Case No. 9. Can an arbitration clause be extended to a non-signatory party, and what are the relevant factors?

SUMMARY

1. The case - 1.1. The Letter of Intent and the Framework Agreement - 1.2. The arbitration clause contained in the Framework Agreement - 2. The regulatory context and applicable rules - 2.1. Joint and several liability of the Respondents and jurisdiction over Respondent 2 and Respondent 3 - 2.2. Estoppel - 2.3. Piercing the corporate veil - 2.4. Implied consent - 3. The Respondents' position: lack of jurisdiction of the arbitral tribunal over Respondents 2 and 3 - 4. The procedural order of the Arbitral Tribunal - 5. Concluding remarks

1. The case

1.1. The Letter of Intent and the Framework Agreement

On 10 April 2014, a letter of intent ("Letter of Intent" or "LOI") was signed between a Delaware corporation (herein referred to as "Respondent 3") belonging to the Alpha Group, interested in acquiring an Italian company ("Target"), and the selling shareholders owning 100% of Target ("Sellers" or "Claimants"). In particular, the extraordinary transaction was aimed at the acquisition, by the Alpha Group, of 100% of Target, through an Italian company to be incorporated under Italian law, Newco S.r.l. (herein referred to as "Purchaser" or "Newco" or "Respondent 1").

Subsequently, following the incorporation of Respondent 1 by the Alpha Group, a framework agreement ("Framework Agreement") was signed between the Claimants and Respondent 1. Respondent 3, signatory of the Letter of Intent, did not participate in the signing of the Framework Agreement.

The Claimants sued Respondent 1 (signatory of the Framework Agreement), as well as the parent company and sole shareholder of Respondent 1 (herein referred to as "Respondent 2") and Respondent 3 (signatory of the Letter of Intent) and related company, sharing a common holding company with Respondent 2. Herein, Respondent 1, Respondent 2 and Respondent 3 are referred to as "Respondents."

According to the Claimants' position, even though Respondent 2 and Respondent 3 are not signatories to the Framework Agreement, they are bound by the arbitration clause contained therein, as they were significantly involved in both the negotiations and the performance of the Framework Agreement. On the merits, the Claimants advance various arguments regarding the Respondents' obligation, under the Framework Agreement, to pay certain conditional price components (Earn Out) pursuant to the Framework Agreement.

In particular, the Claimants argue that the Respondents violated the principle of good faith and fair dealing, primarily (but not exclusively) because – prior to the signing of the Framework Agreement – they allegedly deliberately failed to reconcile the financial statements prepared by Target under Italian accounting principles (OIC) with US GAAP, in violation of Clause 3 of the Letter of Intent. Had the Respondents carried out such reconciliation, or at least informed the Claimants of the significant difference in the resulting equity value, the Sellers would not have agreed to sell Target under the terms set out in the Framework Agreement.

1.2. The arbitration clause contained in the Framework Agreement

The arbitration clause contained in Article 27 of the Framework Agreement provides as follows:

"This Agreement (together with all documents to be executed in implementation thereof, which are not expressly governed by another law) shall be governed, construed and performed in accordance with Italian law. All disputes between the Parties arising out of or in connection with this Agreement (including any question relating to the validity or effectiveness of this arbitration clause) shall be resolved by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce of Paris - I.C.C.

(hereinafter, for the purposes of this clause, also the 'Rules'), by an arbitral tribunal composed of three (3) arbitrators.

One arbitrator shall be appointed by the Claimant with the request for arbitration and the second shall be appointed by the other Party or, failing such appointment within 30 (thirty) days from the notification of the request for arbitration, by the Secretariat of the I.C.C. of Paris in accordance with the Rules.

The third arbitrator, who shall act as chairman of the arbitral tribunal, shall be appointed by the Parties' arbitrators within 30 (thirty) days from (i) the notification of the reply containing the appointment of the second arbitrator, or (ii) the communication by the I.C.C. Secretariat of the appointment of the Respondent's arbitrator. In the absence of agreement within such period, the appointment shall be made by the I.C.C. Secretariat in accordance with the Rules.

The arbitral proceedings shall take place in Milan (Italy) and shall be conducted in English. Italian substantive law shall apply.

The arbitral award shall be final and binding, and the arbitral tribunal shall have the power to charge the losing party, in whole or in part, with the costs and expenses related to the dispute."

The Framework Agreement is governed by Italian law.

2. The regulatory context and applicable rules

2.1. Joint and several liability of the Respondents and jurisdiction over Respondent 2 and Respondent 3

The Claimants' request to extend the arbitral proceedings to non-signatories of the Framework Agreement (Respondent 2 and Respondent 3) creates a strong legal tension between two fundamental principles: (i) preserving the consensual nature of arbitration, according to which a party that has not signed the arbitration clause cannot be called to the related arbitral proceedings, and (ii) the effectiveness and practical fairness of the arbitral award, through extension to related parties.

Although the arguments that follow originated predominantly in the context of Anglo-Saxon common law, they are based on the general principle of good faith: a principle well known in civil law jurisdictions. In Italian law, there are numerous references to good faith. The principle of good faith must govern not only the performance of the contract, but also its formation and interpretation.^[1] 

The general clause of good faith operates in relation to the conduct of the debtor and the creditor within the individual obligatory relationship (Article 1175 of the Italian Civil Code), but also in the pre-contractual phase (Article 1337 of the Italian Civil Code), during negotiation and performance of the contract (Article 1375 of the Italian Civil Code) and also in its interpretation (Article 1366 of the Italian Civil Code), in relation to the overall structure of the interests underlying the contractual relationship. The principle of good faith therefore applies at every stage of contract formation and performance and requires each party to act so as to balance reciprocal interests, regardless of the existence of specific contractual obligations or particular rules.^[2]

The obligation linked to the principle of good faith constitutes, as an expression of the general principle of social solidarity set out in Article 2 of the Italian Constitution,^[3] an autonomous and binding obligation.^[4] In this regard, legal scholars and case law have held that the criterion of good faith represents a tool for the judge to control, even in a modifying or supplementary manner, the content of the agreement, as a guarantee of a fair balance of conflicting interests.^[5]

Having made this premise, the following sections analyse the arguments in favour of the joint and several liability of the Respondents, as well as the arbitral jurisdiction over the non-signatories of the arbitration clause, namely Respondent 2 and Respondent 3.

2.2. Estoppel

Based on the principle of estoppel – an expression of the rule also well known in Italy^[6] of self-responsibility and the duty of consistency, summarised in the Latin maxim "nemo potest contra factum proprium venire" – a non-signatory party may be bound by an arbitration clause contained in a contract when such party "knowingly [and directly] accepts the benefits of a contract that includes an arbitration clause."^[7]

The doctrine of estoppel therefore prevents a party from denying the applicability of an arbitration clause when its claim is closely linked to the contract containing it, even against or in favour of a non-signatory.

In other words, according to the theory of estoppel, "a non-signatory may be required to submit a dispute to arbitration if the contract contained an arbitration clause, if the non-signatory was aware of the contract, benefited from it and did not raise objections to its terms."^[8]

Although the principle of estoppel originated in Anglo-Saxon law, over time it has been increasingly accepted and followed by the courts of civil law jurisdictions, particularly in matters of international arbitration,^[9] as an expression of the aforementioned principle of good faith.Currently, estoppel is considered a general principle of European Union law, and is peacefully recognised and applied by the Italian Court of Cassation.^[10]

In the case under analysis: (i) Respondent 2 and Respondent 3 had clear knowledge of the Framework Agreement, (ii) they had benefited from it in view of the objective of integrating Target within the Alpha Group and (iii) they had never raised objections to the terms of the Framework Agreement. On the contrary, Respondent 2 and Respondent 3 negotiated every aspect in detail and incorporated, only one week before closing, Respondent 1 (until that time a non-existent entity) in order to execute the Transaction and acquire Target.

The Claimants' position was that it was absolutely evident that the real and substantial parties to the acquisition transaction were, on the one hand, the Claimants and, on the other, all the Respondents (none excluded). In this regard, international case law holds that: "When the signatory raises claims concerning substantially interdependent and concerted conduct between the signatory and the non-signatory of the contract, and such conduct is connected to the contract containing the arbitration clause, resort to estoppel is justified." ^[11]

Italian legal scholars and case law ^[12] also hold that the principle of estoppel may bind the non-signatory to the clause because estoppel, although not explicitly mentioned in treaties, may derive its application from the general principles of EU law, particularly those guaranteeing legal certainty and good faith. 

2.3. Piercing the corporate veil

According to the Claimants' position, the use of Newco or Respondent 1 represents a clear example of distorted use of the rights connected to the legal personality of a company. Disregarding legal personality is a technique permitted by some legal systems to remedy cases of abuse of legal personality by the shareholders of a corporation. In Anglo-Saxon jurisdictions this technique is known as piercing the corporate veil.

In effect, Respondent 2 and Respondent 3 used Newco or Respondent 1, an "empty shell," exclusively to conceal and cover the real contractual counterparty (or counterparties) of the Claimants in the acquisition of Target. In other words, what occurred in the present case is the perfect example of abuse of rights (specifically, of the right to corporate legal personality): a situation diametrically opposed to the principle of good faith, and the only possible consequence of such abuse is the disregard of legal personality.

This principle (piercing of the corporate veil) is commonly accepted by both legal scholars ^[13] and case law, ^[14] in Italy and abroad:

"When the claims raised against the parent company and its subsidiary are based on the same facts and are inherently inseparable, a court may refer to arbitration also the claims against the parent company, even though it is not formally a party to the arbitration agreement."^[15]

"The mere fact that a party has not signed an arbitration agreement does not mean that it cannot be bound by it. It is the ordinary principles of contract law that determine who is bound. In appropriate situations, the corporate veil may be pierced and a party may be held bound to the arbitral forum as the alter ego of the signatory"; therefore, even where two entities are considered alter ego, the non-signatory ego must control the signatory in such a way as to avoid "perpetrating a fraud or something analogous to fraud" in order for the non-signatory to be bound by the arbitration agreement. ^[16]

In the present case, the claims against the parent company (Respondent 2) and its subsidiary (Newco or Respondent 1) are clearly identical. The parent company (Respondent 2) completely dominated the subsidiary (Respondent 1), with no respect for its legal autonomy.

To illustrate the disregard of legal personality connected to the principle of piercing the corporate veil, consider the following example widely cited by US legal scholars: "An entrepreneur might actively negotiate a purchase agreement containing an arbitration clause, but at the last moment have it signed by a company attributable to and controlled by him. An application to extend the arbitration clause to the entrepreneur could be based on the idea that the purchaser and seller intended to include the entrepreneur as a party to the agreement." ^[17]

In the present case, the "entrepreneur" is clearly represented by Respondent 2 and Respondent 3, who actively negotiated every aspect of the Framework Agreement, and who – at the last moment (just a few days before!) – had the Framework Agreement signed by Newco or Respondent 1, newly incorporated to become the contractual counterparty in the transaction.

Therefore, Respondent 2 and Respondent 3, although they did not formally sign the Framework Agreement, are – together with Newco or Respondent 1 – the real and substantial counterparties of the Sellers or Claimants, and must be considered directly and jointly and severally liable among themselves for the obligations set out in the Framework Agreement. Indeed, Respondent 2 and Respondent 3 and Newco or Respondent 1 have lost their distinct legal identity due to conduct demonstrating the abandonment of separateness.

In the case at hand, the parent company and the subsidiary: (i) shared offices and personnel; (ii) were managed by the same executives; (iii) had funds in common; (iv) did not operate with each other at arm's length; (v) were not treated as distinct profit centres.

In the case at hand, Respondents 2 and 3 actively participated in the negotiation of the Framework Agreement containing the arbitration clause, but at the last moment had it signed by a company owned and controlled by them, Newco or Respondent 1, as clearly emerges from a systematic reading of the Letter of Intent and the Framework Agreement.

Within the doctrine of "piercing the veil," the Claimants argued that fraudulent manipulation by the parent company of the Alpha Group over an undercapitalised subsidiary (Newco or Respondent 1) may justify not only the application of legal principles regarding the disregard of legal personality, but also the conclusion that the subsidiary (Newco or Respondent 1) acted simply by virtue of an "agency" relationship, as agent of the parent company, which would therefore be the true contracting party.

It was also pointed out that in the directorship agreement, the Sellers accepted a non-competition obligation – not only towards Newco or Respondent 1, but also towards all companies of the Alpha Group, expressly including Respondent 2 and Respondent 3. The clause containing the non-competition obligation also demonstrates the merely instrumental role of Newco or Respondent 1.

2.4. Implied consent

A further argument supporting the Claimants' position is based on the principle of "implied consent." According to this principle, a non-signatory party may be required to be a party to arbitral proceedings when its conduct manifests the intention to be bound by the arbitration agreement.

Applying this principle, as reconstructed by authoritative doctrine^[18] and case law,^[19] agreement can be inferred from the parties' conduct: "A couple dining at a fine restaurant, enthusiastically consuming lamb chops and sipping a 1982 Cheval Blanc Saint-Émilion, will be required to pay the chef's exorbitant prices even in the absence of a formal offer and acceptance. Similarly, two business entities may conduct themselves in such a way that a reasonable observer would interpret their actions as a commitment to arbitrate any disputes." ^[20]

Likewise: "If the terms of the contract necessarily require the promisor to confer a benefit on a third party, then the contract, and therefore the contracting parties, contemplate such benefit. The parties are presumed to intend to bind themselves to the consequences arising from the performance of the contract."^[21]

In this light, "implied consent" focuses on the actual intention of the parties and their conduct: "Although a party is bound by an arbitral award only if it has agreed to submit to arbitration, such agreement may also be implicit in the party's conduct."^[22]

Legal scholars have held that "Arbitral jurisdiction based on implied consent concerns a non-signatory party that, reasonably, should have expected to be bound by (or benefit from) an arbitration agreement signed by someone else, perhaps by a related party. In such circumstances, there is no injustice if arbitral rights and obligations are inferred from conduct."^[23]

In the case at hand, in addition to the formal signatories of the Framework Agreement (Claimants, Target and Respondent 1), the effectiveness of the arbitration clause can be inferred against Respondent 2 and Respondent 3 based on their conduct, the actual intent of the parties and the rationale of the Framework Agreement: namely, the acquisition of Target "with a view to integration into an international group of which the Purchaser is part": a purpose expressly provided for in the Framework Agreement.

In addition, in the case at hand, the Letter of Intent (then signed only by Respondent 3) expressly provided for the joint and several liability of Respondent 3 with the company that would be acquired or incorporated for the purpose of executing the transaction, namely Newco or Respondent 1, a limited liability company, special purpose vehicle (SPV) with a share capital of EUR 10,000 (the minimum required in Italy), incorporated as an empty shell by a leading audit firm only after the start of negotiations and a few months before closing, and acquired by Respondent 2 only one week before closing.

Also in light of the above, the Respondents constitute, in the Claimants' view, an inseparable group of parties. There are numerous and undisputed indications that Respondent 2 and Respondent 3, being parties to the acquisition of Target, should have the arbitration clause extended to them and be entitled to participate in the arbitral proceedings. Among them:

(i) Respondent 1 and Respondents 2 and 3 are related parties (i.e., Respondents 1, 2 and 3 are – directly or indirectly – controlled by the same parent company of the Alpha Group); Respondent 1 is directly controlled by Respondent 2, and Respondents 2 and 3 are sister companies);

(ii) the language chosen for the Framework Agreement and for all its amendments is English (language of the place of incorporation of Respondent 2 and Respondent 3) and not Italian (language of the place of incorporation of Respondent 1);

(iii) there is coincidence of top management (the sole director of Respondent 1 was also the CFO of Respondent 2);

(iv) Newco or Respondent 1 has no employees;

(v) Newco or Respondent 1 did not and does not have its own funds or cash flows, being an empty and inactive shell;

(vi) the place of incorporation of Newco or Respondent 1 corresponds to the registered office of Respondent 2;

(vii) the operating headquarters of Newco or Respondent 1 coincides with that of Respondent 2;

(viii) part of the purchase price of Target was paid to the Sellers or Claimants through the grant of warrants referring to the parent company of the Alpha Group;

(ix) all amendments to the Framework Agreement were signed by the same top manager, sole director of Respondent 1 and CFO of Respondent 2, in the same location at the offices of Respondent 2.

3. The Respondents' position: lack of jurisdiction of the arbitral tribunal over Respondents 2 and 3

The Respondents challenged the Claimants' request to extend the arbitration clause to non-signatories thereof. They argued that – notwithstanding the involvement in the negotiations relating to the Framework Agreement of Respondent 2 and Respondent 3 and notwithstanding the corporate-ownership relationship whereby Respondent 1 is wholly owned by Respondent 2 – the legal principles invoked by the Claimants do not apply in the Italian legal system. The arbitral proceedings at issue were initiated on the basis of the arbitration clause contained in the Framework Agreement (expressly transcribed above), and the Respondents argue that the validity and scope of application of such clause must be assessed exclusively under Italian law.

According to an established principle of private international law, also incorporated in Article V(1)(a) of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, arbitration agreements are governed by "the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made." Consequently, Italian law applies to the arbitration clause invoked by the Claimants, both by virtue of the law chosen by the parties in the Framework Agreement and as the law of the seat of arbitration.

According to the Respondents' position, legal principles different from Italian ones are entirely irrelevant for the purposes of assessing the scope and effectiveness of the arbitration clause vis-à-vis Respondents 2 and 3. Such principles must be disregarded by the Arbitral Tribunal, since an award issued on the basis of a law different from that chosen by the parties, or – in the absence of choice – from that of the country in which it was rendered, would be subject to annulment by the Milan Court of Appeal, pursuant to Article 829 of the Italian Code of Civil Procedure.

Having made this premise, the following sections analyse the Respondents' arguments.

Pursuant to Article 807, paragraph 1, of the Italian Code of Civil Procedure, "the arbitration agreement must, under penalty of nullity, be in writing and specify the subject matter of the dispute," and the same requirements apply to arbitration clauses, as expressly established by Article 808 of the Italian Code of Civil Procedure, according to which "the arbitration clause must be in the form prescribed by Article 807."

The written form requirement implies that the arbitration clause, to be effective, must be drawn up in writing and signed by the parties, who, in certain cases, must also affix a double signature. Although the present case is not one in which a double signature is required, the rule highlights the rigorous approach of the Italian legislator – and of case law – in ascertaining the validity and effectiveness of arbitration clauses.

As consistently affirmed by legal scholars and the Court of Cassation, an arbitration clause lacking the prescribed form requirements does not even exist legally, and the lack of written form cannot be overcome by a different will of the parties, due to the mandatory nature of Article 808 of the Italian Code of Civil Procedure:

"In some cases the legislator assists the interpreter, clarifying which provisions are mandatory or waivable, establishing that a rule applies under penalty of nullity, or unless the parties intend otherwise. The provision of Article 807, paragraph 1, on the form of the arbitration agreement is certainly mandatory. [...] The rules on the form of the arbitration agreement (Article 807, recalled by Articles 808 and 808 bis) are non-derogable";^[24]

"in the absence of written form [...] the arbitration agreement is non-existent";^[25]

"as a general rule, the arbitration clause pursuant to Article 808 of the Italian Code of Civil Procedure must be entered into in writing ad substantiam and must precisely identify the future disputes arising from the main contract."^[26]

The arbitration clause invoked by the Claimants was not signed by Respondents 2 and 3, who are not parties to the Framework Agreement; therefore, the Arbitral Tribunal cannot extend its jurisdiction over them on the basis of an alleged (and moreover non-existent) joint and several liability with Respondent 1. Such extension is clearly excluded by the formal requirements imposed by Italian law, which reflect the general principles on contracts.

Reference is made to Article 1372 of the Italian Civil Code, according to which "the contract does not produce effects with respect to third parties." This principle, known as "privity of contract," widely recognised by Italian legal scholars^[27] and case law,^[28] prevents the parties to a contract from affecting the legal and economic spheres of third parties: 

"In the Italian system, Article 1372 of the Italian Civil Code codifies the principle of privity of contract, according to which the contract has effect between the parties and is not enforceable against third parties."^[29]

This principle finds specific application also in the arbitration context in Article 806 of the Italian Code of Civil Procedure, according to which "the parties may have the disputes arisen between them decided by arbitrators." The rule reflects the principle of the subjective limits of the arbitration clause, according to which "the arbitration clause is enforceable only if concluded by the parties to the contract."^[30]

The Claimants' claim to establish arbitral jurisdiction over Respondent 2 and Respondent 3 must be rejected, in accordance with established case law, according to which:

"Considering the subjective limits of the arbitration clause, pursuant to Article 1372 of the Italian Civil Code, it binds only the contracting parties [...]. The arbitration clause is of a contractual nature and constitutes an autonomous agreement, structurally separate from the contract containing it. It follows that the provisions on contracts, in particular Article 1372 of the Italian Civil Code, also apply to arbitration clauses."^[31]

Furthermore, as established by the Court of Cassation, when one of the parties disputes having concluded or signed the contract containing the arbitration clause – as in the present case – the arbitration agreement cannot be enforced against it:

"According to the constant case law of this Court, and without reason to depart from it, it is for the ordinary courts – and not for arbitrators – to decide on a dispute in which the defendant denies having concluded the contract containing the arbitration clause [...] because arbitration is possible only when the conclusion of the contract and the identity of the contracting parties is not disputed between the parties."^[32]

Finally, as observed by legal scholars, "the arbitration clause binds only the parties who have accepted it, as it constitutes a derogation from ordinary jurisdiction: it cannot concern third parties who are not party to it."^[33] Extending the arbitration clause to third parties who have not expressed explicit consent would entail a form of illegitimate compulsory arbitration, in violation of Articles 102, paragraph 1, and 25, paragraph 1, of the Italian Constitution, preventing the interested party from being judged by its natural judge.^[34]

In this regard, Italian courts state that "the basis of arbitration lies in the free choice of the parties; since only the will of the parties (understood as a mode of exercise, even in the negative, of the rights guaranteed by Article 24, paragraph 1, of the Constitution) may derogate from the rule of Article 102, paragraph 1, of the Constitution [...] the principle established by Article 806 of the Italian Code of Civil Procedure (the parties may have the disputes arisen between them decided by arbitrators) is a general principle, of constitutional rank, deriving from the legal order as a whole."^[35]

The Respondents conclude their analysis by observing that there are no precedents in Italian case law admitting the extension of arbitration clauses to non-signatories on the basis of an alleged joint and several liability with the signatory, or solely for participation in negotiations, or for wholly owning the signatory party.

4. The procedural order of the Arbitral Tribunal

The Arbitral Tribunal upheld part of the arguments raised by the Claimants regarding the possibility of extending the arbitration clause to a non-signatory, formulating the following considerations – albeit in the context of a procedural order and not in an award – regarding the procedural issue of the standing of Respondent 2 and Respondent 3 as defendants. Given the interest of the arguments set out in the procedural order, it is preferred to expressly transcribe the content of the order, which is modified only and exclusively in the terms necessary and functional for the anonymisation of the case under review.

"In support of their position that the arbitration clause contained in the Framework Agreement would also apply to Respondents 2 and 3, despite not being signatories to the Framework Agreement, the Claimants rely in particular on Clause 2 of the LOI. The Tribunal considers that, in Clause 2 of the LOI signed on 10 May 2014 by the CFO of the Alpha Group and subsequently negotiator of the Framework Agreement, Respondent 3 confirmed that 'the Prospective Transaction would be carried out through the acquisition by Respondent 2 – directly or through one or more wholly owned subsidiaries, with the understanding that Respondent 3 would be jointly and severally liable with such subsidiaries.' And it is a fact that the Prospective Transaction was actually carried out as provided in Clause 2 of the LOI, i.e. through a subsidiary wholly owned by Respondent 2, namely Respondent 1.

No joint and several liability of Respondent 3 (nor of Respondent 2) is mentioned in the Framework Agreement. The question therefore arises whether this means that the Parties deliberately derogated from Clause 2 of the LOI during the subsequent negotiations that led to the conclusion of the Framework Agreement, thus excluding any joint and several liability of Respondent 3 (the Respondents' position), or whether, based on the principle of good faith and fair dealing, it must be considered that the 'promise' of Respondent 3 contained in the LOI did not have to be reiterated in the Framework Agreement and became binding with the implementation of the structure provided for in Clause 2 of the LOI (the Claimants' position).

In this regard, the mere fact that the Framework Agreement indicates only Respondent 1 as a contractual party was already anticipated by the Claimants and Respondent 3 in the LOI, and this may therefore not be sufficient to conclude that, subsequently, the joint and several liability of Respondent 3 – on which, based on the LOI, the Claimants could rely – was excluded. A different conclusion should be reached only if it were shown that, during the negotiations of the Framework Agreement, the joint and several liability of Respondent 3 was discussed and expressly excluded, in derogation of what was provided for in the LOI.

Of course, it could be argued that it was up to the Claimants, as Sellers, to ensure that Respondent 3 confirmed its promise of joint and several liability in a separate agreement to be attached to the Framework Agreement. However, this must be balanced against the promise made by Respondent 3 in Clause 2 of the LOI and the fact that the Framework Agreement was signed by a subsidiary of Respondent 3 exactly as provided for in Clause 2 of the LOI. The principle of good faith and fair dealing, which permeates international trade, can hardly exclude that the Claimants rely on such promise by Respondent 3, unless it is shown that the Parties clearly departed from it during the negotiations.

Based on a preliminary analysis of the documents, it does not appear that any derogation from the mechanism provided for by the LOI, including the promise of joint and several liability by Respondent 3, was discussed or agreed. In the Tribunal's view, the Claimants' argument that, based on the principle of good faith, the 'promise' of Respondent 3 contained in the LOI did not necessarily have to be reiterated in the Framework Agreement and would have become binding with the implementation of the structure provided for in Clause 2 of the LOI, is tenable and not manifestly unfounded.

Conceptually, this can also be interpreted as an offer by Respondent 3, which could have been accepted by the Claimants through the implementation of the mechanism provided for in the LOI and, in the absence of sufficient evidence of a derogation from that mechanism, it must be considered that such offer was implicitly accepted by the Claimants at the time of signing the Framework Agreement.

The conclusion that Clause 16 of the LOI includes a reference to Clause 27 of the Framework Agreement, by virtue of which Respondent 3 would also be bound by the arbitration clause contained in Clause 27 of the Framework Agreement, which extends to 'all disputes between the Parties arising out of or relating to this Agreement,' thus also including an agreement on the joint and several liability of Respondent 3 based on a written document (the LOI, which refers to Clause 27 of the Framework Agreement), does not appear at least manifestly unfounded.

Indeed, an interpretation according to which the Milan Court would be competent to decide only on a dispute relating to the LOI (but not to the Framework Agreement), while this Arbitral Tribunal would be competent only on disputes concerning the Framework Agreement (excluding the LOI), does not appear reasonable, given that the two instruments are intrinsically linked to each other, so that the jurisdiction of the Milan Court would in fact be meaningless, since a dispute on the LOI could hardly be decided without taking into account the subsequent negotiations and the Framework Agreement.

Furthermore, the written form requirement under Italian law would appear to be satisfied, since the relevant obligation of Respondent 3 (although it must be read in conjunction with the principle of good faith) is contained in a written and signed document.

Furthermore, it should be noted that the Respondents have also referred to the LOI, in the context of the correct interpretation of the Price and the Reference EBITDA under the Framework Agreement, and may therefore be estopped from arguing that the LOI has lost all legal relevance in another context."

And the procedural order concludes: "In light of the above, the Tribunal considers that it could affirm its jurisdiction over Respondent 3."

5. Concluding remarks

Although the case did not reach the issuance of an award, as it was settled between all parties (including Respondent 2 and Respondent 3), the Arbitral Tribunal's intent – as expressly anticipated in the procedural order described in the previous Section 4 – to "warn" the Respondents about the possibility that the arbitration clause might be considered extended, and thus jurisdiction, also to Respondent 3, was well perceived. The Arbitral Tribunal thus ruled in favour of the possibility of extending the arbitration clause to non-signatories thereof.

Indeed, notwithstanding that the arguments raised by the Claimants were attributable to legal institutions of Anglo-Saxon origin ("estoppel," "piercing the corporate veil," "group of companies doctrine," "implied consent"), what emerged clearly is that the ultimate foundation of the extension of the arbitration clause to non-signatories is to be found in the principle of good faith.

In our legal system, this principle is not a mere interpretive or behavioural criterion, but assumes constitutional rank, finding its root in Article 2 of the Italian Constitution, which enshrines the duty of social solidarity. It permeates the entire system, influencing the formation, interpretation and performance of contracts (Articles 1337, 1366, 1375 of the Italian Civil Code), as well as obligatory relationships in general (Article 1175 of the Italian Civil Code).

In this perspective, the arbitration clause – although constituting an autonomous agreement subject to formal requirements – cannot be interpreted in an atomistic and formalistic manner, but must be read in light of the duty of fairness and loyalty that governs contractual relationships. It follows that, where the conduct of the parties reveals substantial involvement and mutual reliance, the clause may extend also to those who have not formally signed it.

This conclusion is mandatory regardless of the need for an express – formal "per relationem" – reference between connected contracts (a circumstance that would certainly have further facilitated the arguments in favour of extending arbitral jurisdiction to non-signatories of the arbitration clause): what matters is the substance of the legal-economic relationship and the need to avoid abuses of form or of rights. Good faith, as a constitutionally relevant parameter, in fact allows overcoming a merely formal reading and guaranteeing the effective balance of interests at stake.

Therefore, the principle of good faith justifies – and in some cases may determine – the extension of the effectiveness of the arbitration clause also to the non-signatory, when the latter has participated in a decisive manner in the negotiations or in the performance of the contract containing the clause, or has derived a direct benefit from it, thus becoming a substantial party to the relationship.

Excessive interference by the parent or related company in the contractual relationship to which a subsidiary or affiliate is a party (typical of extraordinary acquisition transactions) may constitute conduct expressive of consent to be bound by the arbitration clause providing for the referral to arbitration of disputes arising from that relationship.^[36] It could also be argued that this is not a true case of extension of the arbitration clause to the non-signatory: the point addressed in the case under review and dealt with by the Arbitral Tribunal is to establish whether there was an arbitration intention, so as to allow the non-signatory party to be considered itself a party to the arbitration agreement. 

The extension of the arbitration clause to a non-signatory party has been supported, in the author's view, even regardless of consent. Among the "non-consensual" approaches is precisely the one based on principles developed in the context of substantive law, according to which it would be possible to argue for the piercing of the corporate veil, in order to extend the liability of the subsidiary to the parent company or between related companies or to substitute the liability of the latter for that of the former, on the basis of numerous factual elements established in the specific case.

Notes

^[1] See, among all, Court of Cassation, 18 September 2009, no. 20106: "The question of abuse of rights in corporate law has been examined in two cases: in the first, the breach by a shareholder of the duties of good faith and corporate obligations that led to his exclusion from the company (Court of Cassation, 19 December 2008, no. 29776); in the other, the Court ruled on the abuse of legal personality carried out for the purpose of circumventing the stricter application of the law (see also Court of Cassation, 25 January 2000, no. 804; Court of Cassation, 16 May 2007, no. 11258). In such cases, precisely by invoking abuse, it will be possible to pierce the corporate veil." See also Court of Cassation, 5 March 2009, no. 5348.

^[2] See Court of Cassation, 18 September 2009, no. 20106.

 ^[3] "The Republic recognises and guarantees the inviolable rights of the person, both as an individual and in the social groups where human personality is expressed, and requires the fulfilment of the mandatory duties of political, economic and social solidarity."[

 ^[4] See Court of Cassation, 15 February 2007, no. 3462.

 ^[5] See Court of Cassation, Joint Sections, 15 November 2007, no. 23726 and Court of Cassation, 18 September 2009, no. 20106. Similarly, legal scholars – see MERUZZI, L'exceptio doli dal diritto civile al diritto commerciale, Padua, 2005, 225 et seq., according to whom "The balance between the opposing interests of the parties which, through recourse to good faith pursuant to Article 1366 of the Italian Civil Code, is not used for rebalancing contractual reciprocity, but for defining the rights and obligations of the parties, re-establishing consistency between the contractual regulation and the plan of interests pursued. In other words, interpretation according to good faith operates as an objective criterion for realigning the normative contents of the contract with the underlying interest, regardless of the presence of fraudulent or deceitful intent." See also ADDANTE, entry Responsabilità sociale dell'impresa, in Digesto/civ., Agg., Turin, 2007, para. 1.

^[6] See Court of Cassation, 28 September 2012, no. 16544.

^[7] See MAG Portfolio Consult, GmbH v. Merlin Biomed Group, LLC, 268 F.3d 58, 61 (2nd Cir. 2001).

^[8] See Petitions of Laitasalo, 196 B.R. 913, 924 – Bankr. S.D.N.Y. 1996. Thomson-CSF, S.A., 64 F.3d at 778 and United States Court of Appeals, Second Circuit 9 F. 3d 1060 – Deloitte Noraudit A/s v. Deloitte Haskins & Sells US J & J.

 ^[9] See VON KRAUSE in the paper, Paris Court of Appeal Confirms Importance of Estoppel in International Arbitration, on Kluwer Arbitration Blog, 25 February 2009.

 ^[10] See Court of Cassation, 28 September 2012, no. 16544. See also Court of Cassation, 29 January 1993, no. 1142, confirmed by Court of Cassation, Joint Sections, 21 October 2009, no. 22236, according to which the party that has brought proceedings before an ordinary court to protect rights arising from a contract, despite the presence of a foreign arbitration clause, implicitly waives the right to rely on such clause and therefore cannot invoke it, in ordinary proceedings, in order to defeat the counterclaims and counterclaims of the other party. 

 ^[11] See Random Holdings, LLC v. M3House, LLC, Court of Appeal of the State of California, Second Appellate District, Division Three, 15 June 2017: "under the estoppel exception, a non-signatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claim, when the claims raised against the non-signatory are 'intimately founded in and intertwined' with the obligations under the underlying contract. The claims must be based on the same facts and be inherently inseparable from the arbitrable claims raised against the signatory defendants."

^[12] RADICATI DI BROZOLO, Il principio di estoppel come principio generale dell'UE, in Dir. comm. internaz., 2023.

^[13] See DE NOVA, I terzi e la convenzione arbitrale, Riv. arb., 2012, 777 et seq., where the Author considers "the possibility that the arbitration clause stipulated in the contract of the parent company, or holding company in the technical sense, or of a company of the group may be invoked by or against another company of the group. This means reproducing on a particular terrain the theme of the form and reality of legal personality, and thus of uncovering the substantial interests that lie beyond the corporate screen, and therefore of using arbitration beyond the sphere of the parties to the stipulation based on the principle of appearance." See, among all, TONELLO, La dottrina del piercing the veil nell'american corporate law, in Contr. e Impr., no. 1, 1998, according to which "Piercing the corporate veil is [...] a sort of 'safety valve' [...] that prevents an excessively rigid and formalistic application of the principle of corporate liability, allowing for equitable solutions in terms of substantive justice. [...] by which those cases are neutralised in which the rigid and a priori application of the principle of corporate liability produces unjust results."

^[14] See, among all, Court of Cassation, 18 September 2009, no. 20106; GARCEA, I «Gruppi finti». Appunti in tema di gruppi di società e interposizione nell'esercizio dell'impresa, in Riv. dir. civ., 2005, II, 204 and ADDANTE, entry Responsabilità sociale dell'impresa, cit., para. 6.

^[15] See United States Court of Appeals, Fourth Circuit, J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 320-321 (4th Cir. 1988).

^[16] See United States Court of Appeals, Second Circuit, Interocean Shipping Co. v. National Shipping & Trading Corp., 523 F.2d 527 (2nd Cir. 1975).

 ^[17] See PARK, Non-signatories and international contracts: an arbitrator's dilemma, in Multiple Parties in International Arbitration, Oxford, 2009. The Author offers several arguments in favour of extending the arbitration clause to non-signatories thereof and uses tools such as: (i) "implied consent" in relation to the conduct actually held by the parties, (ii) "piercing the corporate veil" where he clarifies that "At least five common scenarios recur in cases where an arbitral tribunal decides to extend the clause to a non-signatory: participation of the non-signatory in the formation of the contract; a single contractual scheme consisting of multiple documents; implicit or express acceptance of the arbitration clause; non-existence of the legal personality of the signatory; fraud or fraudulent abuse of corporate form"; (iii) "estoppel," by virtue of which a signatory to an arbitration clause cannot "rely on the contract when it suits him [...] and then repudiate it when he believes it is unfavourable to him" and therefore a signatory will be estopped from refusing arbitration with a non-signatory when the essence of the dispute is intertwined with the contract containing the arbitration clause"; (iv) the "group of companies doctrine," according to which the arbitration clause may extend within a corporate group if there are elements of common will, even in the absence of formal signature, and the Author cites the famous Dow Chemical case (Dow Chemical France, 2. The Dow Chemical Company, 3. Dow Chemical A.G., 4. Dow Chemical Europe v. ISOVER Saint Gobain, ICC Case No. 4131, Interim Award, 23 September 1982, confirmed by Paris Court of Appeal judgment, 21 October 1983 in Rev. arb., 1984, 98) and also Pau Court of Appeal, 26 November 1986, in Rev. arb., 1988, 156). For similar principles in earlier arbitral case law, see, e.g., ICC Award case no. 2375, in Journal droit inter., 1976, 973. On the same case and on the "group of companies doctrine" see also A. KIRIAK, Arbitral jurisdiction over non-signatories: the 'group of companies' doctrine, 2015.

For sceptical views on the extension of the principles developed in French case law with reference to the "group of companies doctrine" see E. ZUCCONI GALLI FONSECA, Brevi note sull'ambito oggettivo e soggettivo della clausola compromissoria, nonché sulla sua interpretazione, in Riv. arb., 1-2014, 123, where it is expressly considered that "For example, in France, starting from the famous Dow Chemical case [...] all parties who, although not having formally expressed their consent, have nevertheless participated in the transaction, having intervened in the negotiations or in the execution phase, are considered bound by the arbitration commitment" (op. cit., 125); or again "[...] French judges, for the purposes of extending the effects of an arbitration clause formally binding only two companies of the group to other companies of the group participating in the execution phase, relied [...] on the réalité économique unique between all the companies involved" (op. cit., 125). See also ZUCCONI GALLI FONSECA, Un quadro dei limiti della convenzione arbitrale, in AA.VV., Dell'arbitrato. Studi offerti a Giovanni Verde, Naples, 2010, 954, who, in asking whether the approach in the text finds recognition in Italy, observes how "the Italian interpreter [...] must deal with traditional tools, with all the limitations they offer: fictitious interposition, simulation, appearance of right, undisclosed entrepreneur," as well as EAD., Third Parties in Arbitration, in ZUCCONI GALLI FONSECA and RASIA, Arbitration in Italy. Domestic and International Perspectives, Milan, 2020, 93 et seq. On this subject, see also SALVANESCHI, L'arbitrato con pluralità di parti, Padua, 1999, 161, who, while not excluding that non-signatories could be bound by the arbitration agreement stipulated between other parties, highlights how it is essential, in order to arrive at extensive results, to rely on institutions known to the legal order (such as stipulation in favour of a third party or representation), excluding the possibility of justifying the obligation due to the existence of a group of companies.

^[18] See PARK, Non-signatories and international contracts: an arbitrator's dilemma, in Multiple Parties in International Arbitration, Oxford, 2009, 3, paragraphs 1.11, 1.12 and 1.13; CLEARY GOTTLIEB, Joining Nonsignatories to an Arbitration in the US, Practical Law, updated document (NY Arbitration Week 2020), para. III, letter B); and DELLAPORTAS, Arbitration against non-signatories: the current state of play, in New York Law Journal, 31 March 2014.

^[19] See United States Court of Appeals, Second Circuit, Gvozdenovic v. United Air Lines, Inc., 933 F.2d 1100: "When the plaintiff flight attendants sued an airline and a flight attendants' association following a labour dispute, the non-signatory plaintiffs were bound by the arbitral award because they had voluntarily and actively participated in the arbitration, and such conduct manifested their intention to submit the dispute to arbitration." 

^[20] See PARK in the paper, Non-signatories and international contracts: an arbitrator's dilemma, Multiple Parties in International Arbitration, cit., paragraph 1.11. 

^[21] See Random Holdings, LLC v. M3House, LLC, Court of Appeal of the State of California, Second Appellate District, Division Three, 15 June 2017. 

^[22] See United States Court of Appeals, Second Circuit, Gvozdenovic v. United Air Lines, Inc., 933 F.2d 1100.

^[23] See PARK in the paper, Non-signatories and international contracts: an arbitrator's dilemma, Multiple Parties in International Arbitration, cit., paragraph 1.12.

^[24] G. DE NOVA, Disciplina legale dell'arbitrato e autonomia privata, in Riv. arb., 2006, 424.

^[25] BENEDETTELLI, CONSOLO, RADICATI DI BROZOLO, Commentario breve al diritto dell'arbitrato nazionale ed internazionale, 2nd ed., Milan-Padua, 2017, 50.

^[26] Court of Cassation, 4 January 2017, no. 81.

^[27] GAZZONI, Manuale di diritto privato, Naples, 2013, 953. sub art. 1372, ALPA and MARICONDA, in Codice civile commentato, Milan, 2009, 758.

^[28] Court of Cassation, 17 February 2012, no. 2363; Potenza Court of Appeal, 13 January 2016 (unpublished).

^[29] Potenza Court of Appeal, 13 January 2016.

^[30] Sub art. 806, in CONSOLO, Codice di procedura civile commentato, Milan, 2010, 1514; sub art. 806, in CARPI and TARUFFO, Commentario breve al codice di procedura civile, Padua, 2015, 2930.

^[31] Bari Tribunal, 22 November 2006 (unpublished). See also Naples Court of Appeal, 8 November 2008 (unpublished), according to which "The arbitration clause contained in a contract binds only the contracting parties" and Court of Cassation, 12 July 2007, no. 15603, which provides that "The principle according to which the contract has effect between the parties, except in cases provided by law, excludes that the guarantors of one of the contracting parties, who are jointly and severally liable by virtue of another contract, may be considered entitled to bring an action for the invalidity of an arbitration clause, since they can neither be sued before the arbitral tribunal nor initiate arbitral proceedings."

^[32] Court of Cassation, 5 July 2016, no. 13616. In this sense, see also Monza Tribunal, 16 June 2005 (unpublished), which specifies "On the other hand, the arbitration clause cannot be considered valid and effective pursuant to Articles 807 and 808 of the Italian Code of Civil Procedure, as the contract in which it is included has not been validly signed by both parties." 

 ^[33] DE NOVA, Il Sale and Purchase Agreement: un contratto commentato, Turin, 2017, 44.

^[34] Sub art. 806, in BENEDETTELLI, CONSOLO, RADICATI DI BROZOLO, Commentario breve al diritto dell'arbitrato nazionale ed internazionale, cit., 8.

^[35] Court of Cassation, Joint Sections, 25 October 2013, no. 24153.

^[36] Arbitral tribunal (Jarvin Pres., Derains, Diris), in the dispute between Gamma Import-Export s.r.l. and Beta Ltd; Alfa Europe Import and Export SL, Alfa Holding S.A., Final Award rendered in Brussels on 19 September 2019, case no. 23633/FS, in Riv. arb., 2021, 357 et seq.