
interests they might have in the pending dispute. In short, third parties
are considered aliens, with interests that are largely irrelevant to
arbitration.
Part II of this paper explores the role of third parties in arbitration,
showing that on many occasions the outcome of a dispute pending before
an arbitral tribunal may adversely affect their financial or legal interests.
This realization leads to the primary inquiry of this paper, namely
whether legitimate interests of third parties should be taken into account
in arbitration proceedings (Part III). This paper argues that in principle
they should. In particular, arbitration should operate as an open dispute
resolution system that takes into account the interests of third parties that
are strongly associated on a substantive level with the parties to a
bilateral arbitration agreement. Thus, arbitration would become better
equipped to deal with all the substantive implications of multiparty
disputes, which are becoming more frequently used in modern
commercial practice. Eventually, this would enhance arbitration’s
efficiency and would widen its material scope.
The main aim of this paper is to present the theoretical premises
justifying the participation of third parties (or at least to show that their
interests should be taken into account) in the arbitration process. Absent,
however, are any suggestions as to how third parties should participate in
arbitration proceedings. Whether, for example, third parties could
participate through an analogous application of third party mechanisms,
such as consolidation or intervention, is beyond the scope of this work.
5
II. T
HE INTERESTS OF THIRD PARTIES
Modern business transactions, particularly in the international
context, have become extremely complicated, requiring the participation
of several parties for the delivery of large-scale projects. For example, a
typical construction project may involve the employer and the main
contractor but also an engineer or an architect, several subcontractors,
suppliers, and financiers. Similarly, the complicated structure of many
multinational groups of companies requires several affiliates or
subsidiary companies, directors or stockholders of the same group to
5. This issue will be given greater attention in S. BREKOULAKIS, ARBITRATION AND
THIRD PARTIES (OUP, forthcoming 2010).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1168 PENN STATE LAW REVIEW [Vol. 113:4
become actively involved in the execution of a contract concluded by
only one company of the group.
However, multiparty commercial projects are usually executed
through several bilateral contracts which contain bilateral dispute
resolution arrangements, usually in the form of either arbitration or
choice of courts agreements. This practice leads to the “jurisdictional
fragmentation of the multiparty project,” where the several parties
involved are subject to the jurisdiction of different adjudicatory fora
(arbitral tribunals or national courts). Thus, a dispute arising between
two persons bound by an arbitration agreement in connection with a
multiparty project will have to be resolved by arbitration exclusively
between these two parties. Other parties cannot participate in the
resolution of the dispute through arbitration, even if they have played an
active role in the actual project. Notwithstanding any legitimate interest
they might have in the outcome of the dispute, these parties will remain
third parties both to the arbitration proceedings and the ensuing arbitral
award. Consider the following examples:
• A guarantor may not take part in an arbitration between a
creditor and a debtor. This may be the case despite the fact
that the arbitration may well determine that the guaranteed
debt has been extinguished, in which case the guarantor
would cease to be liable against the creditor.
6
• A subcontractor may not take part in an arbitration between
an employer and a contractor, notwithstanding the fact that
the arbitration may well determine that the work actually
delivered by the subcontractor is defective.
• A team of stockholders may not take part in an arbitration
between their corporation and another party,
notwithstanding the fact that the arbitration may find
against the corporation with considerable financial
repercussions for the stockholders.
• A parent company may not take part in an arbitration
between one of its affiliates and another party,
notwithstanding the fact that the breach of contract by the
6. In a guarantee contract, the guarantor undertakes an obligation that is dependent
upon and collateral to the main obligation. This is accepted equally in England, see
Halsbury’s, Laws of England, ¶ 101 (Lexis Nexis Butterworths 2007); see also Re
Conley, ex p Trustee v. Barclays Bank Ltd., [1938] 2 All E.R. 127, at 130 (CA); in the
United States, see R
ESTATEMENT (THIRD) OF SURETYSHIP & GUARANTY § 1 et seq. (1996);
and in France, see French Code Civil art. 2288 (as amended by the recent Ord. No3 46 of
23 March 2006) and Delebecque, in Rèp. Civ. (2007), Cautionnement, art. 2288 et seq.
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1169
latter has effectively caused damages to the parent company
itself.
Inevitably, in all the above examples, the determination of a dispute
in bilateral arbitrationproceedings will take place against the backdrop of
the multilateral commercial project. Consequently, it is likely that the
bilateral arbitration proceedings will adversely affect the legal or
financial interests of third parties that are closely related to the dispute.
This risk is generally recognized in litigation. Thus, the vast majority of
national civil procedures provide for extensive third party mechanisms,
which give interested third parties the opportunity to participate in the
bilateral proceedings and prevent possible adverse effects.
7
Furthermore,
under specific circumstances, some national civil procedures give a third
party the right to challenge the judgment issued in bilateral proceedings
even though the third party never participated in the original
proceedings.
8
In some jurisdictions, third-party recourse is provided against
arbitral awards.
9
This remedy, however, is usually limited to domestic
7. For example, for joinder, in England see the CPR, Rule 6.20(3)(b); in the United
States, see the FRCP, Rules 19 and 20; and in Germany, see the German Civil Procedure
Statute (“ZPO”), §§ 59-61. For intervention, in England, see the CPR, Rule 19(2)-(3); in
the United States, see the FRCP, Rule 24(a); in France, see the New Code of Civil
Procedure (“NCPC”), art. 325 et seq.; and in Germany, see the ZPO, § 66. For
consolidation, in the United States see FRCP, Rule 42(a); in Germany see the ZPO,
§ 147; and in France see the NCPC, art. 367.
8. This effect is more of an adverse effect or a prejudice vis-à-vis third parties
rather than the full effect of res judicata. The rule usually requires previous notice of the
proceedings to the third party, which, if the party does not intervene in the ongoing
proceedings, loses the right of recourse against the judgment. For example, in France, the
NCPC, art. 581 provides for “tierce opposition,” a means by which a third party may
attack a judgment that merely affects the third party (i.e., prejudices its interest) rather
than binds it with a res judicata effect. See Code de procédure civile, 100th ed. (2009
Dalloz) under art. 583, para.7, for information on those parties that may use the “tierce
opposition,” or only those that are neither parties to the proceedings nor represented by
the real parties. Cf. Cass. 2e civ. [court of ordinary jurisdiction], 16 May 1973, Bull. civ.
II, No. 165. A similar means of recourse available to third parties against a judgment
issued between two other persons is also provided in the Greek Code of Civil Procedure,
art. 92 and art. 583 et seq., where again a third party may attack a judgment by which it is
not bound by res judicata.
9. Tierce opposition is also provided against an arbitral award in Article 1481 of
France’s NCPC. The same is accepted in Greece. See G. Pantazopoulos, I Tritanakopi
kata tis Diaititikis Apofasis [“Third Party Recourse against an Arbitral Award”],
A
RMENOPOULOS, at 513 (1988) [in Greek]; cf. S. KOUSOULIS, DIATHSIA [“Arbitration”], at
125 (Sakkoulas Athens-Thessalonica 2004) [in Greek], who also accepts that third parties
can attack an arbitral award although on the basis of a different provision of the Greek
Code of Civil Procedure. This has also been recently accepted by some courts in the
United States, despite the fact that Section 10 of the Federal Arbitration Act (“FAA”)
expressly reserves this right to parties in arbitration proceedings. See Westra Constr.,
Inc. v. U.S. Fid. & Guar. Co., 2006 U.S. Dist. LEXIS 27887 (M.D. Pa. 2006); see also
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1170 PENN STATE LAW REVIEW [Vol. 113:4
arbitrations, mainly for policy purposes seeking to protect the finality of
international arbitral awards.
10
Nevertheless, the fact that third-party
recourse against domestic awards has been accepted in some
jurisdictions provides evidence that the interests of a third party might
well be adversely affected by arbitration proceedings.
11
In addition, it
illustrates that third party interests are in general worthy of protection.
More conclusive evidence suggesting that third party interests are
worth protecting in arbitration can be found in the plethora of national
judgments and arbitral awards extending the scope of arbitration
agreements and proceedings to include “non-signatory” parties based
upon various, sometimes innovative, theoretical constructions such as
equitable estoppel,
12
incorporation by reference,
13
assumption,
14
Ass’n of Contracting Plumbers, Inc. v. Local Union No. 2 United Ass’n of Journeymen &
Apprentices of Plumbing & Pipefitting Industry, 841 F.2d 461, 467 (2d Cir. 1988)
(holding that third parties to arbitration may nevertheless challenge an award where they
would have the right to intervene by reference to United States Fed. R. Civ. P. 24(a)); cf.
Amina Dammann, Vacating Arbitration Awards for Mistakes of Fact, 27
REV. LITIG. 441,
468 (2008).
10. In France, see the NCPC, art. 1507; see also A. Mourre, L’Intervention des Tiers
à l’Arbitrage, Recueil Vol.I (2000-2002) Les Cahiers de l’Arbitrage, at 104. The same is
accepted in Greece. See K
OUSOULIS, supra note 9, at 267 et seq.
11. Cf. A.
REDFERN ET AL., LAW AND PRACTICE OF INTERNATIONAL ARBITRATION ¶ 8-
75
(4th ed. 2004) (acknowledging that arbitral awards may have a “significant” albeit
“indirect” effect upon third parties, for example, in the case where one person is jointly
liable with another who is a party to the arbitration. If an award is given against one of
the parties it will then be at least of persuasive significance against the other person.
Redfern et al. also provide the example of an award that orders performance in relation to
the delivery of property by one of the jointly liable parties which award will necessarily
affect the other jointly liable third party.).
12. United States courts have on several occasions estopped signatory parties to
arbitration agreements from initiating court proceedings against “non-signatory” parties,
ordering the signatories to submit their dispute with the “non-signatories” to arbitration.
See, e.g., Smith/Enron Cogeneration Ltd. P’ship v. Smith Cogeneration Int’l Inc., 198
F.3d 88, 98 (2d Cir. 1999), cert. denied, 531 U.S. 815 (2000); Thomson-CSF v. Am. Arb.
Ass’n, 64 F.3d 773, 779 (2d Cir. 1995); Choctaw Generation Ltd. P’ship v. Am. Home
Assurance Co., 271 F.3d 403 (2d Cir. 2001); Hughes Masonry v. Greater Clark County
Sch. Bldg., 659 F.2d 836 (7th Cir. 1981).
However, on various occasions the doctrine of equitable estoppel has equally
applied to estop a “non-signatory” party from avoiding arbitration with the signatory
party. See Denney v. BDO Seidman L.L.P., 412 F.3d 58 (2d Cir. 2005); Int’l Paper v.
Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411 (4th Cir. 2000); Am.
Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d Cir. 1999); In re
Weekley Homes, 180 S.W.3d 127 (Tex. 2005); Carlin v. 3V Inc., 928 S.W.2d 291, 296
(Tex. App. 1996); Merrill Lynch, Pierce, Fenner & Smith v. Eddings, 838 S.W.2d 874
(Tex. App. 1992).
13. See the judgments of the Canadian courts in the cases of Kanitz v. Rogers Cable
Inc. (2002), 58 O.R.3d 299 (Ont. S.C.J. 2002) and Nanisivik Mines Ltd. v. F.C.R.S.
Shipping Ltd., 113 D.L.R. 4th 536 (Fed. Ct. 1994).
14. ICC award in case no. 7453 of 1994, ICC case no. 4504 of 1985-1986, and ICC
case no. 4972 of 1989; cf. Gvozdenovic v. United Air Lines, Inc., 933 F.2d 1100 (2d Cir.
1991).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1171
agency,
15
alter ego or piercing the corporate veil,
16
and the doctrine of
“group of companies.”
17
Therefore, it follows that (1) arbitration
proceedings between two parties may potentially have collateral effects
on third parties and (2) when this occurs it is reasonable to argue that
third parties should be given the right to protect their interests.
III. S
HOULD ARBITRATION ALLOW FOR THE INTERESTS OF THIRD
PARTIES?
The prevailing view in jurisprudence and legal discourse is that
third parties bear no relevance to arbitration,
18
which naturally leaves
their interests unprotected.
19
Three arguments are typically put forward
in support of the prevailing view. The first, and probably strongest
argument, is related to the principle of the contractual nature of
arbitration, which has acquired the status of an inviolate and sacrosanct
arbitration rule.
20
Allowing a party that is not bound by an arbitration
agreement to participate in the arbitration process would simply not be in
line with the above principle. The second argument supporting the view
that third parties are irrelevant to arbitration is that third parties get what
they bargained for, or rather what they failed to bargain for. Here, it is
presumed that third parties have made a considered decision not to enter
into an arbitration agreement and have therefore excluded themselves
from the arbitration process altogether.
21
The third argument
15. See Arnold v. Arnold Corporation-Printed Comm’ns for Bus., 920 F.2d 1269
(6th Cir. 1990).
16. In the United States, see Carte Blanche (Singapore) Pte., Ltd. v. Diners Club
Int’l, Inc., 2 F.3d 24, 26 (2d Cir. 1993); Mag Portfolio Consultant GMBH v. Merlin
Biomed Group LLC, 268 F.3d 58, 63 (2d Cir. 2001). In Canada, see Transam. Life Ins.
Co. of Canada v. Canada Life Assurance Co., 28 O.R. 3d 423 (Ont. Ct. of Justice 1996).
17. Interim award in ICC case no. 4131 of 1982, Dow Chemical v Isover-Saint-
Gobain, (1984) Rev. Arb. 137; (1983) 110 Clunet 899, with note Derains; see ICC case
no. 5103 of 1988, 2 (1991) 2 ICC Bull., at 20; ICC case no. 5920 of 1989, 2 (1991) 2 ICC
Bull., at 27; ICC case no. 10758 of 2000, 16 (2005) 2 ICC Bull., at 87.
18. See, e.g., Giorgio Bernini, Arbitration in Multi-Party Business Disputes, in
Y
EARBOOK COMMERCIAL ARBITRATION 295 (Kluwer Deventer 1980); Commission on
International Arbitration, Final Report on Multi-party Arbitrations, Paris, June 1994, by
the Working Group under the Chairmanship of M. Jean-Louis Delvolvé, in (1995) 6 ICC
Bull. 26, ¶ 5 [hereinafter Delvolvé Report]; P. Fouchard, Multi-Party Business Disputes,
Institute of International Business Law and Practice, ICC Doc. No. 359, 1980, at 57; F.
Nicklisch, Multi-Party Arbitration and Dispute Resolution in Major Industrial Projects,
11 J.
INT’L ARB., No. 4, at 57 (1994); REDFERN ET AL., supra note 11, at ¶¶ 3-73;
Leboulanger, Multi-Contract Arbitration, 13 J.
INT’L ARB., No. 4, at 43 (1996).
19. Cf. M
OURRE, supra note 10, at 100 (analysis of the third parties’ interests,
arguing for the analogous application of national intervention mechanisms in arbitration).
20. See Delvolvé Report, supra note 18.
21. Cf., Nicklisch, supra note 18, at 69 (who argues that even when two contracts in
the context of a single project between different parties contain identical clauses this does
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1172 PENN STATE LAW REVIEW [Vol. 113:4
underscores the importance of confidentiality in arbitration
proceedings—confidentiality will be compromised by multi-party
arbitration proceedings.
22
It is arguable whether confidentiality is an
inherent procedural feature of arbitration, and thus always applicable.
23
Nevertheless, where confidentiality does apply, it will indeed have a role
to play, militating against the participation of third parties in arbitration
proceedings where the original parties wanted to remain confidential.
In spite of these valid arguments, the following sections of this
paper suggest that the interests of third parties should be taken into
account in arbitration proceedings, and that a procedural mechanism of
communication between the arbitration proceedings and third parties
should be established. Although it is a private dispute resolute system,
arbitration should not remain a closed system, exclusively reserved for
those parties that are contractually bound by an arbitration agreement.
Instead, arbitration should be a dispute resolution system which, under
particular circumstances, is flexible and able to communicate with third
parties that have legitimate interests in a dispute pending before a
tribunal.
First, this paper will examine the interests of the actual parties to an
arbitration. Second, it will demonstrate how third-party mechanisms will
increase the efficiency of arbitration by preventing overlapping
proceedings and expanding the material scope of arbitration. Finally,
and perhaps more importantly, this paper will show that the scope of
arbitration proceedings should remain in tune with the multiparty scope
of the dispute pending before the tribunal. Otherwise, the necessary
functional equilibrium between arbitration proceedings and the
multiparty substantive background of these proceedings will be
disturbed, hampering the resolution of the dispute.
A. The Interests of the Parties to Arbitration
So far this paper has focused on the interests of third parties. This
section examines the interests of the actual parties to an arbitration
agreement and arbitration proceedings. Would parties who have made a
conscious decision to provide for bilateral arbitration have any interest at
a later stage to allow a third party to join the arbitration proceedings? It
is almost impossible to answer this question from the perspective of both
not alter the fact that the parties have in essence negotiated and concluded two
“individual contracts” which “are two-way reciprocal agreements”).
22. See Leboulanger, supra note 18, at 65.
23. See J.
LEW ET AL., supra note 2, at 177 (“Without an explicit agreement between
the parties there will be no binding obligation of confidentiality under most arbitration
laws.”); see also [Supreme Court] 2000-10-27 (Swed.), 51(11) Mealey’s IAR, B 1, cited
therein.
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1173
parties, claimant and respondent, as their interests on this issue will be
invariably divergent.
Some parties might benefit from the presence of a third party in
their arbitration proceedings. This will typically be the case for the
“middle party” in a string sale of goods or a construction contract. A
contractor, for example, will be interested in having a subcontractor
joined to its arbitration proceedings against the employer, so that the
subcontractor will be bound by the determinations of the final award. In
this way, the contractor could avoid wasting money and time initiating
separate proceedings with an uncertain outcome against the
subcontractor to recover any damages the contractor would have to pay
the employer for defective work actually delivered by the
subcontractor.
24
Similarly, albeit not in the context of successive contracts, an
employer will have an interest in joining the architect or project manager
to its arbitration proceedings against the contractor, and in having that
contractor bound by the determinations of the final arbitral award.
25
The
same applies to guarantee transactions. Here, for example, the debtor
will have an interest in joining the guarantor to its arbitration
proceedings against the creditor, especially when the final award is
favorable to the debtor. Otherwise, the creditor will be free to initiate
second proceedings against the guarantor and to recover the debt, in
which case the guarantor will have a recourse claim against the debtor.
Eventually, the debtor might have to pay the guarantor for a debt he was
found not liable for in the first arbitration.
However, other parties will have no interest in joining a third party
to their arbitration proceedings. In a construction contract, for example,
this party will typically be the employer, whose interests would be better
served if the dispute against the contractor were resolved privately and as
quickly as possible. The involvement of a subcontractor in the pending
dispute would complicate the proceedings and would increase the time
and the cost of arbitration.
Overall, there is insufficient evidence to generally suggest that the
presence of a third party will equally serve the interests of both parties to
an arbitration. However, there will be occasions where the interests of
one of the parties and, possibly the interests of a third party, will be
better served by multiparty arbitration proceedings. In such a case, the
24. Cf. Nicklisch, supra note 18, at 63 (noting that the main purpose of multi-party
arbitration is to save time and money and to avoid inconsistent findings on identical facts,
“as can occur in separate proceedings to the advantages of having a subcontractor taking
part in the proceedings between the employer and the contractor”).
25. Cf. Thomas J. Stipanowich, Arbitration and the Multiparty Dispute: The Search
for Workable Solutions, 72 I
OWA L. REV. 473, 478 (1987).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1174 PENN STATE LAW REVIEW [Vol. 113:4
question is whether the multiparty arbitration would be possible, despite
the non-agreement of the other party to the arbitration. This would not
be a previously unheard of proposition. There are indeed arbitration laws
and rules taking the approach that multiparty proceedings will not require
the consent of all the relevant parties; the agreement between a third
party and one of the parties to the arbitration would suffice for the third
party to be joined to the pending arbitration.
26
This approach has also
been endorsed by some national courts.
27
26. For example, the Netherlands Code of Civil Procedure (“Rv”), art. 1046,
provides for compulsory consolidation to be ordered by the President of the Amsterdam
District Court. This is also provided in Section 6B of the Hong Kong Arbitration
Ordinance (relating to consolidation or concurrent hearings) and Section 7 (relating to
interpleading), both of which are applicable for domestic arbitrations. See Hong Kong
Arbitration Ordinance, No. 341 (1997) 3 O.H.K. §§ 6B, 7; see also Italian Arbitration,
art. 816 (quinquies providing that the intervention, or joining, of a third party who is
considered to “be necessary by law” (‘litisconsorzio necessario’), will always be
admissible, irrespective of the consent of the original parties to the arbitration
proceedings).
Similar third party mechanisms can also be found in Section Two, Schedule Two of
the New Zealand Arbitration Act and in Australia in Section 26 of the Queensland
Commercial Arbitration Act. In addition, in the United States, see Section 10 of the U.S.
Revised Uniform Arbitration Act. See N
AT’L CONFERENCE OF COMMISSIONERS ON
UNIFORM STATE LAWS, UNIFORM ARBITRATION ACT § 10 (2000). Under the Uniform
Arbitration Act, however, if the arbitration agreement expressly prohibits consolidation,
the court would have no power to violate the agreement. See id. at § 10(c). A number of
U.S. state laws also include third party mechanisms similar to those previously
mentioned. See, e.g., WASH. REV. CODE ANN. § 7.04A.100 (LexisNexis 2008)
(consolidation); G
A. CODE ANN. § 9-9-6(e) (2008) (consolidation); ALASKA STAT.
§ 09.43.370 (2008) (consolidation); S.C. CODE ANN. § 15-48-60 (LexisNexis 2007)
(joinder).
The same approach is also taken by the following arbitration rules:
(1) Article 22.1(h) of the arbitration rules of the London Court of International
Arbitration (“LCIA”). Applying article 22.1(h), the tribunal will decide, upon the
application of a real party whether a third party will be joined in the arbitration. LCIA
requires only the consent of the applicant and the third party, but not the consent of the
other real party.
(2) Article 11 of the Belgian Centre for Mediation and Arbitration (“CEPINA”)
arbitration rules. Under CEPINA article 11, the decision on consolidation, at the request
of one of the parties or the tribunal or upon the CEPINA’s own motion, will be taken by
the CEPINA’s appointment committee or the chairman of the tribunal.
(3) Also, in the Swiss Rules, the decision for consolidation of two proceeding is
taken by the administrative body (Chambers) (art. 4(1)), whereas the decision for
intervention or joinder is taken by the arbitral tribunal (art. 4(2)). Cf. The innovative
provision art. 10. Vienna rules will also permit joinder in cases where the substantive
applicable law “positively provides that the claim is to be directed against several
persons” (art. 10(1)(a)).
This “non-consensual approach” is more frequent in arbitration rules related to
specific industries, such as construction, commodities, securities, or maritime. See, e.g.,
AAA Construction Industry Arbitration Rules and Mediation Procedures (Including
Procedures for Large, Complex Construction Disputes) R-7 (consolidation) or the AAA
New Jersey Residential Construction Lien Arbitration Rules, § 5 (Joinder), the AAA
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1175
Should an agreement between a third party and one of the original
parties to the arbitration be enough for multiparty proceedings, or would
this stretch the consensual nature of arbitration beyond its limits? The
following sections seek to shed some light on this question.
B. Maximizing the Efficiency of Arbitration
From a policy standpoint, to increase its efficiency standards,
arbitration has to be able to interact with third parties and allow for their
interests. This interaction will prevent overlapping parallel proceedings
and expand the material scope of the arbitration.
Supplementary Procedures for Securities Arbitration, § 2 or the NASD Uniform Code of
Arbitration § 10314(d) or the New York Stock Exchange Arbitration Rules § 612(d).
Of course, as regards arbitration rules it could be argued that the consensual
principle is not actually violated, even when the rules allow for multiparty proceedings on
a non-unanimous basis. The fact that the parties have initially referred to a set of
arbitration rules in their arbitration agreement means that they have consented to all the
provisions included therein. Although in theory this is a valid argument, it is arguable
whether all parties agreeing on a set of rules are perfectly aware of the existence of non-
consensual third-party mechanisms.
27. Case law has also taken this approach. Here, specific mention should be made to
the particularly well-known case Compañía Española de Petróleos, S.A. v. Nereus
Shipping, S.A., 527 F.2d 966 (2d Cir. 1975) (ordering the consolidation of arbitration
proceedings between a ship-owner and its charterer, on the one hand, and the ship-owner
and the guarantor of the charterer on the other hand). In Nereus, the 2nd Circuit applied
Fed. R. Civ. P. 42(a) to arbitration proceedings by virtue of Rule 81(a)(3), which has
been amended. The new rule, 81(a)(6), contains language similar to that of Rule
81(a)(3), and provides: “Other Proceedings. These rules, to the extent applicable, govern
proceedings under the following laws, except as these laws provide other procedures: . . .
(B) 9 U.S.C., relating to arbitration. The Nereus case triggered extensive debate on the
issue of compulsory consolidation in arbitration. See, e.g., I
SAAK DORE, THEORY AND
PRACTICE OF MULTIPARTY COMMERCIAL ARBITRATION, Graham & Trotman/Marinus
Nijhoff London/Dordrecht/Boston (1990); Stipanowich, supra note 25, at 478; J.
LEW ET
AL
., supra note 2, at 379. The Nereus case was recognized as authority in Marine
Trading Ltd. v. Ore Int’l Corp., 432 F. Supp. 683 (S.D.N.Y. 1977); Sociedad Anonima de
Navegacion Petrolera v. Cia de Petroleos de Chile, 634 F. Supp. 805 (S.D.N.Y. 1986);
Cable Belt Conveyors, Inc. v. Alumina Partners of Jamaica, 669 F. Supp. 577 (S.D.N.Y.
1987), aff’d mem., 857 F.2d 1461 (2d. Cir. 1987); North River v. Phila. Reinsurance, 856
F. Supp. 850 (S.D.N.Y. 1994) (refused to order consolidation on other grounds); and
Specialty Bakeries v. Robhal, 1997 WL 379184 (E.D. Pa. 1997) (also refused to order
consolidation). However, more recent authority suggests that it is at least doubtful
whether Nereus is still good law. In particular, the following decisions refused to follow
Nereus: Phila. Reinsurance v. Employers of Wausau, 61 Fed. Appx. 816 (3d Cir. 2003);
Cavalier Mfg. v. Clarke, 862 So. 2d 634 (Ala. 2003); Hartford Accident and Indem. v.
Swiss Reinsurance Am., 87 F. Supp. 2d 300 (S.D.N.Y. 2000); cf. Weyebaeuser v.
Western Seas Shipping, 743 F.2d 635 (9th Cir. 1994); United Kingdom of Great Britain
v. Boeing, 998 F.2d 68 (2d Cir. 1993); and Ore & Chemical v. Stinnes Interoil, 606 F.
Supp. 1510 (S.D.N.Y. 1985).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1176 PENN STATE LAW REVIEW [Vol. 113:4
1. Regulating Overlapping Proceedings
Multiparty arbitration proceedings will prevent the commencement
of several bilateral proceedings with overlapping subject matters.
Parallel overlapping proceedings create the risk that the determinations
of an arbitral award between the two parties to an arbitration agreement
might be irreconcilable, not to say conflicting,
28
with those of a
subsequent award or judgment between a third party and one of the
parties to the first arbitration.
29
When several parties are intertwined in a multi-party commercial
project, it is likely that the same issues will arise in more than one set of
proceedings.
30
For example, in the context of construction contracts, the
issue of causation or liability will likely arise both in the proceedings
between an employer and a contractor and in the proceedings between
the same contractor and a subcontractor. Similarly, defects or delay in
the work of a subcontractor will affect the liability of the contractor
against the employer.
Fortunately, it is the case that inconsistent awards do not occur
often.
31
However, when they do occur they raise doubts about
arbitration’s reliability and the authority of arbitral awards. An arbitral
award is presumed to be an authoritative determination of the pending
28. The term “irreconcilable” is preferred here to the term “conflicting”: as the latter
is stricter, referring to decisions with mutually exclusive legal consequences between the
same two parties, whereas the former is wider referring to merely contradictory decisions
in the case of multiparty relationships. However, both “conflicting” and “irreconcilable”
decisions result in problematic, and thus unacceptable, situations. For example, in the
context of the European Regulation (Brussels I) 44/2001, see Article 34.4, which
precludes the recognition of “irreconcilable” rather than merely “conflicting” judgments.
Commission Regulation 44/2001, art. 34.4, 2000 O.J. (12) 1.
29. Cf. McAlpine Constr. v Unex, [1994] 38 Con LR 63 (CA). “It is clear that to a
considerable extent the issues in the arbitration and in the action, if it is fought, will
overlap. Clearly this is undesirable, and there is a strong case for preventing duplication
of proceedings. The parties have chosen arbitration to decide the issues which do
overlap, and there is thus a presumption that the same issues should not be decided in an
action also, with the possible risk that the judge in the action will arrive at a different
decision from the arbitrator on some of those issues.” Id. at 77.
30. See Cable Belt Conveyors, 669 F. Supp. at 577 (consolidation of arbitration
proceedings was appropriate where both disputes centered on same construction project,
principal issue in both proceedings was a question of who was responsible for extra costs
incurred in completion of the project, and resolution of disputes in separate proceedings
could lead to inconsistent findings).
31. See, e.g., CME Czech Rep. v Czech Rep., 15 W
ORLD TRADE AND ARB.
MATERIALS 171 (Svea Ct. of Appeals (Sweden) 2003); R. S. Lauder v Czech Rep., 14
W
ORLD TRADE AND ARB. MATERIALS 35 (UNCITRAL Arb. Trib. 2002) (Final Award);
CME Czech Rep. v Czech Rep., 14 W
ORLD TRADE AND ARB. MATERIALS 109
(UNCITRAL Arb. Trib. 2001) (Partial Award).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1177
dispute; hence arbitral awards are granted a res judicata effect.
32
However, when two conflicting awards are rendered, one of them clearly
has to be wrong.
Of course, it is not argued that arbitral awards can never be wrong.
As with any decision, arbitral awards are indeed fallible, which is
precisely why they are safeguarded with the authority of res judicata.
33
A fallible decision, i.e., a potentially wrong decision, is tolerable as long
as this decision is never exposed as clearly wrong. However, the
issuance of two irreconcilable awards with inconsistent determinations
on the same factual or legal issues turns potentially wrong awards into
clearly wrong ones. Therefore, irreconcilable awards negate the purpose
of res judicata and expose the whole legal system as defective. In fact,
irreconcilable awards constitute a legal sore.
34
More importantly,
irreconcilable awards may frustrate the expectations of the parties to
arbitration, who might find their award unenforceable as it conflicts with
another arbitral award or national judgment.
35
In litigation, multiparty proceedings concentrate all the intertwined
parties and claims before a single forum to prevent the risk of conflicting
determinations. By contrast, in arbitration, the lack of third-party
mechanisms permit parallel overlapping proceedings, thus increasing the
risk of irreconcilable awards.
2. Increasing the Material Scope of Arbitration
The failure of arbitration to allow for the interests of third parties
restricts its material scope. This is an issue usually linked with the
discussion of inarbitrability. However, it is more closely related to the
inability of arbitration to effectively deal with multiparty disputes and the
interests of third parties. For example, national laws often provide that
insolvency disputes must collectively be submitted to the exclusive
32. See, e.g., Stavros Brekoulakis, The Effect of an Arbitral Award and Third Parties
in International Arbitration: Res Judicata Revisited, 16 A
M. REV. INT’L ARB. 177 (2005).
33. “[Decisions] are not final because [they] are infallible but [they] are infallible
only because [they] are final.”
Brown v. Allen, 344 U.S. 443, 540 (1953) (Jackson, J.
concurring).
34. Cf. Abu Dhabi Gas Liquefaction Co. Ltd. v. Eastern Bechtel Corp., [1982] 2
Lloyd’s Rep. 425, 427 (“As we have often pointed out, there is a danger in having two
separate arbitrations in a case like this. You might get inconsistent findings if there were
two separate arbitrators. This has been said in many cases . . . it is most undesirable that
there should be inconsistent findings by two separate arbitrators on virtually the self-same
question, such as causation. It is very desirable that everything should be done to avoid
such a circumstance.”).
35. See, e.g., Stefan Kröll, A
RBITRATION IN GERMANY: THE MODEL LAW IN PRACTICE
§ 1061 (Karl-Heinz Böckstiegel et al. eds., Kluwer Law Int’l 2007).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1178 PENN STATE LAW REVIEW [Vol. 113:4
jurisdiction of specially designated national courts.
36
In essence,
insolvency disputes
37
are excluded from the arbitration domain because
arbitration is not an open dispute resolution system, able to accommodate
for collective proceedings. An insolvency dispute would most likely
involve several claims (some unsecured, some secured or preferred,
some even contested) and several parties (for example, the insolvent, the
trustee, and several creditors).
38
The resolution of an insolvency dispute
might implicate third parties (other creditors not bound by an arbitration
agreement), affecting their claims and interests. Consequently,
insolvency disputes are reserved for the exclusive jurisdiction of national
courts, as national courts provide for multiparty proceedings and take
into account the interests of all the parties involved in the dispute.
Therefore, the inarbitrability of insolvency disputes stems more from the
current inability of arbitration to break its bilateral restraints than from
public policy considerations.
39
A similar theory underpins the inarbitrability of some intra-
company disputes: an arbitral award will only bind some of the several
shareholders that are parties to the arbitration agreement.
40
Thus, an
arbitration award may not be able to resolve all the multiparty
implications of an intra-company dispute, taking into account the
interests of the shareholders not bound by the arbitration agreement. It
follows that the issue of inarbitrability is closely linked to the character
of arbitration as a closed dispute resolution system unable to provide an
effective solution to disputes that implicate third parties. This inability
limits the jurisdictional purview of arbitration and curtails its material
scope.
If arbitration proceedings allowed for the interests of third parties,
they would have a far-reaching dispute resolution impact, which would
36. See, e.g., Austrian Bankruptcy Code § 43(5) and § 111(1); C. COM., R. 662-3
(Fr.).
37. To the extent that insolvency disputes are considered inarbitrable, see, for
example, Christoph Liebscher, Insolvency and Arbitrability, in A
RBITRABILITY:
INTERNATIONAL AND COMPARATIVE PERSPECTIVES 165 (Loukas A. Mistelis & Stavros L.
Brekoulakis eds., Kluwer Law Int’l 2009). See also Stefan M. Kröll, Arbitration and
Insolvency Proceedings—Selected Problems, in P
ERVASIVE PROBLEMS IN INTERNATIONAL
ARBITRATION 357-76 (Loukas A. Mistelis & Julian D.M. Lew eds., Kluwer Law Int’l
2006).
38. See Liebscher, supra note 37, at 165-67.
39. See Stavros Brekoulakis, On Arbitrability: Persisting Misconceptions and New
Areas of Concern, in A
RBITRABILITY: INTERNATIONAL AND COMPARATIVE PERSPECTIVES
32-37 (Loukas A. Mistelis & Stavros L. Brekoulakis eds., Kluwer Law Int’l 2009);
D
ANIEL COHEN, ARBITRAGE ET SOCIÉTÉ ¶ 243 (1993).
40. See Pilar Perales Viscasillas, Arbitrability of (Intra-) Corporate Disputes, in
A
RBITRABILITY: INTERNATIONAL AND COMPARATIVE PERSPECTIVES, supra note 39, at 273;
see also Rolf Trittman & Inka Hanefeld, Arbitrality, in A
RBITRATION IN GERMANY: THE
MODEL LAW IN PRACTICE 120-21 (Karl-Heinz Böckstiegel et al. eds., 2007).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1179
be welcome in the context of multiparty projects. Arbitrators would thus
have a wider jurisdictional remit and would be able to consider the full
picture of a multiparty project, which would better position them to
assess and to determine the pending dispute.
To conclude, policy reasons suggest that arbitration would be a
more effective dispute resolution system if operated as an open dispute
resolution mechanism whereby the interests of relevant third parties
could be taken into consideration. This would reduce the risk of
conflicting determinations and would expand arbitration’s domain.
C. The Need for a Functional Equilibrium Between Arbitration
Proceedings and the Multiparty Substantive Background of the
Arbitration Proceedings
Finally, and most importantly, allowing for the interests of third
parties would ensure that arbitration is never conducted outside of its
multiparty substantive context. On the one hand, the principle of
“contractual freedom” permits commercial parties to make contractual
arrangements in accordance with their commercial interests. Parties are
free to choose their contractual partners, i.e., they may decide with whom
they wish to do business. On the other hand, parties are equally free to
make dispute resolution arrangements in accordance with their
commercial interests. Here, the principle of “procedural party
autonomy” permits parties to enter into an arbitration agreement and thus
choose with whom they want to arbitrate.
Usually, those parties bound by a substantive contract will coincide
with those parties bound by the arbitration agreement concluded in view
of that substantive contract. This occurs simply because the arbitration
agreement will most likely be incorporated into the main contract.
However, there are cases where the group of parties bound by the same
substantive rights and duties (“the substantive group”) is wider than the
group of parties bound by the arbitration agreement (“the arbitration
group”). This discrepancy between the substantive group and the
arbitration group may be the product of cross-contract arrangements
among several parties, a statute, or the conduct of a third party.
1. Discrepancy Arising From Cross-Contract Arrangements of
Several Parties
Contractual arrangements, especially in contemporary commerce,
can be multifaceted and complicated. Often, several parties conclude
several bilateral contracts, which refer back to each other. This type of
intertwined contract will usually set out a wide network of rights and
duties binding all the parties to the several bilateral contracts. Thus, a
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1180 PENN STATE LAW REVIEW [Vol. 113:4
party to one contract may have a right or assume a duty against a party to
another contract (“cross-contract rights and duties”).
Take, for example, the case where the main construction contract
between an employer and a contractor, including a bilateral arbitration
agreement, contains a clause according to which the employer would be
directly liable to the subcontractor for the payment of work. At the same
time, the subcontract contains a clause giving the employer the right to
request modifications or variations of the work directly from the
subcontractor. In such a scenario, the two contracts create a network of
contractual rights and duties that is wider than the boundaries of each of
the bilateral arbitration agreements included in the main contract and the
subcontract. All three parties (employer, contractor, and subcontractor)
constitute an intertwined substantive group, while the scope of the two
arbitration agreements remains bilateral. In other words, there is a
discrepancy between the substantive group of parties and the arbitration
group of parties.
Similarly, take the example of two parallel contracts, one concluded
between two parent companies and the other concluded between their
affiliates. Suppose that the contract between the two parent companies,
including a bilateral arbitration agreement, provides that:
[I]n the event [that] any party (“the non-performing party”) shall . . .
default in the payment . . . the other party (“the performing party”),
shall have the right . . . to set-off, counterclaim or withhold payment
in respect of any default by the non-performing party or any affiliate
of the non-performing party under this agreement or any other
agreement between the parties or their affiliates. . . .
41
At the same time, suppose that the contract between the two affiliates,
including a different bilateral arbitration agreement, provides for a
similar set-off clause.
42
Here, the substantive arrangements of the
several parties create a network of interlinked contractual rights and
duties that is wider than the boundaries of each of the two bilateral
arbitration agreements included in the two substantive contracts. Thus,
on a substantive level, each of the parent companies will have the right to
set-off a claim that this company or its affiliate might have against the
other parent company or its affiliate. However, on an arbitration level,
41. Sinochem Int’l Oil (London) Co. v. Mobil Sales & Supply Corp. [2000] 1 Eng.
Rep. 758 (Q.B.). In Sinochem the parties had agreed on two jurisdiction (choice of
courts) agreements rather than two arbitration agreements. See id.
42. See id.
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1181
the two parent companies and the two affiliates will be bound as a pair
by separate bilateral arbitration agreements.
43
2. Discrepancy Arising from a Statute
A similar situation may arise from the application of a statute. For
example, French law
44
and the law of some countries
45
influenced by
French law provide that, under certain conditions, a sub-contractor may
have a direct action, not only against the contractor, but also against the
employer. Under this type of legislation, the employer could be liable
directly to the sub-contractor. However, it is questionable whether the
tribunal constituted under the bilateral arbitration agreement between the
contractor and the subcontractor would have jurisdiction to allow for the
presence of the employer in the arbitration proceedings. The bilateral
arbitration arrangements would seem to fall short of the substantive
rights and duties accorded to the several parties by law.
3. Discrepancy Arising from the Conduct of a Third Party
Multiparty substantive relationships that extend beyond the
boundaries of a bilateral arbitration agreement may arise from the
conduct of a third party. This is typical in the context of transactions
involving a group of companies. Often, one of the several companies of
the group will enter into a contract, containing an arbitration agreement;
other companies of the same group may also become involved in the
contract, by, for example, actively taking part in the negotiation,
performance, or termination of the contract which they never signed.
46
The conduct of the third party company might give rise to rights or
liability of this third party in relation to the contract containing the
bilateral arbitration agreement. Thus, the group of parties linked with
substantive rights or duties will include the third party and will therefore
be wider than the group of parties bound by an arbitration agreement,
43. For more examples of several bilateral contracts creating a wide network of
several interrelated parties, see ICC tribunal in case No. 5894, Bank X v. Company Trade
France (Fr., U.S. v. Fr.) 1997 Int’l Comm. Arb. 25 (1989). See also No. 8817, Agent v.
Principal (Spain v. Den.), 1999 Int’l Comm. Arb. 75 (1997).
44. Law No. 75-1334 of December 31, 1975, Journal Officiel de la Republique
Francaise [J.O.] [Official Gazette of France], art. 12, amended by Law No. 94-475 of 10
June 1994, Journal Officiel de la Republique Francaise [J.O.] [Official Gazette of
France], June 11, 1994, art. 5(II). See also Christopher R. Seppala, French Law on
Subcontracting, 1991 I
NT’L CONSTR. L. REV. 78.
45. See, e.g., Commercial Code art. 565 (1996) (Alg.); Civil Code art. 662 (1949)
(Egypt); Commercial Code art. 661 (1953) (Libya).
46. See, for the example, the facts in the well-known ICC case No. 4131, Dow
Chemical v. Isover-Saint-Gobain, 9 Int’l Comm. Arb. 131 (1982).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1182 PENN STATE LAW REVIEW [Vol. 113:4
which most likely will exclude the third party.
47
The same will apply
when a third party interferes with a transaction between two signatory
parties by committing a fraud or some other legal wrong.
48
In all the above cases, the crux of the matter is that there will be a
conflict between commercial reality and the scope of the arbitration
proceedings. The freedom of the parties to choose whom they will
arbitrate with (i.e. procedural party autonomy) may create an artificial
discrepancy between the substantive and the procedural aspect of the
same multiparty relationship: the number of the parties bound by an
arbitration agreement may be less than that of the parties actually bound
by a wide network of substantive rights and duties. In principle, parties
are allowed to make dispute resolution arrangements with a scope that is
narrower than the background of their substantive relationships. This is
exactly the essence of procedural party autonomy. However, the
question is whether there should be any limits on procedural party
autonomy. Should two parties involved in an intertwined multiparty
relationship be completely free to provide for bilateral proceedings in
isolation from the wider substantive background, which involves several
parties? The question becomes particularly pertinent when the
discrepancy between the substantive and the procedural aspect of the
same multiparty relationship might hamper the efficient resolution of the
dispute in the bilateral arbitration proceedings.
To return to the above example of two interlinked contracts between
two parent and two affiliate companies:
49
it is doubtful whether, in
arbitration proceedings between the two parent companies, either of them
could rely on the set-off clause and invoke claims of its affiliate against
the affiliate of the other parent company. Such a claim would most
likely go beyond the scope of the bilateral arbitration agreement that
binds the two parent companies. Eventually, the narrow scope of the
arbitration proceedings will, in essence, overturn the substantive
arrangements made by the same parties.
As already mentioned, in litigation national procedural systems
provide for extensive third-party mechanisms. A review of these third-
47. Unless the doctrine of group of companies will apply to “extend” the arbitration
agreement to the third party. See supra note 17. However, this will be far from certain.
48. See, e.g., McBro Planning & Dev. Co. v. Triangle Elec. Constr. Co., Inc., 741
F.2d 342, 342-43 (11th Cir. 1984). In McBro, a construction manager contracted with the
owner of a hospital with regard to renovation work on the hospital, while an electrical
engineer executed a separate agreement with the owner to perform electrical work on the
same hospital. The electrical engineer filed a suit against the construction manager,
alleging that the latter had “harassed and hampered its [electrical] work.” Id. at 343. The
construction manager invoked the arbitration clause included in its contract with the
owner and moved for an order to compel the electrical engineer to arbitrate with it. Id.
49. See supra note 41 and accompanying text.
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1183
party mechanisms shows that the procedural rights accorded to the
parties depend on how closely a party is interrelated to the dispute on a
substantive level: in particular, when a third party is strongly associated
in terms of interests with one of the original parties to the proceedings,
third-party mechanisms of mandatory nature are usually provided by
national litigation systems.
50
Here, the presence of the third party is
considered indispensable for the resolution of the dispute between the
two original parties in the proceedings. On the other hand, when a third
party is contractually linked only but not strongly associated with one of
the original parties to the proceedings, third-party mechanisms of
permissive or ancillary character are provided by national litigation
systems.
51
Here the presence of the third party is considered helpful but
not absolutely necessary for the resolution of the dispute between the two
original parties in the proceedings.
52
This is an overarching principle
common to almost all procedural systems.
In this way, national procedural systems ensure that a functional
equilibrium between the substantive and the procedural aspect of a
dispute is always sustained. Accordingly, when it is necessary, they all
allow for the scope of the dispute resolution proceedings to extend and
adjust to the substantive background of the pending dispute.
It is only logical that the procedural arrangements will have to
follow and adjust to the substantive arrangements of the parties. The aim
of a dispute resolution mechanism set in a contract is to give effect to the
substantive rights and duties of the parties. The substantive contract is
the main reason that the parties initially contacted one another,
negotiated, and finally entered into, an agreement. The dispute
resolution agreement of the parties was concluded in view of the main
contract. Therefore, procedure is considered—by nature—ancillary to
substance.
53
50. See, e.g., U.S. FED. R. CIV. P. 24(a)(2) (providing for intervention as a matter of
right “when the applicant claims an interest relating to the property or transaction which
is the subject of the action and the applicant is so situated that the disposition of the
action may as a practical matter impair or impede the applicant’s ability to protect that
interest . . .”); see also F
ED. R. CIV. P. 19(1) (providing for mandatory joinder of the third
party that is “required”); French NCCP, art. 331 (providing for mandatory intervention
(“intervention force”)).
51. U.S. F
ED. R. CIV. P 20 (providing for permissive joinder of a third party); French
NCCP, art. 330 (providing for ancillary intervention (“internvention accessoire”)).
52. “Persons having interest in subject-matter of litigation which may conveniently
be settled therein are ‘proper parties,’ whereas those whose presence is essential to
determination of entire controversy are ‘necessary parties.’” Texas & Pac. Ry. Co. v.
Bhd. of R.R. Trainmen, 60 F. Supp. 263, 268 (W.D. La. 1945).
53. For a more detailed discussion on the relation between substance and procedure,
and some legislative efforts to free procedure from its generally auxiliary character, see
K. Kerameus, Procedural Unification: the Need and the Limitations, in I
NTERNATIONAL
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1184 PENN STATE LAW REVIEW [Vol. 113:4
This proposition should equally apply to the dispute resolution
mechanism of arbitration. It is true that unlike litigation, arbitration
borders on contractual law due to its contractual origins. However, once
arbitration commences the tribunal assumes jurisdictional powers similar
to that of a national court.
54
Moreover, the resulting arbitral award has
the same jurisdictional power as a national judgment: it is enforced as a
national judgment rather than as a contract and it is vested with the
power of res judicata.
55
Overall, arbitration has the same purpose as
litigation: to effectively resolve a specific dispute.
56
Consequently, this
functional equilibrium between substance and procedure in principle
should also apply to arbitration.
Thus, it seems reasonable to argue that the principle of procedural
autonomy should be subject to certain limitations, namely that arbitration
arrangements cannot altogether overturn the substantive arrangements
involving several parties. When several parties have created a multiparty
substantive network, the principle of procedural party autonomy should
be in tune with the wider substantive background. To conclude,
arbitration should allow for interests of third parties, especially when the
third parties are an integral part of the substantive background of the
arbitration.
PERSPECTIVES ON CIVIL JUSTICE: ESSAYS IN HONOUR OF SIR JACK I. H. JACOB Q. C. 53 (I.R.
Scott ed., 1990).
54. Indeed, arbitrators are granted wide jurisdictional powers by the relevant
arbitration laws and rules that are very similar to the power granted to national judges.
See, e.g., English Arbitration Act, 1996, c. 23, §§ 33, 34, 37, 38, 39, 41 (Eng.); cf. also
Model Law, art. 19 (2) (providing that the arbitral tribunal may “conduct the arbitration
in such manner as it considers appropriate”) and art 26 (where arbitrators are granted the
power to appoint an expert). Arbitrators may even have the right to summon third parties.
See, for example, Section 7 of the U.S. Federal Arbitration Act, which provides: “The
arbitrators . . . may summon in writing any person to attend before them or any of them
as a witness and in a proper case to bring with him or them any book, record, document,
or paper which may be deemed material as evidence in the case.” 9 U.S.C. § 7 (2006)
(emphasis added).
55. See R
ESTATEMENT (SECOND) OF JUDGMENTS § 84, ¶ 1 (1982) (“. . . a valid and
final award by arbitration has the same effects under the rules of res judicata, subject to
the same exceptions and qualifications, as a judgment of a court.”). In England, see
Fidelitas Shipping Ltd v. V/O Exportchleb, [1965] 1 Lloyd’s Rep. 13. See also R
OBERT
MERKIN, ARBITRATION LAW § 16.116 (Informa 1991). In France, see Article 1476 of the
NCPC (for domestic arbitration) and Article 1500 (for international arbitration). See also
Cass. soc., March 19, 1981, (1982) Rev Arb. 44. In the Netherlands, see Arbitration Act
1986, art. 1059. In Belgium, see Article 1703(1) of the Belgian Judicial Code. In
Austria, see the new Austrian CCP § 607. In Hong Kong, see Section 2GG of the Hong
Kong Arbitration Ordinance (applicable to both domestic and international arbitration),
Section 40B.2 (domestic only), and 42 (international only). See Hong Kong Arbitration
Ordinance, No. 341 (1997) 3 O.H.K. §§ 2GG, 40B.2, and 42.
56. But cf. EAA § 1(a) (stating that “the object of the arbitration is to obtain the fair
resolution of disputes. . . .” (emphasis added)).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1185
This realization finds further support in two arguments. The first
relates to equity and due process considerations. In particular, it has
been argued that the interests of the third parties should be taken into
account on the basis of the principle of “equality of the parties,” which
should “be read to include all parties to the contract, not just those who
are participating in the arbitration.”
57
Such a wide meaning of the term
“parties” will include third parties to arbitration that are substantively
intertwined in the dispute pending before the tribunal. Furthermore, it
has been argued that third parties should be allowed to intervene or to be
joined to arbitration proceedings by reference to due process.
58
This
should be the case in particular, whenever the presence of the third party
is indispensable for one of the parties to the arbitration proceeding to
make its case before the tribunal.
59
Unless the third party is allowed to
participate in the arbitration, the existing party to the proceedings will be
unable to present its case and therefore due process will be violated.
The second argument is the suggestion that when two parties enter
into arbitration agreements, it is reasonable to infer that they are, or at
least should be, aware of the surrounding substantive circumstances. In
particular, parties must know that more parties are implicated in the
commercial project they are getting involved in; as they also must know
that the rights and duties of the several parties are substantively
interdependent.
For example, all the parties involved in a transaction with a group of
companies are aware of, and apparently accept, the fact that the third-
party company of the group becomes actively involved in the actual
performance of the contract. Similarly, an employer and a contractor,
when concluding a bilateral arbitration agreement, are aware of the
several parties (engineer, project manager, subcontractor, suppliers,
sureties) and contracts involved in the execution of the construction
work.
57. See James Hosking, The Third Party Non-Signatory’s Ability to Compel
International Commercial Arbitration: Doing Justice without Destroying Consent, 4
PEPP. DISP. RESOL. L.J. 469 (2004); Nana Japaridze, Fair Enough? Reconciling the
Pursuit of Fairness and Justice with Preserving the Nature of International Commercial
Arbitration, 36 H
OFSTRA L. REV. 1415, 1432 (2008); S.I. Strong, Intervention And
Joinder As of Right in International Arbitration: an Infringement of Individual Contract
Rights or a Proper Equitable Measure?, 31 V
AND. J. TRANSNAT’L L. 915, 981 (1998).
58. See Strong, supra note 57, at 927.
59. For case law that has by analogy applied national participatory provisions to
arbitration on similar considerations, see Ass’n of Contracting Plumbers v. United Ass’n
of Journeymen, 841 F.2d 461, 466 (2d Cir. 1988); F.W. Woolworth Co. v. Miscellaneous
Warehousemen’s Union, 629 F.2d 1204, 1213 (7th Cir. 1980); Holborn Oil Trading Ltd.
v. Interpetrol Bermuda Ltd., 658 F. Supp. 1205, 1206-09 (S.D.N.Y. 1987); Litton
Bionetics Inc. v. Glen Constr. Co., Inc., 437 A.2d 208 (Md. 1981); Plaza Dev. Services v.
Joe Harden Builder, Inc., 365 S.E.2d 231 (S.C. Ct. App. 1988).
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1186 PENN STATE LAW REVIEW [Vol. 113:4
Whether awareness in this context equals consent, as has been held
by some national courts, is difficult to argue.
60
One “should be
extremely cautious about forcing arbitration,”
61
overlooking the fine line
between awareness and consent.
62
Nevertheless, the parties’ clear
awareness of the wider substantive background of their bilateral
arbitration arrangements should be a factor accounted for in this delicate
situation.
63
IV. C
ONCLUSION
The aim of this paper was to explore the relevance of the interests of
third parties to an arbitration. It would be unrealistic, and indeed wrong,
for one to arrive at certain conclusions on such a thorny topic.
64
60. French national courts have held that awareness in this context equals consent.
See Cour d’appel [CA] [court of appeal] Korsnas Marma v. Durand-Auzias, Nov. 30,
1988, (1989) Rev. Arb. 691 (P.-Y.Tschanz holding that “. . . an arbitration clause included
in an international contract has an autonomous validity and effectiveness, which calls for
the clause to be extended to parties directly involved in the performance of the contract
and in the disputes arising out of the contract, provided that it is established that [the
parties’] activities raise the presumption that [the parties] were aware of the existence
and the scope of the arbitration clause, and irrespective of the fact that they did not sign
the contract including the arbitration agreement” (in French; translation of the author)
(emphasis added)); see also Cour d’appel (CA), Ofer Bros v. Tokyo Marine and Fire Ins.,
Feb. 14, 1989, (1989) Rev. Arb. 691 (note P.-Y. Tschanz); Cour d’appel (CA), Orri v.
Lubrifiants Elf Aquitaine, January 11, 1990, (1992) Rev. Arb. 95 (note D. Cohen) (1991);
118 J.D.I., p.141 (note B. Audit).
61. See InterGen N.V. v. Grina, 344 F.3d 134, 143 (1st Cir. 2003) (“the courts
should be extremely cautious about forcing arbitration in situations in which the identity
of the parties who have agreed to arbitrate is unclear”) (quoting McCarthy v. Azure, 22
F.3d 351, 354-55 (1st Cir. 1994)); see also E.I Dupont de Nemours & Co. v. Rhone
Poulenc & Resin Intermediaries, 269 F.3d 187, 204 (3d Cir. 2001); Comer v. Micor, Inc.,
436 F.3d 1098 (9th Cir. 2006).
62. See J. Hosking, Non-Signatories and International Arbitration in the United
States: the Quest for Consent, 24 A
RB. INT’L 303 (2004) (“A review of the theories,
principles and procedures employed to bind non-signatories, reveals—perhaps
unsurprisingly—that the ‘touchstone’ for this determination is whether or not the relevant
entities consented to arbitrate with one another.”); see also Thomson-CSF v. Am. Arb.
Ass’n, 64 F.3d 773, 779-780 (2d Cir. 1995) (“A non-signatory may not be bound to
arbitrate except as dictated by some accepted theory under agency or contract law.”).
63. “An agreement implied in fact is founded upon a meeting of minds, which,
although not embodied in an express contract, is inferred, as a fact, from conduct of the
parties showing, in the light of the surrounding circumstances, their tacit understanding.”
Hercules, Inc. v. United States, 516 U.S. 417, 424 (1996) (quoting Baltimore & Ohio
R.R. Co. v. United States, 261 U.S. 592, 597 (1923)); see also Republic of Nicaragua v.
Standard Fruit Co., 937 F.2d 469 (9th Cir. 1991) (noting that “the clear weight of
authority holds that the most minimal indication of the parties’ intent to arbitrate must be
given full effect, especially in international disputes”). The Ninth Circuit in Republic of
Nicaragua relied in part on Bauhinia Corp. v. China Int’l Mach. and Equip. Co., 819 F.2d
247 (9th Cir. 1987).
64. See Stephen Bond, Recent Developments in International Chamber of Commerce
Arbitration, in P
RACTISING LAW INSTITUTE, INTERNATIONAL COMMERCIAL ARBITRATION:
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
2009] INTERESTS OF THIRD PARTIES IN ARBITRATION 1187
Nevertheless, the above analysis has yielded some cautious results. The
starting, and less controversial, point made in this paper was that
arbitration proceedings and arbitral awards can touch upon and even
adversely affect the legal and financial interests of third parties.
Whether this adverse effect would justify the participation of third
parties in the arbitration proceedings is not equally clear. Examining the
issue from the viewpoint of the actual parties to a set of arbitration
proceedings, it would be difficult to suggest that the presence of a third
party will equally serve the interests of both the claimant and the
respondent. Most frequently, one of the parties to the arbitration will
have no interest in having a third party join the proceedings.
However, support for the proposition that arbitration should allow
for the interests of third parties can be found in other arguments. To
begin with, multiparty arbitration proceedings would enhance the
efficiency of arbitration. If arbitration was able to accommodate
multiparty arbitration proceedings, the risk of conflicting awards
resulting from overlapping parallel proceedings would be more
effectively controlled.
Equally important, third-party proceedings would expand the
material scope of arbitration to include disputes that are in principle
considered inarbitrable. As was argued here, in many cases
inarbitrability is linked more with the inability of arbitration to take the
interests of third parties into account than with public policy
prohibitions.
However, the most convincing argument for third-party arbitration
proceedings is that arbitration arrangements should remain in tune with
their substantive background. As was shown, in many cases, the scope
of bilateral arbitration proceedings falls short of the implications of a
dispute involving several parties. Here, it is questionable whether two
parties should be totally free to make bilateral arbitration arrangements
against a multiparty substantive backdrop. This may result in an
artificial discrepancy between the substantive and the procedural aspect
of the same multiparty relationship, eventually hampering the efficient
resolution of the dispute in the bilateral arbitration proceedings.
It was not the aim of this paper to determine the exact limitations of
procedural party autonomy; however, the paper argued that in principle
there should be limits imposed on procedural party autonomy when
several parties are involved in a single commercial project. As was
submitted, procedural party autonomy could not overturn the multiparty
RECENT DEVELOPMENTS 89 (1988). “No generally acceptable solution to the manifold
issues arising from multiparty arbitrations has yet been found by either the ICC or any of
the dozens of other scholars, lawyers and arbitral institutes working on this issue.” Id.
BREKOULAKIS.DOC 7/1/2009 8:31:14 AM
1188 PENN STATE LAW REVIEW [Vol. 113:4
substantive background and leave out of the arbitration proceedings third
parties that are substantively intertwined in a dispute before the tribunal.
Otherwise, the functional equilibrium between substance and procedure,
which should apply not only to litigation but to arbitration as well, would
be disturbed. Eventually, the focus of arbitration proceedings should
widen to include all the substantive implications of a dispute before a
tribunal and all the third parties involved therein. Third parties with an
interest in the outcome of the arbitration are not necessarily aliens and
therefore they should not be altogether excluded from the arbitration
process.
Overall, there is more merit in the argument that arbitration should
be a dispute resolution system, which—under particular circumstances—
would be able to allow for the interests of necessary third parties. Thus,
arbitration would be better equipped to deal with multiparty disputes
arising out of multiparty projects, which become increasingly frequent in
modern commercial practice.
