Multi-party Disputes and Joinder of Third Parties
Nathalie Voser , Litigation and Arbitration partner, Schellenberg Wittmer; Assistant Professor, University of Basel (Switzerland). I would like to thank my colleagues Andrea Meier, Christopher Boog and Patrick Rohn for their review of the draft report and their important contributions, as well as Lars Bauer for his diligent research and editing of the text.
I. Introduction
1. General Introductory Remarks
It is a well-known fact in the field of international arbitration that over the last decade the number of proceedings in which more than two parties are involved has increased rapidly. The reasons for this are common knowledge: the growing international interdependency of commerce and the globalization of today's business world have led to complex contractual relationships which very often involve more than just two parties. As a result, it is safe to say that roughly 40 percent of arbitration cases involve more than two parties. (1)
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An insider at the ICC International Court of Arbitration has pointed out that the “reality of international commercial disputes has dramatically changed. Before, the great majority of disputes seemed to be bipolar disputes. Presently, an important number of disputes are multiparty and even multi-polar disputes.” (2) Consequently, an important distinction should be drawn within multi-party arbitration: on the one hand, there are multi-party arbitrations which are bipolar, meaning that the “parties can normally be divided into two camps: a Claimant camp and a Respondent camp”. (3) On the other hand, there are multi-party arbitrations which are multi-polar. This means that there are not just two camps, but more than two diverging interests. It is mainly the latter constellation which today causes difficulties and concerns in the arbitration community.
The issues at stake in multi-party and/or multi-polar arbitration vary greatly. Nevertheless, there are certain types of dispute which typically include more than two parties. Traditionally, such disputes involve construction and major industrial projects (with related sub-contracts), (4) guarantees, defective products, commodities transactions, transactions where the same asset is sold many times, (5) and supply chains (6) or, more generally, back-to-back purchases/sales, where there is an imminent risk that the contractual partner (and thus the party with title to the claim) is not the entity who is the final owner and who suffers the economic damage. (7) In more recent times, other types of dispute have been mentioned, such as shareholders' and joint-venture arbitration, (8) multi-party merger and acquisitions, trust arbitration, (9) insurance and re-insurance page "344"disputes (10) and sports-related disputes (11) (for example among several sponsors). In such situations, the contracts are interdependent and, quite often, there are back-to-back conditions which call for joint adjudication.
Although multi-party arbitration is of great practical relevance, arbitration as a dispute resolution mechanism is not, in its present state, well-equipped to handle such disputes and there are a number of complex and still unresolved issues. The problems connected to multi-party situations are considered a disadvantage of arbitration (12) and these situations encompass the most complex issues that the international arbitration community faces today. These issues have not only led (and continue to lead) to an abundance of publications, (13) but also to the amending of certain arbitration rules. (14)
This Report shall deal with multi-party proceedings from an overall perspective and address certain specific issues. Before going into a detailed discussion, some of the terms page "345"used in connection with multi-party arbitration should be defined, since it is sometimes difficult to understand the literature due to the differences in nomenclature (see Sub-sect. 2 below). Furthermore, there are important distinctions to be drawn which are relevant for the understanding of the complex issues at stake (see Sub-sects. 3 to 5 below).
The important work done by the Working Group A of the ICCA Congress 2006 in Montréal (15) will not be reiterated here. Instead, the present Report will concentrate on issues which have, so far, been discussed less often in the arbitration community at large. The section on the extension of the arbitration agreement to a non-signatory (see Sect. V below) will be somewhat cursory, and will focus on the Swiss situation; the emphasis will be on the other sections.
There are many other facets of multi-party arbitration which are highly interesting but which this Report does not address, such as
– / Consolidation of proceedings (see separate Report by Michael Pryles and Jeffrey Waincymer, this volume, pp. 437-499); (16)– / Separate proceedings with the same arbitrators as an alternative to the extension of the arbitration agreement to third parties and/or the joinder of third parties; (17)
– / Class-wide arbitrations; (18)
– / Amicus curiae briefs. (19)
2. Important Terms in the Context of Multi-party Arbitration and Joinder
The term multi-party arbitration is an umbrella term, used to reflect the fact that there are more than two parties involved in one arbitration proceeding. As a rule, when speaking about multi-party arbitration the focus is not (or is no longer) on who is a party to the arbitration, but rather on the method of appointing the arbitral tribunal and conducting the multi-party arbitration proceedings.
The term joinder is commonly used in the context of multi-party arbitration. In more recent literature, the term is limited to situations where a third party is asked to join an page "346"already pending arbitral proceeding. (20) More precisely, the term joinder, in this Report, covers a situation where a notice of arbitration, which determined the “original” parties to the arbitration, has already been filed. A request for joinder exists when the respondent wants to file a counterclaim either against the claimant and a third party, or solely against a third party (counterclaim or claim against a third party). (21) A joinder can also cover a situation in which the claimant decides at a later stage of the proceedings that a third party should become an additional respondent. A joinder is primarily a procedural issue and deals with the question of who can participate in a given arbitration. It does not, per se, provide for any answers to the separate issue of whether or not there is a valid arbitration agreement.
Sometimes, the wording used in the context of joinder is not “third party”, but third person. (22) On the one hand, in a technical sense, this wording is more correct, since the third person to be joined is not yet a party to the arbitral proceedings. On the other hand, if a third person has implicitly consented to the arbitration agreement, it should automatically be a party to the arbitral proceedings. This logic endorses the use of the term “joining of a third party”, which is more often used than “third person” in the context of joining. This Report will, for reasons of convenience and uniformity, use the term third party in connection with joinder.
The term extension is most often used in the context of non-signatories to an arbitration agreement. A person or entity may be bound by an arbitration agreement, even though he is not expressly named in the agreement. Thus, the term “extension” always refers to a party who falls within the personal scope of an arbitration agreement. (23) Although some justified criticism has been raised with regard to the concept of extension, (24) for the sake of uniformity this term shall be used in the present Report.
A claim for recourse is a claim by the respondent against a third party in order to have recourse should the claimant prevail against the respondent. This claim allows the adjudication of the main claim and the claim for recourse in the same forum. In the terminology used in the United States, the defendant becomes a third-party plaintiff and the third party a third-party defendant. (25) In contrast to a counterclaim against a third party, a cross-claim is a claim made by one respondent against another respondent in the proceedings. (26)
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While all these are claims by one party against a third party, the discussion of multi-party arbitration must also look at intervention, where a third party wishes to join the arbitral proceedings. (27)
3. Signatories v. Non-signatories to the Arbitration Agreement
In light of the fundamental difference between state court proceedings and arbitration regarding the basis for jurisdiction, an important distinction should be drawn between a situation where several parties have signed the arbitration agreement and one where a third party becomes (from the very beginning or later) a party to the arbitral proceedings without having signed the original arbitration agreement. The first situation can be described as arbitral proceedings among multiple signatories to an arbitration agreement and is discussed in Sects. III and IV below. The second situation, which is usually referred to as extension of the arbitration agreement to non-signatories, is more complex, and is covered in Sect. V of this Report.
Two preliminary comments should be made in this context. Firstly, the issue of signatories to an arbitration agreement encompasses different situations. Either multiple parties to an agreement have signed a contract containing an ordinary, uniform bipolar arbitration clause which does not specifically take into account the fact that a multi-party dispute might arise (see Sect. III), or the arbitration clause does indeed anticipate this eventuality and makes special provisions (see Sect. IV). As a second preliminary comment, the difference between multi-party arbitrations among signatories of a mutual arbitration agreement, as compared to the extension to non-signatories, is very important from a practical point of view. As shown below, the arbitration institutions, such as the ICC, also draw important distinctions between these two situations. (28) The fact that the extension to a non-signatory third party means that this third party is considered to be a party to an existing arbitration agreement must not be forgotten. In other words, if one accepts the premise that there cannot be arbitration without the consent of all parties involved, there is no methodological difference in principle between these two situations. The legal theories actually all have the same goal: of construing the consent of the third party to the existing arbitration agreement. Following the extensive work by Bernard Hanotiau (29) this is now commonly accepted. One should, however, note that while the above-mentioned premise is correct, the focus on the consent of the third party is not entirely justified. This is because the theory of extension is often understood in a broad sense, and could include, for example, the abuse of rights (which is the basis for the piercing of the corporate veil in some jurisdictions) (30) or the assignment of obligations. There also is an ongoing debate about which theory the arbitration community should adopt for the purposes of extending a written arbitration agreement; some proponents focus on (constructive) consent, others on different theories (such as estoppel or abuse of rights).
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As a final comment, it should be noted that a significant issue that inevitably arises in the context of extension is the form of the arbitration agreement. (31)
4. Multiple Parties v. Other Forms of Participation in Arbitration Proceedings
National procedural rules have developed different forms of participation in state court proceedings. A third party either becomes a party based on a claim by one of the existing parties, or based on its own claim. Another variation is when the third party does not become a proper party to the proceedings, but participates nevertheless in order to promote an outcome which is favorable to it, albeit only with limited procedural rights. In Germany, this variation is generally known as a “side intervention” (Nebenintervention). France defines it as intervention volontaire accessoire. The American system, like the Anglo-Saxon one, does not distinguish between a “side intervention” with limited rights and full party rights of the joining third party. (32)
In the context of this Report, the question arises as to whether international arbitration should also distinguish between different forms of participation and, if so, who should determine these forms. This issue will be discussed in Sect. VI below.
5. Multiple Parties from the Beginning of the Arbitration vs. Joining of Third Parties After the Constitution of the Arbitral Tribunal
There is another practically important distinction to be drawn. Whether or not the arbitral tribunal has already been constituted makes an important difference when discussing whether a third party should be joined in the arbitration proceedings. The problems are obvious: Is this possible in the first place? If so, can (or must) the joining party accept the already appointed arbitration panel? Legal doctrine on this issue is scarce. However, when the issue has been addressed, the authors have, at least as a general rule, stated that replacing one or more arbitrators is too burdensome on the existing parties to the arbitral proceedings. (33) It is doubtful that this argument is justified in every situation. Sect. VII will attempt to define some typical situations where the replacement of an arbitrator is justified to allow the third party to be joined, even if this is at the cost of an efficient procedure. (34)
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II. Advantages of, and Obstacles to, Multi-party Arbitrations
1. Advantages
The main advantage of multi-party proceedings versus separate proceedings is that they enhance the efficiency of the dispute resolution, since common issues of fact and/or law may be addressed by the same panel in one proceeding. (35)
There are other good reasons for dealing with related disputes between several parties in one forum, such as avoiding the risk of conflicting awards which can lead to the unjustified loss of a party's claim. This concern is particularly relevant in regard to claims of recourse: if the respondent wishes to take recourse against a third party in a separate proceeding, but the second arbitral tribunal does not honor the findings of the first panel regarding the liability of the respondent, the respondent might face the problem of completely losing its recourse option. (36)
In construction project disputes, other difficulties are encountered; these generally result from the subcontractors and suppliers working together to fulfill the same obligation, namely that of the main contractor. (37) A typical situation involves a claim by the main contractor (claimant) against the owner (respondent), when there is a threat of claims by the subcontractor(s) against the main contractor, even though such claims have not yet been filed. Often, the main contractor cannot claim any damages based on possible claims from the subcontractors, since under many legal systems it is not deemed to have suffered legally relevant damage (in the form of an increase of liabilities) if the claims have not materialized in the form of a judgment against it. Consequently, the main contractor (claimant) risks not being compensated for its potential damages and might still have to pay the subcontractor in later proceedings. The situation is even more delicate if the main contractor and the subcontractor concluded a back-to-back agreement, whereby the subcontractor would obtain what the main contractor obtains from the owner. In a two-party arbitration (involving only the owner and the main contractor) this means that no damages can be paid, since there is no legally relevant damage on the claimant's (main contractor's) side. Thus, both the main contractor and the subcontractor end up empty-handed.
2. Obstacles
a. Consensual nature of arbitration
The main obstacle to multi-party arbitration proceedings stems from the very nature of arbitration as a consensual dispute resolution mechanism. (38) This is also the fundamental difference from state court proceedings: while state courts have authoritative jurisdiction over the parties which is vested in them by the State, in arbitration, the jurisdiction of the arbitral tribunal is derived solely from a common agreement between the parties. While state courts have well-established and predictable rules providing for multi-party page "350"proceedings and the joinder of third parties to pending court proceedings, which can be imposed on the parties to the proceedings as well as on third parties, this is not the case in arbitration.
b. Arbitration has a two-party (bipolar) setup
The second main obstacle to multi-party arbitration, which is closely related to the consensual nature of arbitration, is the notion that arbitration is in principle a two-party setup (39) or, as it is sometimes called, a bipolar proceeding. (40) In a bipolar proceeding, the parties are considered to be arbitrating an existing or future dispute amongst themselves. This is well-illustrated by the rules governing the appointment of arbitrators. Although there are exceptions, (41) arbitration codes and institutional rules usually only provide for the appointment mechanism in two-party situations, as per, for example, Arts. 10(2) and 11(3)(a) of the UNCITRAL Model Law on International Commercial Arbitration (the Model Law). Even in those institutional rules which do provide for a multi-party appointment, the standard is that the claimant(s), on the one side, and the respondent(s), on the other side, each jointly appoint one arbitrator. (42)
Although such provisions do provide guidance in certain situations, they are based on a simplified concept that multiple parties can always be divided into two categories, i.e., either claimant or respondent. (43) However, there are many examples in practice, such as chain of delivery, which demonstrate that this view is overly simplistic. Initially, everyone in the chain is united in the interest of proving that there is no defect in the product in question. However, if the final buyer can show that the product was, in fact, defective, the people who were jointly responsible for the delivery – for example, in a case where one party delivered and the other was responsible for the proper transportation and installation – become opponents, since each will try to show that the defect is the other party's responsibility. Another example, where it is more likely that a multi-party arbitration agreement exists, is the situation of claims between two groups of joint venture partners. Here, within the “losing side”, it is very likely that each party has separate interests and will want to take recourse against the other partner(s).