Bahrain’s perspective on extension of arbitration clauses to Subcontract agreements
Litigation / Bahrain
Arbitration clauses are based on contract, and therefore will only apply to the direct parties of an agreement under the Privity of Contract principle.
Law Update: Issue 359 - Real Estate & Construction and Hotels & Leisure
Ehsan AhmedAssociate,Dispute Resolution
Ayman HaiderTrainee Lawyer,Dispute Resolution
Arbitration clauses are - in their nature - based on contract, and therefore will naturally only apply to the direct parties of an agreement under the Privity of Contract principle recognised under both Common and Civil Law.
However, as arbitration continues to develop the concept of extending an arbitration agreement to non-signatory parties emerged as a way for consolidating related disputes into one proceeding, rather than having separate proceedings in interrelated matters. While it is understood that the cornerstone of arbitration is the agreement of parties to submit their dispute to arbitration and therefore, party autonomy is manifested in the parties’ consent to submit their disputes to arbitration. Such consent however can either be express or implicit.
While express consent is the most common method of being bound by an arbitration agreement, those in support of the extension of arbitration clauses have relied on implicit consent to support the principle of extension. Such consent is given where one party does not formalize the arbitration agreement.
However, through their acts, they have in fact given their consent to submit to the arbitration agreement. In such manner, implicit consent means that non-signatory must reasonably expect to be bound or benefit from an arbitration agreement signed by another person.
An example of an implicit consent which causes the arbitration agreement to extend is where there is a chain of contracts presenting a linear structure, where those contracts do share the same essential object or service. In such contracts where the subjects participating in the chain are contractually bound with two other people, the previous and subsequent co-contractor under two different contracts, different courts found that the rights and duties of arbitration follow the same cause of action as derived from previous agreements in prior chains of contracts and where the consent to settle disputes through arbitration had been expressed in the initial contract this consent is presumed to be made impliedly in the following chain of transactions.
This is particularly applicable to construction projects which involve a myriad of interconnected construction, procurement, lease, and supervision agreements. It is this close connection between the agreements and the way the execution of each affects the other, despite each agreement involving different parties, that make the concept of extension of arbitration clauses a useful concept for those involved in construction. A main contractor penalised for delay caused by various subcontractors does not need to file separate claims against each subcontractor to establish each’s fault and liability for the delay, the main contractor may join them all in one claim applying the principle of extension of arbitration clauses, even where a subcontract does not include the agreement to arbitrate, or even include sub-sub-contractors despite not having a direct agreement with them, thereby making the process of establishing and proportioning liability between subcontractors for such delay a relatively smooth one.
And while there have been a few arbitration centres that have updated their rules to include the application of such principles (provide an example), whether arbitration agreements can extend to cover parties outside the scope of the agreement remains largely unanswered in the region.
Recently, this question has been asked of the several of Bahrain’s Courts (Higher Civil Court, Supreme Court of Appeals, and the Bahrain Chamber for Dispute Resolution (“BCDR”)), with both the Higher Civil Court and the Supreme Court of Appeals taking the classic position that, under the principle of privity of contracts, only the parties to a particular arbitration agreement can invoke that a dispute should be referred to arbitration, and that no party outside the scope of such agreement may invoke that the dispute should be referred to arbitration.
The BCDR on the other hand, seemed more favourable towards accepting the possibility of extending an arbitration clause to bind third parties outside the scope of the agreement in dispute. And while in the particular case the defence was not accepted, the BCDR provided the conditions upon which it may be ready to accept such defence.
In its verdict, the BCDR provided that for an arbitration agreement to extend to non-signatories, the agreements in question must have a form of unity. This unity can be found where the agreements signed by the non-signatories is an extension of the main agreement which includes the agreement to arbitrate. Applying this to construction projects, where an employer and the main contractor sign their contract with an agreement to arbitrate any disputes that arise out of such agreement, and the main contractor then signs several contracts with sub-contractors - achieving the unity required by the BCDR - the subcontractors may be bound by the agreement to arbitrate despite being non-signatories to such agreement.
While this concept will undoubtedly remain controversial and will require much more development and fine tuning before its becomes a staple of arbitration in Bahrain, it remains a positive step that places Bahrain ahead of many other jurisdictions in the region in terms of its support for arbitration, with the only other courts recognising this concept being Egypt and Jordan.
In its verdict, the BCDR provided that for an arbitration agreement to extend to non-signatories, the agreements in question must have a form of unity. This unity can be found where the agreements signed by the non-signatories is an extension of the main agreement which includes the agreement to arbitrate.
For further information,please contact Ehsan Ahmed.
Published in June 2023
