1. INTRODUCTION

Contrary to its title, this article does not pretend to know the 'right' track, even less to be able to guide readers 'back' on to the right track. It is an attempt to present the doctrine of piercing the corporate veil in the context of arbitration and to distinguish it from other legal theories, in particular the group of companies doctrine.

The doctrine of piercing the corporate veil, also known as Durchgriff in German or levée du voile social in French is difficult to define because it has been developed in different jurisdictions and varies in the different legal systems.

However, the following interesting elements can be found in Garry Born's book on international commercial arbitration:

"the essential theory is that one party so dominates the affairs of another party, and has sufficiently misused such control, that it is appropriate to disregard the two companies' separate legal forms and to treat them as a single entity."1

The doctrine is hence an exception to the principle that corporations generally benefit from limited liability and separate legal identity. The exception is justified by elements of fairness, or, to put it differently, the doctrine is an expression of the general principle that substance should prevail [Page147:] over form when adherence to form would be abusive. as one arbitrator has put it:

"la question qui se pose à la fin est celle de savoir dans quelle mesure la fiction juridique de la personnalité morale doit céder le pas devant les réalités du comportement des hommes et cesser de protéger ceux qui se cachent derrière le voile social." 2

Along similar lines, the US Court of appeals for the Second Circuit has stated the following:

"Ultimately, the question in any particular case is whether, in light of the circumstances, 'the policy behind the presumption of corporate independence and limited shareholder liability - encouragement of business development - is outweighed by the policy justifying disregarding the corporate form - the need to protect those who deal with the corporation." 3

2. PIERCING THE CORPORATE VEIL IN THE CONTEXT OF ARBITRATION

The doctrine can be used in different contexts and serve different purposes. Most commonly, it is used to hold a shareholder liable for the liabilities of its corporation. In that respect, one commentator has referred to the concept of 'piercing for liability'. 4

In arbitration, the doctrine has also - or essentially - been used to extend the arbitration agreement to non-signatories.

In that respect, piercing the corporate veil is one of many other theories permitting, under certain circumstances, the extension of the arbitration agreement to non-signatory third parties. 5

The 'extension' can be based on other theories, in particular contract law theories. It is likely that the different theories will overlap to some extent or at least that they will be invoked in the same cases. This is simply because the same factual scenario is likely to support arguments based on contract as well as on the doctrine of piercing the corporate veil. 6

There is a broad variety of contract law concepts that may be used to extend an arbitration agreement, such as agency, including apparent or ostensible [Page148:] authority, 'assumption of debt', tacit ratification of the contract, third-party beneficiary doctrine or estoppel and the abuse of right doctrine. 7

I will not enter into such concepts, but it is important to stress the primary role of these classic contract law theories in resolving questions relating to the extension of the arbitration agreement. as Redfern et al. put it, in relation to the doctrine of piercing the corporate veil, '[m]ore established principles of private law - such as assignment, agency and succession - thus remain the surest way in which to bind a third party to an arbitration agreement'. 8

In practice, one sometimes notes the opposite, namely parties writing pages on piercing the corporate veil and not a word on apparent authority arguments.

3. PIERCING THE CORPORATE VEIL AND THE GROUP OF COMPANIES DOCTRINE

The 'extension' of the arbitration agreement can also be based on the group of companies doctrine, which leads us to the relationship between the corporate veil-piercing doctrine and the group of companies doctrine. The group of companies doctrine has been dealt with in detail by yves Derains, but it is important for our purposes to distinguish it from the doctrine of piercing the corporate veil. although they are different, these two theories are too often treated according to the same standards or mixed up.

Piercing the corporate veil doctrine focuses on the fraud or the abuse of right resulting from the use or abuse of a corporate form in order to limit the liability of the real party.

The group of companies doctrine focuses on the determination of the intention - or the presumed intention - to arbitrate. The fact that the nonsignatory belongs to a group of companies is merely one factor to take into account in order to determine such presumed intention.

The differences between the two theories are convincingly highlighted by Gary Born, who states that there is a 'fundamental difference between the alter ego doctrine and the group of companies doctrine'. He further states:

[Page149:]

"The alter ego theory is a rule of law that is invoked to disregard or nullify the otherwise applicable effects of incorporation of separate legal personality. The outcome of this analysis is that one entity is deemed either non-existent or merely an unincorporated part of another entity. […] In contrast, the group of companies doctrine is ordinarily a means of identifying the parties' intentions, which does not disturb or affect the legal personality of the entities in question." 9

The doctrine of piercing the corporate veil therefore pertains to company law, whereas the group of companies doctrine is predominantly a contract law theory. 10 This characterization has an impact on the identification of the applicable laws (see below).

The group of companies doctrine is also broader in the sense that it casts a wider net to catch non-signatories. It is also more controversial and, according to some authors, not necessarily in line with the expectations of the business community.

Finally, the group of companies doctrine is essentially a French doctrine that has not been recognized in other jurisdictions and is specific to arbitration, whereas the doctrine of piercing the corporate veil is much more widespread, if not universal.

In summary, the two doctrines are specific and must be distinguished, although this is not always done. as an example, an - otherwise excellent - book contains the following subtitle 'piercing the corporate veil within groups of companies'. 11 In my opinion, this is a perfect illustration of the confusion between the two theories.

4. PIERCING THE CORPORATE VEIL IN ARBITRAL AWARDS

For the purposes of the present analysis, I have examined published arbitral awards that applied the doctrine of piercing of corporate veil or the group of companies doctrine.

This review is not meant to be exhaustive and is limited to publicly available awards. It obviously has no statistical value. 12 Nevertheless, some interesting conclusions can be drawn from these arbitral awards:

[Page150:]

1. The two doctrines are effectively mixed up in practice. 13 Sometimes, one does not really know which doctrine is being applied by the arbitrators. By contrast, one can mention ICC award no. 10818, which clearly distinguished the two theories. 14

2. The doctrine of piercing the corporate veil, when properly distinguished, is often based on: (i) a conflict of law analysis; and (ii) the application of a specific domestic law, 15 whereas the group of companies doctrine is often based on trade usages. 16

3. Cases involving the extension of an arbitration agreement based exclusively on piercing the corporate veil are rare and show the reluctance of arbitrators to rely only on this theory. 17

5. PIERCING THE CORPORATE VEIL IN SOME JURISDICTIONS

It is outside the scope of this article to examine in detail the doctrine of piercing the corporate veil as it has been applied by national courts in the context of arbitration. It is sufficient to note that this doctrine has been widely recognized as a means of extending the scope of arbitration agreements in exceptional circumstances. 18 The following examples from uS, French and Swiss case law serve as an illustration of this principle.

In the United States, several decisions have applied the doctrine of piercing the corporate veil in relation to the extension of an arbitration agreement. 19

The corporate veil is pierced only in exceptional circumstances, generally when an 'element of fraud or other wrong' can be demonstrated. In Fisser v. International Bank, the US Court of appeals for the Second Circuit adopted a three-pronged test for disregarding the separate entity of a corporation:

"(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and (2) Such control must have been used by the <page nr="151" /> defendant to commit fraud or worse, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiff 's legal rights; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. (247 App. Div. 144, 287 N.Y.S. 76)."20

This test has frequently been referred to in subsequent decisions. 21

The courts apparently refer to the same standards as those that apply for holding a corporation responsible for the contractual obligations of another entity. The US District for the Southern District of New York stressed this point in the following terms:

"Under appropriate circumstances, a corporation which was not such a signatory may be held bound to arbitrate a dispute in which it is involved. However, the principles utilized to determine whether in such cases, arbitration is appropriate are merely those which are employed in other contractual disputes to ascertain whether, on some theory, it is just to disregard independent corporate existence and hold one corporation responsible for the contractual obligations of another." 22

In France, the courts do not seem to have applied the theory of the levée du voile social specifically in relation to the extension of the arbitration agreement. This can be explained by the prevalence of the group of companies doctrine before French courts. 23

The group of companies doctrine was sufficient to address those situations that, in other jurisdictions, could have led to an analysis based upon the doctrine of piercing the corporate veil.

However, the concept of fraud is not unknown in French case law. In the Orri case, the Paris Court of appeal and the French Cour de cassation relied upon this concept to extend the arbitration agreement. 24 This notion of fraud was even the only basis for extension in the decision of the French Cour de cassation, which ruled as follows:

"[…] attendu que par divers éléments qu'elle a caractérisés, la Cour d'appel, a relevé que 'Saudi-Europe Lines' n'était que l'appellation sous couvert de laquelle M. Orri exerçait personnellement le commerce maritime et que ce n'est que par un subterfuge, constitutive de fraude, destiné à dissimuler le véritable contractant, que celui-ci <page nr="152" /> s'est effacé pour laisser place au signataire déclaré; qu'ainsi et par ce seul motif, la Cour d'appel a, justement décidé, à la suite des arbitres, que la clause compromissoire engageait M. Orri."

In Switzerland, the doctrine of piercing the corporate veil is possible in cases of 'abuse of right', but the case law has traditionally been very reluctant to disregard the legal entity of a corporation. 25 In addition, Swiss case law has clearly distinguished between piercing the corporate veil for liability and piercing the corporate veil for extending arbitration agreements. 26

Following a judgment delivered in 1996, it was even doubtful whether the latter was available, at least in situations where the piercing of the corporate veil was based on insufficient capitalization of the subsidiary. In such a case, the Swiss Federal Tribunal stated that the parent company would not be held jointly liable with the subsidiary, but only after it has been established that the subsidiary was insolvent and that the liability of the parent company would be not covered by the arbitration agreement. 27

More recently, however, the Swiss Federal Tribunal has issued a judgment confirming that the doctrine of piercing the corporate veil can be used to extend the arbitration agreement. 28 Federal Judge Bernard Corboz has recently expressed the same opinion. 29

However, some scholars stress that, in case of echte Durchgriff, the arbitration agreement would not be extended but that the non-signatory would replace the signatory. 30

6. AN ATTEMPT TO DEFINE THE RIGHT TRACK AND TO HIGHLIGHT POSSIBLE ISSUES FOR REFLECTION

The starting point of the analysis is always the legal independence of the signatory (to the extent that it is a legal entity). piercing the corporate veil is and should remain an exception that is based on fairness. Control of the signatory by the non-signatory party is necessary but not sufficient for applying the doctrine. 31 Control must have been used to commit fraud or an abuse of right. In fact, the essence of the doctrine lies in the abuse of right of the corporate form.32 one arbitral tribunal expressed this idea in the following terms:

[Page153:]

"En résumé, l'appartenance de deux sociétés à un même groupe ou la domination d'un actionnaire ne sont jamais, à elles seules, des raisons suffisantes justifiant de plein droit la levée du voile social. Cependant, lorsqu'une société ou une personne individuelle apparaît comme étant le pivot des rapports contractuels intervenus dans une affaire particulière, il convient d'examiner avec soin si l'indépendance juridique des parties ne doit pas, exceptionnellement, être écartée au profit d'un jugement global. On acceptera une telle exception lorsqu'apparaît une confusion entretenue par le groupe ou l'actionnaire majoritaire." 33

Such abuses can be very diverse, and it is not possible to enter into all possible scenarios. In any event, the analysis is very much fact-oriented, and it is therefore difficult to compare one case to another.

With respect to the effect of the doctrine, the doctrine may or may not result in the extension of the arbitration agreement itself. This point is in fact very delicate and deserves greater attention. It is important to realize the difference between piercing for liability and piercing for jurisdiction.

It is also important to realize that the effects of the doctrine may vary depending upon the applicable law or even upon the specific circumstances of the case.

If a parent company is liable as a result of the piercing of the corporate veil, will it be solely responsible, jointly responsible (together with the affiliate) responsible only if the affiliate cannot pay? The answer to this question is not obvious and in fact not uniform.

It is also worth noting that, if the parent company is liable, this does not necessarily imply that it is also bound by the arbitration agreement. It is crucial to distinguish between the jurisdictional issue and the liability on the merits. 34 These issues are too complex to be addressed here in detail with regard to the different domestic laws. My aim is simply to draw attention to these questions and to note that it is too often assumed, without real justification, that the doctrine of piercing the corporate veil entails joint liability and the extension of the arbitration agreement.

[Page154:]

Piercing the corporate veil does not require that the intention of the nonsignatory third party be expressed in writing. There was an important debate in Switzerland on this question. The Swiss Federal Tribunal has now clearly taken a position by holding that there is no formal requirement to extend the arbitration agreement. 35

As long as there is an arbitration agreement in writing, it can be interpreted and extended to third parties even if the third parties did not express their intention in writing. I consider that this case law is not wrong, given the fact that the doctrine is based on an abuse of right.

The question regarding the applicable law is difficult and has apparently not been dealt with extensively. If the theory pertains to company law, the place of incorporation of the company should be the starting point of the reasoning. 36 But which company: the signatory or the non-signatory? In addition, since the doctrine is designed to correct the effect of the law based on good faith, the place of residence of the contracting party, which invokes the abuse, could also play a role. I do not pretend to have exhausted the topic of the applicable law, but would merely like to point out the difficulty - and importance - of this issue.

When the issue of the applicable law is difficult or uncertain, one can be tempted to refer to 'transnational' or 'uniform' rules or standards, which avoid such difficulties. This approach is advocated by Born, who states as follows:

"As with the doctrines of apparent authority and estoppel, it is artificial to select the law of any particular national jurisdiction to define those circumstances in which basic principles of fairness and good faith in international business dealings require disregarding a corporate identity conferred by national law and subjecting a party to an international arbitration agreement. Rather, uniform international principles better achieve the purposes of the veil piercing doctrine, without materially interfering with the parties' expectations."37

However, it appears that, with respect to the doctrine of piercing the corporate veil, such a 'transnational' approach does not find great support in the case law or in arbitral awards. as pointed out above, courts and arbitrators usually base the doctrine on national law standards. In fact, I have found only one award that expresses a preference for the use of transnational standards for piercing the corporate veil.

[Page155:]

7. CONCLUSIONS

In conclusion, based on my review of the case law and awards, I would say that the doctrine of piercing the corporate veil, when correctly identified and applied independently and not in conjunction with the group of companies doctrine, seems to be rather on the right track.

It is applied seriously, not too extensively and consistently by both courts and arbitral tribunals. In particular, I did not find inconsistent standards depending upon whether the doctrine was applied by arbitrators or by courts.

What is missing, however, is a more detailed analysis of the effects of this doctrine. This is a topic that would benefit from further investigation.

[Page156:]

1
G.B. Born, International Commercial Arbitration (Kluwer Law International, 2009) p. 1154.

2
ICC case no. 8385, JDI (1997) pp. 1061 et seq., 1067.

3
Carte Blance Pte v. Diners Club International, Inc. et al., 2 F.3d 24 (2d Cir., 1993) at 26, citing Wm Passalacqua Builder, Inc. v. Resnick Developers South, Inc., 933 F.2d 131 (2d Cir., 1991) at 139.

4
See generally K. Vandekerckhove, Piercing the Corporate Veil (Kluwer Law International, 2007).

5
It has been often noted that the terms 'extension' of the arbitration agreement to 'non-signatories' are not only awkward in English but also not absolutely accurate. First, because the issue is not to extend the arbitration agreement but to determine who are the real parties to it, irrespective of the language that was used in the clause. Secondly, because the signature is not the decisive criterion for deciding who is a real party. nevertheless, I will comply with the apparently dominant terminology and refer to the extension of the arbitration agreement to non-signatories in this article.

6
W.W. Park, 'non-Signatories and International Contracts: an arbitrator's Dilemma', in Multiple Party Actions in International Arbitration (oxford university press, 2009) p. 4, para. 1.17.

7
Ibid., at p. 18, para. 1.64; a. Redfern et al., Law and Practice of International Commercial Arbitration, 4th edn. (london, 2004) p. 148, para. 3-30 and p. 150, para. 3-32; Y. Derains and E. A. Schwarz, A Guide to the ICC Rules of Arbitration (Kluwer Law International, 2005) p. 89; B. Hanotiau, 'problems raised by Complex arbitrations Involving Multiple Contracts - parties - Issues: an analysis', Jnl. Int. Arb. 3 (2001) p. 253 et seq.

8
Redfern et al., supra n. 7, at p. 151, para. 3-33.

9
Born, supra n. 1, at p. 1171.

10
See D. Cohen, 'l'engagement des sociétés à l'arbitrage', rev. arb. (2006) pp. 35 et seq., 60- 63.

11
Redfern et al., supra n. 7, at p. 148.

12
See the useful summaries and comparative chart in park, supra n. 6, at pp. 26-31.

13
ICC case no. 5721, JDI (1990) pp. 1020, 1023-1024; ICC case no. 9873, ICC Ct. Bull. 16(2) (2005) pp. 89-90; ICC case no. 10758, ICC Ct. Bull. 16(2) (2005) p. 91 = JDI (2001) p. 1171.

14
ICC case no. 10818, ICC Ct. Bull. 16(2) (2005) pp. 98, 100-101.

15
Ad hoc arbitration 1989, ASA Bul. (1990) p. 270 (applying Swiss and Italian laws); ad hoc arbitration 1991, ASA Bul. (1992) p. 202 (applying Swiss law); ICC case no. 7626, yCa (1997) p. 132 (applying english law); ICC case no. 8163, ICC Ct. Bull. 16(2) (2005) p. 81 (applying German law); ICC case no. 11160, ICC Ct. Bull. 16(2) (2005) p. 103 (applying venezuelan law); but see ICC case no. 8385, JDI (1997) p. 1061 (manifesting preference for international standards, but noting that New York and Belgian law would lead to the same result).

16
ICC case no. 4131, Dow Chemical, JDI (1983) p. 899; ICC case no. 6000, ICC Ct. Bull. 2(2) (1991) p. 31.

17
Among the awards cited above in footnote 15, only two (ICC case no. 8385 and ad hoc arbitration 1991) accepted the piercing of the corporate veil. See also ICC cases nos. 9719, 10818 and 11209, ICC Ct. Bull. 16(2) (2005) pp. 87, 98 and 106 (refusing to pierce the corporate veil). The orri award - ICC case no. 5730, Rev. arb. (1992) p. 125 - does not, in our opinion, belong to this category, although the arbitral tribunal accepted the extension of the arbitration agreement. The main argument was ostensible authority and ratification rather than, strictly speaking, piercing the corporate veil.

18
B. Hanotiau, Complex Arbitrations, Multiparty, Multicontract, Multi-issue and Class Arbitrations (Kluwer Law International, 2005) pp. 43-47; D. vidal, 'l'extension de l'engagement compromissoire dans un groupe de sociétés: application arbitrale et judiciaire de la théorie de l'alter ego', ICC Ct. Bull. 16(2) (2005) pp. 67-80; n. voser, 'Multi-party disputes and Joinder of Third parties', in a.J. van den Berg (ed.), ICCa: 50 Years of the New York Convention (Kluwer Law International, 2009) pp. 374-376.

19
Fisser v. International Bank, 282 F.2d 231 (2d Cir., 1960); Coastal States Trading, Inc. v. Zenith Navigation SA, 446 F.Supp. 330 (S.D.n.y., 1977); Farkar Co. v. RA Hanson Disc. Ltd., 441 F.Supp. 841 (SDny 1977); Laborers' Local Union 472 & 172 v. Interstate Curb & Sidewalk, 448 a.2d 980 (n.J. 1982); Federated Title Insurers, Inc. v. Ward, 538 So.2d 890 (Fla. Dist. Ct. app., 1989); Freeman v. Complex Computing Company, Inc., 979 F.Supp. 257 (S.D.n.y., 1997); Freeman v. Complex Computing Company, Inc., 119 F.3d 1044 (2d Cir., 1997).

20
Fisser v. International Bank, 282 F.2d 231 (2d Cir., 1960) at 237, citing Lowendahl v. Baltimore & Ohio R.R. Co., 247 app. Div. 144.

21
Coastal States Trading, Inc. v. Zenith Navigation Sa, 446 F.Supp. 330 (S.D.n.y., 1977) at 337; Glenn v. Wagner, 329 S.e.2d 326 (n.C., 1985) at 455; Federated Title Insurers, Inc. v. Ward, 538 So.2d 890 (Fla. Dist. Ct. app., 1989) at 891; Freeman v. Complex Computing Company, Inc., 979 F.Supp. 257 (S.D.n.y., 1997) at 1053.

22
Coastal States Trading, Inc. v. Zenith Navigation SA, 446 F.Supp. 330 (S.D.n.y., 1977) at 336.

23
J.-F. poudret and S. Besson, Comparative Law of International Arbitration (2007) p. 220, para. 257.

24
rev. arb. (1992) p. 95, with a note by Cohen (Paris); Rev. arb. (1992) p. 73, with a note by Cohen (Cas.); poudret and Besson, supra n. 23, at p. 219, para. 255.

25
Berger and Kellerhals, Internationale und interne Schiedsgerichsbarkeit in der Schweiz (2006) p. 184, para. 527; aTF 108 II 213; aTF 113 II 31.

26
aTF 120 II 155, c. 6d; poudret and Besson, supra n. 23, at pp. 222-223, para. 258.

27
ASA Bul. (1996) p. 496, c. 5-7; poudret and Besson, supra n. 23, at pp. 223-224, para. 258.

28
Decision of 25 august 2009, 4a_160/2009.

29
B. Corboz, in Commentaire de la LTF (Berne, 2009) p. 639, para. 105 ad art. 77.

30
Berger and Kellerhals, supra n. 25, at pp. 184-185, para. 528; voser, supra n. 18, at p. 378.

31
ICC case no. 5721, JDI (1990) p. 1020, 1024; ICC case no. 9873, ICC Ct. Bull. 16(2) (2005)pp. 89-90.

32
Hanotiau, supra n. 7, at p. 277; Born, supra n. 1, at pp. 1153-1154; poudret and Besson, supra n. 23, at p. 228, para. 264; ICC case no. 11209, ICC Ct. Bull. 16(2) (2005) pp. 106, 107.

33
ICC case no. 5721, JDI (1990) pp. 1020, 1024.

34
aTF 120 II 155, c. 6d; poudret and Besson, supra n. 23, at para. 258; l. lévy and B. Stucki,'note concernant l'arrêt du Tribunal fédéral suisse du 16 octobre 2003', Rev. arb. (2004) pp. 716-717.

35
aTF 129 III 727, c. 5.3.1; see J.-F. poudret, aSa Bul. (2004) pp. 390-397.

36
Park, supra n. 6, at p. 18, para. 1.64; J.D.M. Lew, l.A. Mistelis and S.M. Kröll, Comparative International Commercial Arbitration (Kluwer Law International, 2003) p. 147 (referring to the 'applicable company law'); but see Born, supra n. 1, at pp. 1163-1164 (advocating the application of 'uniform international principles').

37
Born, supra n. 1, at p. 1164.