Parent company bound by subsidiary’s agreement to arbitrate under applicable Russian law

A recent High Court decision has clarified the circumstances in which a party is entitled, or indeed bound, to be included as a party to an arbitration even though it was not a signatory to the arbitration agreement.

22 December 2015

The recent decision in Ashot Egiazaryan and Vitaly Gogokhiya v OJSC OEK Finance and The City of Moscow [2015] EWHC 3532 (Comm) has clarified the circumstances in which a party is entitled, or indeed bound, to be included as a party to an arbitration agreement to which they are not a signatory.

This case has arisen out of an arbitration award and a subsequent challenge pursuant to s.67 of the English Arbitration Act 1996. The original claim is in tort by reference to Russian Law, namely Article 1064 of the Russian Civil Code (Гражданский кодекс Российской Федерации, Статья 1064), which provides that “harm caused to the personality or property of a citizen or legal entity shall be subject to compensation in full by the person who has caused the harm.”  The core of the claim related to allegations that the respondents initiated the redistribution of a company’s ownership by a combination of legal, illegal and illegitimate means and through pressure exerted by implementation of corporate raids.

Pursuant to Article 105 of the Russian Civil Code (Гражданский кодекс Российской Федерации, Статья 105) a parent company is jointly and severally liable with its subsidiaries for contracts entered into by the latter.  The arbitration tribunal sitting in London concluded that this included the liability to perform the arbitration agreement.  However, on the basis of the long-standing principle that English law governs who is a party to an arbitration agreement and as the arbitrators concluded that the proper law of the agreement was English law, the tribunal concluded that Article 105 did not have effect.

The High Court disagreed with this conclusion.  Burton J noted that at English law on many occasions parties who are not signatories of an arbitration agreement may be entitled or bound to be parties to an arbitration. Such circumstances include: agency, lifting of the corporate veil, succession, merger or assignment. English law is most certainly the starting point for the analysis where the arbitration has its seat in England, however, putting the question into proper context, English conflicts rules may lead to the conclusion that another system of law applies.

Burton J referred to the comments by Lord Collins in Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46 at paragraphs 105 and 106:

“one of the most controversial issues in international commercial arbitration is the effect of arbitration agreement on non-signatories. Arbitration is a consensual process, and in each type of case the result will depend on a combination of (a) the applicable law; (b) the legal principle which that law uses to supply the answer (which may include agency, alter ego, estoppel, third-party beneficiary); and (c) the facts of the individual case.”

In this instance, Burton J was explicit that the “applicable law” is not necessarily the proper law of the agreement. Instead he noted that English choice of law rules would look to the law of the domicile of a party in relation to a parent’s liability for obligations entered into by its subsidiary. He further noted that in the context of entering into a legal transaction, all matters concerning the constitution of a corporation are governed by the law of the place of incorporation.

For these reasons Burton J ruled that even though the first respondent (The City of Moscow) had not been a signatory to the arbitration agreement, under Russian law, which was the law of incorporation of its subsidiary (OJSC OEK Finance), it was bound by the arbitration agreement. Furthermore English law, as the law of the agreement, will look to local law to decide whether such group companies should be joined as a party.

The Egiazaryan case forms another step in the court’s analysis of choice of law as it has recently been active in doing so in Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] EWCA Civ 638, where the Lord Justices of Appeal considered the effect of inconsistent dispute resolution provisions and formulated a three stage test to determine the law of an arbitration agreement and provided useful clarification as to which law should apply where none is expressly stated.

The Egiazaryan case is an interesting example of the complex network of different national laws that may be applicable to issues in an international commercial arbitration.  It also illustrates the importance of considering the laws of the places of incorporation of signatories to arbitration agreements and how those laws may impact on the parties’ obligations.  In addition it may also be prudent to reassess active agreements to determine where liability may lie.