Extending your reach to the "invisible parties" to the arbitration agreement

by Dentons
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Dentons

[co-author: Tan Ting Wei]

Aggrieved claimants may sometimes seek to extend their claims not only to the company that agreed to arbitrate disputes – but also to that company’s shareholders or ultimate controlling person(s).  Such efforts are usually driven by commercial realities – while the company may be insolvent, or asset-light and liability-heavy, the shareholders or ultimate controlling person(s) may have substantial assets. Even if these parties have not signed the arbitration agreement in question, it may still be possible to join them by “piercing the corporate veil” of the signatory company.

Singapore courts have recognized a tribunal’s authority to join shareholders to an arbitration by piercing the corporate veil. In fact, Singapore courts have already enforced awards against parties who did not expressly sign the arbitration agreement. However, these cases have only involved awards rendered by tribunals seated outside of Singapore. Nonetheless, the Singapore courts reasoned that so long as the supervisory court of the seat has not set aside the award, Singapore courts will be inclined to enforcing the award.

However, insofar as arbitrations seated in Singapore are concerned, there appears to be no reported decision where the Singapore courts considered the issue of whether to set aside an award in which the arbitral tribunal had exercised its power to pierce the corporate veil. Recently, the Delhi High Court in Sudhir Gopi vs Indira Gandhi National Open University O.M.P. (COMM) 22/2016, engaged in this analysis – ultimately deciding to set aside an arbitration award because the Delhi High Court found that the tribunal did not have sufficient grounds to pierce the corporate veil in order to join the shareholders in question.

Below, we discuss the factors a Singapore court may consider when deciding whether to set aside an award in which the arbitral tribunal had exercised its power to pierce the corporate veil. Notably, the Singapore court’s considerations may differ in cases where the tribunal has joined shareholders (on the grounds of the “alter ego” doctrine) versus when it has joined a company (on the grounds that the company is part of a “group of companies”).

Ultimately, while a Singapore court may uphold an award against a non-signatory shareholder, it may choose to set aside an award against a non-signatory company.

A. Joining non-signatory shareholders or individuals

Subject to the precise terms of the arbitration agreement, Singapore courts recognize that tribunals have jurisdiction to “pierce the corporate veil” and join parties who have not explicitly signed an arbitration agreement, on the basis of the alter ego doctrine.

1. Who can be considered an alter ego of the signatory?

“Piercing the corporate veil” refers to the situation where the company’s separate legal personality can be disregarded, and the individual shareholders can be made personally liable for the acts of the company. When the company is used as an extension or alter ego of its controller to carry out his own business, the corporate veil can be pierced so as to impose liability on the controller under the contract and the arbitration agreement.

In Singapore, both courts and arbitral tribunals have the power to join companies or individuals who are not formally signatories to the arbitration agreement, if they are involved in some material way in the underlying transaction or project. In fact, non-signatories may be considered a party to the arbitration via piercing of the corporate veil on the basis of the alter ego doctrine.

In Aloe Vera of America, Inc v Asianic Food (S) Pte Ltd and another [2006] 3 SLR(R) 174 (Aloe Vera of America), the arbitration agreement was entered into between Aloe Vera of America Inc (AVA) and Asianic Food (S) Pte Ltd (Asianic). However, it was the shareholder of Asianic, Mr Chiew Chee Boon (Mr Chiew) who had signed the contract containing the arbitration agreement on behalf of the Asianic. A dispute arose between AVA and Asianic, and AVA commenced arbitration proceedings against both Asianic and Mr Chiew.

Here, the arbitral tribunal found that Mr Chiew was “at all material times the president, a director and shareholder of Asianic and that Asianic was undercapitalised, failed to honour corporate formalities and was the alter ego of Mr Chiew”, and rendered a final award ordering both Asianic and Mr Chiew to pay AVA damages. When AVA sought to enforce the arbitration award in Singapore, Mr Chiew sought a declaration that he was not a party to the arbitration agreement.

The Singapore High Court found that whether a person is an alter ego of a company is an issue which can in an appropriate case be decided by arbitration. In holding that Mr Chiew was a party to the arbitration agreement, the arbitrator was acting within his jurisdiction, as it was an accepted principle of arbitration law that an arbitral tribunal has jurisdiction to determine whether a particular person is party to an arbitration agreement. In this regard, if the tribunal had properly decided its jurisdiction under the law of Arizona, which was the governing law of the arbitration agreement, and the supervisory court in Arizona did not overrule the tribunal’s finding, then the Singapore Court which is called to enforce the award is not entitled to look into the merits of the case. The Singapore High Court eventually upheld the assistant registrar’s decision to grant AVA leave to enforce the arbitration award.

2. What laws apply to determine whether the non-signatory is an alter ego of the signatory?

Generally, the party seeking to join shareholders of a company who are non-signatories to the arbitration agreement has to demonstrate that piercing of the corporate veil will be appropriate under the laws of incorporation of the signatory company. However, the issue is that the definitions of alter ego vary materially across different jurisdictions, and are applied in various contexts. Thus, this raises an additional factor which parties should take into account before entering into arbitration agreements.

Some jurisdictions appear to be more open to piercing the corporate veil, while other jurisdictions appear to be less willing to do so. For instance, U.S. Courts appear to have been more prepared than courts in other jurisdictions to apply an alter ego analysis, so as to subject a non-signatory to an arbitration agreement to the arbitration proceedings.

In contrast, the English Courts appear to have been more hesitant to apply the alter ego doctrine in a similar context. This difference was recognised in the U.S. case of FR 8 Singapore Pte Ltd v Albacore Maritime Inc and others 794 F. Supp. 2d 449 where the plaintiff, FR 8 Singapore Pte Ltd (FR 8), commenced an action against the defendant, Albacore Maritime, and three other non-signatories to the arbitration agreement, to compel the non-signatories to arbitrate FR 8’s claim in London as alter egos of Albacore Maritime.

In deciding whether to grant FR 8’s motion, the District Court of New York noted that the U.S. federal common law of piercing the corporate veil is more favourable compared to English law. Nonetheless, the Court found that U.S. federal common law was not applicable as the contract between FR 8 and Albacore Maritime expressly provided for English law as the choice of law. Ultimately, the Court decided that based on English law, there were no grounds for the corporate veil to be pierced so as to compel the non-parties to arbitrate the FR 8’s claim as alter egos of the Albacore Maritime. FR 8’s motion was dismissed accordingly.

B. Joining a company under Group of Companies doctrine

Parties may also attempt to join an associated company that is a non-signatory to the arbitration agreement under the group of companies doctrine.

It is common for corporate organizations to structure their business by incorporating numerous subsidiary companies that share a common source of control. In such cases, it may be possible to argue that the companies function as a “group of companies” or a “single economic entity”. While arbitral tribunals seem to have the power to pierce the corporate veil so as to join shareholders to the arbitration, such powers do not extend to situations involving a group of companies thought to be a single economic entity.

Unlike the situation of piercing the corporate veil, the Singapore Courts do not recognise that arbitral tribunals have the jurisdiction to join associated companies to the arbitration agreement. In Manuchar Steel Hong Kong Ltd v Star Pacific Line Pte Ltd [2014] 4 SLR 832, the Singapore High Court found that the single economic entity concept has very little traction in the international arbitration community, especially outside jurisdictional issues (such as whether a company within the group is part of the group for the purposes of jurisdiction). Similarly, in the English case of Peterson Farms Inc v C & M Farming Ltd [2004] EWHC 121 (Comm), the English Court rejected the “group of companies” doctrine, and found that the tribunal had no jurisdiction to award damages suffered by the group companies who were not parties to the arbitration agreement.

One of the possible explanations why the courts hesitate to join associated companies under the doctrine of group of companies may be because the doctrine requires the arbitral tribunal to discern the subjective intentions of the parties, and enquire as to whether parties intended for the scope of the arbitration agreement to extend to the associated company. This seems to be stretching the notion that an arbitral tribunal has the power to decide its own jurisdiction a step too far.

C. Will Singapore courts ultimately set aside awards against a non-signatory party?

Singapore is seen as a pro-arbitration jurisdiction. As such, party autonomy plays a central role in any tribunal or court’s consideration. The starting point of all arbitrations is an agreement to arbitrate, and a party cannot be forced to arbitrate against its will or without its consent. In fact, this was recently affirmed by the Singapore Court of Appeal in Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2016] 1 SLR 373, where the Court held that an arbitral tribunal’s jurisdiction is based on the consent of the parties, as manifested in the arbitration agreement.

While it has been well-established that Singapore courts are deferential to the courts of the place of the seat of arbitration when enforcing an award, it remains to be seen whether Singapore courts will take a different approach when deciding on whether the arbitral tribunal should pierce the corporate veil so as to join a non-signatory party to the arbitration, when Singapore is the seat of the arbitration.

D. Implications for Businesses

If you are being joined as a party to the arbitration agreement, please seek legal advice.  This is to ascertain your rights and position and address the issue of whether the arbitral tribunal indeed has jurisdiction to allow such joinder, despite the lack of your express consent. As explained above, whether the arbitrator has jurisdiction to pierce the corporate veil will depend on the laws of incorporation of the signatory company. This may in turn raise complex choice of law issues. If an award has already been rendered against you even though you are a non-signatory to the arbitration agreement, it may be possible to set aside the award or challenge the enforcement of the arbitration award.

If you intend to join a party to an arbitration that has not explicitly signed the arbitration agreement, it is prudent to consider whether (a) the laws of incorporation of the company being joined would support such a position and (b) whether the laws of the seat of arbitration support the position that arbitral tribunals have the jurisdiction to pierce the corporate veil.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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