Arbitration is based on the consent of involved parties. However, in complex commercial environments, the entities holding rights and obligations do not always align with the signatories of contracts.
Partner
Tahota Law Firm
Tel: +86 10 8586 5151
Email: yarui.zhou@tahota.com
In cross-border transactions, actual trading partners often delegate contract signing to other entities for reasons like tax planning, risk isolation and foreign exchange controls. This arrangement poses challenges for subsequent dispute resolution. Who are the signatories to the arbitration agreement? Who are the real parties in interest? Do the signatories have the capacity to perform? Will the final arbitration award be enforceable or merely a piece of paper?
The joinder of parties mechanism has become a common legal tool to address these issues. This article, drawing on two recent and successful cases, shares practical insights from the perspectives of both the claimant and respondent.
Joinder mechanism
The rules of major international arbitration institutions generally include provisions for the joinder of parties, although their specific terms may vary. Typically, a party in an arbitration can request the joinder of an additional party. Some arbitration rules even allow third parties to join ongoing proceedings at their own request.
The main challenge in joinder of parties arises when a party to be joined is not a signatory to an arbitration agreement. The key issue becomes whether the agreement can be extended to include the non-signatory party.
In international arbitration practice, a tribunal or arbitration institution must first identify the applicable law of the relevant country or region. This influences the validity of legal theories in the specific case and affects the possibility of extending an arbitration agreement to non-signatories.
Experience sharing
Claimant’s joinder request — dismissed. In this first sample case, the author represented a respondent to a cross-border medical mask sales dispute under the special circumstances of the pandemic. For the convenience of cross-border settlements, the respondent chose a British Virgin Islands (BVI) company as the contracting party when signing a sales contract with the claimant.
The contract was governed by Hong Kong law and stipulated that disputes be resolved through arbitration in Hong Kong. The BVI company also arranged for its affiliated company in mainland China to sign a procurement contract with the mask manufacturer to complete domestic procurement and to deliver the masks abroad.
A dispute over the masks’ quality arose between the claimant and the respondent. Through the Hong Kong High Court, the claimant successfully froze the respondent’s bank account in Hong Kong. However, the account balance was only HKD700,000 (USD89,900), insufficient to cover the claimed compensation.
To gain a greater advantage, the claimant filed a joinder request in arbitration, seeking to join the respondent’s affiliated company and actual controller to the proceedings. The request was based on partnership theory, with the claimant arguing that these entities should bear joint and several liability.
To counter, the respondent needed to not only avoid having the actual controller and affiliated companies joined to the arbitration to bear liability, but also to restore balance between the parties and regain their bargaining power.
On behalf of the respondent, the author first challenged the applicable law. The claimant argued for the application of Hong Kong law to determine the establishment of a partnership. However, the author pointed out the relevant parties were all located in mainland China, and the related activities primarily occurred there. Therefore, according to the closest and most real connection principle in Hong Kong conflict of laws, mainland Chinese law should apply.
Additionally, considering the timing of the events in question, the determination of the partnership should follow the General Principles of the Civil Law. These specific provisions for identifying a partnership are unique, and the applicant was not familiar with them.
Ultimately, the author successfully persuaded the tribunal that the proposed parties did not constitute a partnership with the respondent and should not be bound by the arbitration agreement. This led to a dismissal of the claimant’s request.
Joining non-signatories. In the second sample case, as the claimant’s counsel, the author assisted in the joinder of a third party — a Kazakhstani group company that had not signed an arbitration agreement — as a respondent and hold it liable for breach of contract.
The nominal respondent was a UAE company but, in reality, the group company handled project negotiations, communications and execution; the UAE company was merely a contracting party for settlement convenience. After the dispute arose, the claimant discovered the UAE company lacked capacity to perform and, based on the agency theory, sought to join the group company.
The contract only stipulated the application of the UN Convention on Contracts for the International Sale of Goods. The key issue was determining the applicable law to establish an agency relationship.
In collaboration with a Hong Kong barrister, the claimant argued that, according to Hong Kong conflict of laws, the law of the country where the agent was expected to perform should determine the agency relationship. If it was a case of apparent authority without actual authorisation, the law governing the contract between the agent and the third party should apply.
Both scenarios pointed to the application of mainland law. Referring to article 402 of China’s Contract Law on indirect agency, and various contract details such as the UAE company being part of the group company and having the same contact address, the claimant successfully convinced the tribunal that, although the UAE company signed the contract in its own name, the contract directly bound the group company and the claimant. Ultimately, the tribunal ruled to join the group company as a respondent.
Lessons
In complex commercial transactions involving multiple parties, it is crucial for all parties to conduct thorough due diligence to clarify their rights and obligations, and to preserve evidence for potential future disputes.
When joining parties to arbitration proceedings, the correct application of law is essential. In practice, the flexible use of conflicts of laws, and the clear determination of applicable law, can effectively promote the proper application of arbitration theory, thereby facilitating the efficient and fair resolution of disputes.
Zhou Yarui is a partner at Tahota Law Firm. She can be contacted by phone at +86 10 8586 5151 or by email at yarui.zhou@tahota.com
