Economic reality of groups of companies (yes) / Conditions for extending the scope of an agreement to arbitrate to companies the majority of whose shares are owned by a signatory of the contract containing the agreement to arbitrate: active role in the contractual negotiations or direct implication of the companies in the contract containing the agreement to arbitrate / Nonextension to companies in the group that do not meet either of these conditions / The notion of the principal shareholder as guarantor of the companies he controls is inimical to all concepts of representation / Right of the beneficiary of a stipulation to invoke the arbitration clause agreed to by the stipulating party (yes)

The dispute involves as Claimants 'Mr Paul' and three companies of which he is, directly or indirectly, the main shareholder. These companies, ADA, BDB and CDC, operate luxury hotels in France. In 1987 a Protocol was signed by Mr Paul and Company Z (Defendant) to create a hotel group. According to this protocol, ADA was to receive an infusion of funds by Mr Paul and by Z, the parties' common goal being to merge their shares in ADA into a holding company. To this end Mr Paul was therefore to assign to ADA the shares he owned in various companies under his control.

The steps undertaken to implement this scheme did not succeed. Mr Paul, together with ADA, BDB and CDC, now demand that Z be compelled to compensate them for the damages they have suffered because the protocol was not implemented.

The agreement to arbitrate in the protocol provides that the arbitration shall take place in Paris and that the arbitral tribunal will be empowered to arbitrate as 'amiable compositeur ex aequo et bono'.

'JURISDICTION OF THE ARBITRAL TRIBUNAL

Whereas Z contests the arbitral tribunal's jurisdiction over the present dispute; the grounds for this claim are subdivided into a claim of absence of jurisdiction over the persons bound by the agreement to arbitrate and a claim of absence of jurisdiction because of the extracontractual nature of this dispute;

A. Jurisdiction over the Parties

Whereas it is undisputed that Mr Paul alone signed the arbitration clause included in the 1987 Protocol; in order nevertheless to justify the jurisdiction of the arbitral tribunal over the other claimant companies the latter rely on the "group" concept and the fact that Mr Paul would have played a leading role in these companies, all of which together might be called the "Paul Group"; that to support this analysis the companies argue that Mr Paul owns a large majority of the shares of each of them and that the failure of Z would have had damaging consequences not only for Mr Paul himself but also for the companies in his group;

Whereas, without denying the economic reality of a "group of companies", the scope of an arbitration clause may be extended to nonsignatory companies with separate legal significance only if they played an active role in the negotiations leading to the agreement containing the clause, or if they are directly implicated in the agreement.

Whereas in the present case, the purpose of the 1987 Protocol was to assign funds to a company (ADA) in which Mr Paul held 56% of the shares, to bring it under the control of a holding company owning some 75% of the company's capital and in which Mr Paul would have owned 50.1 % and Z 49.9% of the shares; that more particularly concerning Mr Paul, he was to assign 102,631 BDB shares and 4,074 XXXX shares directly or indirectly owned by him, and all the YYYY shares directly or indirectly owned by him;

Whereas in light of these facts, the benefit of the arbitration clause can only be extended to the companies in the "Paul Group" that have effectively taken part in the negotiations that led to the Protocol of 1987 or that are directly implicated by the said Protocol, excluding those which have been no more than instruments in a financial operation of a majority shareholder who used at will the shares he owned in these companies; whereas indeed a company, one of whose shareholders, even though a majority shareholder, parts with shares of the company, cannot claim to have any rights arising out of such an assignment of property; therefore a distinction must be drawn between the various claimant companies in the "Paul Group";

1) Whereas the transfer to ADA of the 102,631 shares belonging to Mr Paul does not allow BDB, for the abovestated reasons, to claim that it is implicated by the Protocol of 1987 and thus bound by the arbitration clause included in the Protocol; Mr Paul has done no more than dispose of, at his discretion, shares he owned, directly or indirectly, without committing BDB as an independent legal entity; the majority position held by Mr Paul in that company does not in any way alter this situation; it is indeed clearly stated in the 1987 Protocol that the shares assigned by Mr Paul to ADA are assigned by himself or by the companies under his control "for which he answers" ("se porte fort"); the very concept of surety is inimical to any idea of representation since someone answering for someone else only commits himself, without committing the person whose agreement he promises under his own responsibility; in the absence, therefore, of any representation and considering that Mr Paul could part personally with the shares he owned as shareholder of BDB, the latter's claim does not fall within the jurisdiction of the arbitral tribunal;

2) Whereas, for identical reasons, the same solution must be applied to CDC, part of whose share capital was to be assigned by Mr Paul to ADA; it should furthermore be added, as a special circumstance, that the shares owned by Mr Paul were to be assigned to Z to begin with, to be subsequently assigned by the latter to ADA; thus CDC cannot claim that it was part of the "Paul Group" at the time of the assignment, in order to benefit through the latter from the agreement to arbitrate; it therefore has no right to avail itself of the arbitration clause establishing the jurisdiction of the arbitral tribunal to deal with its claim;

3) Whereas, on the other hand, ADA's position differs greatly from that of the other abovementioned companies, insofar as it was ADA that, following the Protocol of 1987, was to receive the shares to be assigned to it by Mr Paul and Z; it was thus primarily implicated by the 1987 Protocol, which was specifically drawn up in order to "create a powerful group based on a company with officially listed shares", i.e. a group based on ADA (Art. 61 of the Protocol); quite obviously ADA was in the center of all these negotiations, so much so that in its absence the 1987 Protocol would have been pointless;

Whereas the Protocol contained at least one stipulation made by a third party in favour of ADA, which was to be the beneficiary of the promised capital infusion and thus become the parent company of a group which the parties agreed to set up; while it is accepted that the beneficiary of such a position cannot be made to comply with an arbitral award resulting from proceedings where it was not represented, it may, however, request as claimant the right to submit its claim to arbitration in accordance with an arbitration clause;

Whereas lastly all the provisions in favour of ADA were implicitly accepted by the latter which, to implement the Protocol, took all the preliminary steps necessary to convene an extraordinary shareholders' meeting to amend its own articles of association; that though this shareholders' meeting could not take place because the triggering condition provided in the 1987 Protocol was not met, it nevertheless implicitly showed by its behaviour, at a time when it could still be thought that the said Protocol would be enforced, its desire to implement the provisions in its favour and in particular the arbitration clause, an integral part of this agreement;

Whereas for these reasons while the jurisdiction of the arbitral tribunal is to be denied on the claims submitted by BDB and CDC, it is, on the other hand, to be ruled that the arbitration clause signed by Mr Paul extends to ADA;'