Transnational Construction Arbitration

Renato Nazzini

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CHAPTER 5 Arbitration and the expanding circle of consenting parties: joinder of additional parties and consolidation of related claims

Neil Andrews

Introduction

The voluntary principle (need for party consent)

5.1 The basic proposition (hereafter the voluntary principle) is that arbitral tribunals cannot require joinder of additional parties (including use of the procedural mechanism of representation, see paragraphs 5.45 to 5.48 of this chapter), or consolidation of related arbitration references, unless all parties (subsisting and prospective) consent.1 Such consent can be given either immediately before the relevant procedural variation or much earlier, notably by agreeing to institutional rules which permit this.2 5.2 For example, the London Court of International Arbitration (LCIA) Rules (2014) permit (1) ‘one or more third persons to be joined in the arbitration as a party’3 or (2) ‘the consolidation of the arbitration with one or more other arbitrations into a single arbitration subject to the LCIA Rules’.4 But joinder of additional parties under (1) requires the applicant party and the proposed new party to consent in writing;5 and consolidation under (2) requires all relevant parties to consent in writing to the proposed consolidation.6 This is to be contrasted with the English court’s power to order

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the combination of related claims, including claims between different parties, without obtaining party consent.7

The way ahead

5.3 The main argument here will be that a party’s assent to a set of institutional arbitral rules involves contractual accession to a complex network8 of rules to which all other participating parties are subject and from which they all potentially benefit. Institutional rules confer rights and duties, entitlements and possible ‘burdens’. This contractual analysis (see further paras 5.13–5.24 below) will provide the platform for an efficient and flexible system regulating (1) joinder of additional parties, including processing of wider cohorts of parties within particular arbitral proceedings, and (2) consolidation of related arbitration proceedings. Indeed (as developed below at paras 5.43–5.44) more than one arbitral institution, perhaps even a network of such institutions, could introduce a set of coordinated and mutually supportive rules to facilitate the matters just mentioned at (1) and (2).

Current arbitration mechanisms of joinder and consolidation

Joinder of an additional party (or set of additional parties)

5.4 Where the arbitration is between parties A and B, and A wishes to add X as a third party, but X is not a party to any arbitration agreement, X is not compellable to join the arbitration as a co-respondent. X could be added as a party only if A, B and X consent (for a qualification under the LCIA (2014) Rules, see note 5). The same analysis applies when it is intended that instead of a solitary additional party, new party X, a set (small, big, or very large) of new parties will be added. This consensual restriction upon joinder of new parties is another manifestation of the voluntary principle:9 that participation in arbitration requires universal party consent.

Consolidation

5.5 Section 35 of the Arbitration Act 1996 (England, Wales, and Northern Ireland) empowers the tribunal to permit separate arbitration proceedings to be consolidated (arbitration between X and Y becomes fused with arbitration between X and Z, or between A and B) or at least that concurrent proceedings be held (arbitration between X and Y and between A and B, or X and B, here continue to subsist independently, separate awards

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being ultimately given, but the procedural dividing door is opened to allow each arbitration to be inspected by the participants in the parallel arbitration, and for the two to be coordinated). But each of these procedural mutations, joinder of additional parties and consolidation or concurrence, requires the consent of all parties. 5.6 There is no parallel in the field of arbitration to court-directed consolidation of civil proceedings.10 However, in principle an arbitral tribunal could be consensually clothed with the power to engage in these techniques, whether (1) by specific agreement in a master contract to which all prospective disputants are party or (2) by virtue of the institutional rules11 to which the parties might have assented when making their arbitration agreement, including (3) networks of agreements joining different institutions and parties consenting to conduct proceedings under their rules. Of these various contractual platforms, a combination of (2) and (3) appears more flexible and useful and those points are developed in paragraphs 5.28 to 5.52 of this chapter.

Principles relevant to joinder and consolidation in arbitration law

5.7 Here we can identify four principles.

Principle 1: party consent and the voluntary principle 12

5.8 Arbitration rests on consent between the parties and the need for consent embraces any decision to involve a person in the arbitral process or to connect related or parallel arbitration proceedings. Consent must be real and free. The voluntary principle of arbitration is fundamental. The alternative to private consent is statutory compulsion. But any such mandatory form of participation in arbitration would be an exception to, or violation of, the voluntary principle.

Principle 2: procedural privity

5.9 An award is binding and carries the force and preclusive effect of a matter finally determined (res judicata) only between the parties to the arbitration.13

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Principle 3: enforcement only against a true party

5.10 Enforcement of an award against a non-party will fail, under either the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), or a national system for enforcing domestic awards. Complex issues can arise. As the Dallah litigation shows (Dallah Real Estate & Tourism Holding Co v Pakistan)14 the issue whether the award-debtor is truly a non-party can require the enforcing court to consider proof of intricate foreign law. In that case the Supreme Court of the United Kingdom held that a Paris award could not be recognised in England, under the New York Convention (1958), because the French arbitral tribunal had (adopting the English analysis of the French position) incorrectly determined that the Pakistan Government was a party to the relevant arbitration agreement. However, subsequent to the English decision just mentioned, a French court (Paris Cour d’appel, 2011) upheld the award, applying French internal law.15 From an English perspective, Lord Neuberger, in a lecture, described this chain of events as ‘melancholy’.16

Principle 4: consumer protection

5.11 English legislation17 ensures that consumers (whether, in this context, an individual or a legal person)18 are not bound by an arbitration agreement in respect of a claim for £5,000 or less.

Access to arbitration under the English contractual third party beneficiary statute

Exclusion of the Contracts (Rights of Third Parties) Act 1999 by the contracting parties

5.12 It is important to note that the provisions examined in paragraphs 5.13 to 5.27 of this chapter are not mandatory. And so contracting parties A and B can insert a clause, or orally agree, that the Act will be excluded, or that particular provisions of that statute will not apply. The effect will be that no third party benefits will arise under the Act, or at least that section 8(1) and/or section 8(2) of that statute will not apply. The Act does not spell out this possibility of exclusion. But the power is implicit and the Law

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Commission itself discussed this.19 In fact, many commercial documents contain a clause excluding the 1999 Act.

Section 8(1), Contracts (Rights of Third Parties) Act 1999 20

5.13 This legislation is specific to England and Wales. Section 8(1) empowers a third party T to sue party A in arbitration proceedings if the contract between parties A and B confers a direct right of action on T to obtain a benefit (such as the payment of money by A to T). The identity of third party T must be clearly ascertainable, although T need not be named.21 5.14 For example, the contract between A and B might require A to pay £1,000,000 to T. The same contract, as between A and B, might also provide that disputes arising from this transaction are to be arbitrated. The result is that section 8(1) will give T a procedural right. This means that if A fails to pay T, T’s substantive right to receive payment (this right arising under section 1 of the 1999 Act) will operate in parallel to T’s procedural opportunity to sue A using arbitration. 5.15 In fact this arbitration ‘opportunity’ operates on T as a procedural constraint: T cannot use the court process when suing A for the promised sum. Instead T’s capacity to realise the substantive benefit of party A’s promise (the claim for the unpaid £1,000,000) is prima facie confined to arbitration, unless A waives that requirement (as where A commences active judicial proceedings, or A submits to T’s commencement of court proceedings).22 5.16 In short, section 8(1) is structured so that third party T’s access to arbitration arises only because T has acquired the substantive right to payment by party A; and T’s

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only procedural route to gaining such payment is arbitration (unless the debtor, A, waives that procedural restriction). 5.17 Section 8(1) was applied in Nisshin Shipping Co Ltd v Cleaves & Co Ltd.23 In this case party B had chartered A’s ship and third party T had brokered this deal. The charter-party stated that T should receive a specified commission payable by A, the shipowner. The charterparty further provided that ‘any dispute arising’ between A and B should be referred to arbitration. In the Nisshin Shipping case it was conceded by counsel that T also had (in addition to the 1999 Act right of action) a right under a trust of a promise24 (an equitable right conferred on T as third party) to sue A (B having defaulted in his trustee duty to sue A on T’s behalf). That concession was made on the basis of House of Lords authority (Walford’s Case), which was directly in point.25 5.18 Colman J held that T’s right to the specified commission, a substantive right arising under section 1 of the 1999 Act could, and should, be brought by arbitration, as stated in section 8(1) of that Act. There would be no need for T to join B as a party to the arbitration reference: the arbitration would be between T and A, B having dropped out of the picture. Colman J’s opinion that recourse by T in this context to arbitration is the mandatory form of procedure is consistent with general principle. Thus, it is widely accepted that where statute or assignment26 confers a right of action on a third party, T, against party A, T cannot rely on the substantive terms of the contract between the contracting parties A and B without submitting to the arbitration clause applicable as between A and B.27 5.19 But Colman J also held that section 8(1) would not help T to bring the trust of a promise claim (see text at note 21) because that subsection is only concerned with claims against A founded on section 1 of the 1999 Act and not with any rights of action exercisable by a third party and arising independently of that Act. 5.20 And so T was at the parting of the procedural ways, at a fork in the road. If he wished to assert his right to payment under section 1 of the 1999 Act (as a statutory third party beneficiary expressly or impliedly entitled to this sum), T could and indeed must bring arbitration proceedings against A; alternatively, if T elected to bring his claim against A on the basis that T was the beneficiary of a trust of the promise made by A to B, T could procedurally vindicate that non-statutory right only by resort to court proceedings.

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Section 8(2), Contracts (Rights of Third Parties) Act 1999: a pure right of arbitration conferred on a third party 28

5.21 Under section 8(2) the right to arbitrate can be conferred as an autonomous right by A and B on T (contrast section 8(1) of the 1999 Act, noted at paragraphs 5.13–5.20, where T’s involvement in arbitration as against A follows from the promise by A of a substantive benefit to T, such as payment of money by party A to the third party T). The identity of T must be clearly ascertainable, although T need not be named.29 And so a right created under section 8(2) confers on third party T the unilateral power to insist 30 that any dispute between T and A should proceed to arbitration (A is the promisor who has conferred this section 8(2) autonomous arbitration right). But T could decide not to resort to arbitration and instead to bring court proceedings against A or to acquiesce in court proceedings brought against T by A. 5.22 Section 8(2) is thus structured so that T’s access to arbitration is in effect a floating right, exercisable by T (but also capable of being waived by T) should any dispute arise between T and A. This provision would appear capable, therefore, of empowering a range of prospective parties to gain the right to arbitrate. But section 8(2) does not place the relevant targeted third parties under an obligation to arbitrate. And so section 8(2) cannot be used to create a barrier to justice by precluding third parties from having access to courts. 5.23 It is possible that an arbitration right, conferred under section 8(2), could have been useful in the context that gave rise to a notorious contractual saga in Alfred McAlpine Construction Ltd v Panatown.31 In this case a clause stipulated for arbitration between parties A and B, parties to a building contract. But the economically interested third party, T, the owner of the land, was not party to that arbitration agreement. Court proceedings brought by party B against party A proved abortive because the House of Lords held that B could not recover substantial damages on behalf of T. The technical obstacle was that T had a direct contractual action against party A under a deed, which imposed a duty of care on party A in the performance of the building contract. Party A and party T had entered into this deed by way of side agreement at the time the main building contract (between the builder, party A, and the contractor, party B) had been formed. 5.24 Following the 1999 Act, the procedural stalemate in this case can be avoided if the A/B contract contains a clause in favour of third party T empowering T to bring a claim by arbitration. This right to arbitrate would take effect under section 8(2) of the 1999 Act. Another solution would be to insert an arbitration clause into the deed between A and T.

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Opt-in multi-party arbitration

5.25 In principle, an arbitral tribunal can be consensually clothed with the power to engage in that type of enlarged form of arbitration. This would be consistent with the voluntary principle because each party would need positively to opt in.

Representative proceedings and opt-out systems

5.26 Where the class of potential claimants (perhaps respondents) is large, it might be desirable to have representative arbitral proceedings, that is, arbitration conducted by a representative32 claimant acting on behalf of other identically or similarly placed ‘victims’. Are such representative proceedings possible in arbitration? The voluntary principle would require the representative to be party to an arbitration agreement. The persons represented would also need to have agreed to such proceedings and to this particular mechanism. Such agreement (in writing) would need to occur in advance or at the time of submission of the dispute to arbitration. Awards would be declared binding on both the representative and the represented.33 5.27 Although objections to such awards might be made by either represented persons (who have lost or not won well enough) or the defeated respondent, such a jurisdictional objection would appear to be unsound. There will have been no breach of the consensual principle: each type of objector will in fact not have been taken by surprise and will have consented in writing to this type of process. A positive award would appear to be enforceable under the law of the seat, and be accorded res judicata effect also. Whether it would be upheld under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) might be less straightforward.

Revisiting ‘party consent’

5.28 The traditional34 manifestation of consent in arbitral practice is a written35 arbitration agreement. The agreement provides a direct nexus linking the relevant party to the proposed arbitral proceedings. But where the agreement refers to the rules of a nominated

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arbitration institution, it is obvious that the parties are acceding to a more complex set of contractual restrictions and benefits. They are contracting into an institutional system of regulation. They have incorporated that system ‘by reference’. That basic and uncontroversial feature of institutional arbitration agreements can provide the foundation for more creative arrangements necessary to solve problems of joinder of additional parties (including large claims affecting cohorts of interested persons) and consolidation of related arbitration proceedings. 5.29 Each party’s ex ante consent to having any relevant or specified dispute(s) subject to a nominated arbitration institution is the basis on which that assenting party becomes contractually subject to procedural arrangements contained in those institutional rules. Those institutional provisions are the rules of the arbitral game to which each party has subscribed. Those rules have been formulated in the interest of economy and fairness to ensure the fair disposal of subsequent arbitral proceedings. Such a subscription to institutional rules is to be conceptualised as party accession to a multilateral contract administered by the relevant arbitral institution or network of arbitral institutions (where institutions have contractually interacted by linking their procedural rules). The analogy in English contract law would be cases liberally recognising party membership of complex contracts (yachting contests,36 on which see paragraphs 5.31 to 5.42, and unincorporated associations). As for the latter context, in Re Recher’s Will Trusts, Brightman J offered this contractual analysis of the relations between members of an association:37

persons [are at liberty to] band themselves together as an association or society … in pursuit of some lawful … purpose. An obvious example is a members’ social club…. [The] rights and liabilities of the members of the association will inevitably depend on some form of contract inter se, usually evidenced by a set of rules. In the present case it appears to me clear that [all relevant members] … were bound together by a contract inter se. Any such member was entitled to the rights and subject to the liabilities defined by the rules…. The resultant situation, on analysis, is that the London & Provincial society represented an organisation of individuals bound together by a contract … Just as the two parties to a bi-partite bargain can vary or terminate their contract by mutual assent, so it must follow that [members] … could, at any moment of time, by unanimous agreement (or by majority vote, if the rules so prescribe), vary or terminate their multi-partite contract…. The contract is the same as any other contract and concerns only those who are parties to it, that is to say, the members of the society.

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