The single economic entity concept

The Singapore High Court has confirmed in Manuchar¹ that the long-standing and well-established principle of separate legal personality remains applicable in the context of enforcement of arbitral awards. Singapore law is clear that limited exceptions exist for piercing the corporate veil. Beyond these exceptions, which are narrow in nature, situations where third-party nonsignatories may be bound by an arbitration agreement are likely to be extremely limited.

It is well established that a company and its owner are separate legal persons. The landmark Salomon case² held that – save for very limited exceptions – the company has rights and liabilities of its own which are distinct from those of its shareholders. It is also generally accepted that consent is central to the formation of an arbitration agreement.

Combining these two concepts, only companies that have consented to an arbitration agreement may enforce arbitral awards or bear liabilities flowing therefrom. It also follows that third-party non-signatories, including their shareholders, are prima facie precluded from holding such rights and obligations.

There may be exceptions to this general rule. Some such exceptions are found in private law principles:

• assignment – when contracts are assigned from one party to another.
• ageny – when agents conclude or perform contracts on behalf of principals.
• succession – when companies merge to form new entities, arbitral obligations might correspondingly be ‘transferred’.

However, it would be a misnomer to refer to such doctrines as ‘exceptions’ to the rule of privity – these private law principles serve to identify, as a matter of law, the correct parties to the arbitration agreement.

We should also mention the Dow Chemicals decision (ICC case numbers 2375 and 5103) – a case that gave birth to the highly controversial ‘group of companies’ doctrine, known to be limited in application outside France. Under this doctrine, an arbitration agreement signed by one company in a group of companies entitles (or obligates) affiliate non-signatory companies, if the circumstances surrounding negotiation, execution and termination of the agreement show that the mutual intention of all the parties was to bind the non-signatories.

In July 2008, the steel company Manuchar chartered a vessel from SPL Shipping. A dispute arose resulting in Manuchar commencing arbitration in London. SPL Shipping failed to participate. In default, two arbitral awards were rendered in Manuchar’s favour, leading to attempts to enforce the awards in Singapore.

Enforcement was ineffectual and Manuchar sought enforcement of the award against a third party, Star Pacific, on the grounds that SPL Shipping and Star Pacific were part of a ‘single economic entity’ as both were part of the same corporate group.

Manuchar then sought an order from the court for pre-action discovery of certain documents from Star Pacific to support this action. The court dismissed Manuchar’s application. Among other things, it held that Manuchar’s intended cause of action, even with sufficient evidence, was unviable at law.

This decision was based on the following grounds:

• Star Pacific was not party to the arbitration agreement. Using language borrowed from the Singapore Court of Appeal in the high-profile PT First Media case³, the court noted that allowing enforcement against a non-party to the arbitration would be anathema to the ‘internal logic of the consensual basis of an agreement to arbitrate’. It also cited the well-known decision of the English courts in the Peterson Farms case⁴, and held that an arbitral tribunal has no jurisdiction to make orders binding on parties which have not entered into binding arbitration agreements.
• The Singapore High Court noted that there was a ‘striking similarity’ between the group of companies doctrine described above and the ‘single economic entity’ concept advanced in Manuchar. The Singapore High Court, following the Peterson Farms decision, noted that the approach embodied by the group of companies doctrine had been described in that case as being ‘open to a number of substantial criticisms’ and ‘seriously flawed in law’. In so doing, the Singapore High Court held that it was ‘beyond doubt that an arbitral award cannot impose enforceable obligations on strangers to an arbitration agreement’.
• The ‘single economic entity’ concept relied upon by Manuchar was conceptually difficult to reconcile with the established doctrine of separate legal personality and the narrow exceptions for the piercing of the corporate veil. This basic tenet of company law ensures that businesses can structure their transactions to take advantage of benefits conferred by law. Only in very limited circumstances of abuse, such as evasion of the law or frustration of its enforcement, can the corporate veil be pierced.

The court also compared the unidirectional movement of liability (in the direction of the ultimate controller), when abuse of the corporate form occurs, to the multidirectional movement of liability should the proposed single economic entity concept be held valid. In the former situation, parent companies would only be liable for obligations of their subsidiaries. However, in the latter, companies could be held liable for the obligations of both their subsidiary companies as well as other related companies (e.g. ‘sister’ companies). Conceptually, the High Court was concerned that the idea of ‘one for all, all for one’ under the ‘single economic entity’ concept would have wide-reaching implications.

As a practical example, the High Court referred to the well-established practice of one-ship companies. Regarded as legitimate practice for shipping businesses to limit their liability, it is settled law that a one-ship company is not liable for losses caused by a sister ship owned by another company.

KC Lye is a partner and Nicholas Thio an associate in the Singapore office of Norton Rose Fulbright.