EXTENSION OF THE ARBITRATION AGREEMENT TO THIRD PARTIES (NON-SIGNATORIES)

I. INTRODUCTION

An arbitration agreement is an important contract that reflects the parties’ intention to resolve their disputes through arbitration rather than before the courts1. Since an arbitration agreement generally means waiving the right to apply to the courts regarding the agreed disputes, it is binding only on the parties. The extension of the arbitration agreement to third parties means “the participation of persons who are not parties to the arbitration agreement in the proceedings as parties under this agreement in certain cases.”

Although although it is often thought that the principles and conditions underlying the arbitration agreement preclude the existence of the extension mechanism, with the increasing development and complexity of international commercial relations, it has been observed that third parties who have neither personally signed nor expressly accepted the arbitration agreement may, in certain circumstances, be bound by the provisions of this agreement or benefit from the advantages provided by these provisions2.

The necessity of the extension mechanism has been acknowledged both by international judicial bodies and within national and international legal doctrine; within the evolving institution of arbitration, opinions have been expressed that the scope of the arbitration clause may be extended to third parties who are not parties to the dispute. This study aims to analyze the legal grounds for extending arbitration agreements to non-parties, in light of Turkish law and international practice.

II. NATURE OF THE ARBITRATION AGREEMENT AND EXTENSION

A. Principles Preventing Extension

1. Written Form Requirement

One of the elements that may prevent the extension of an arbitration agreement to third parties is the requirement that the agreement be in writing. Although both Turkish law and various international legal systems have regulated this form requirement flexibly in line with the UNCITRAL Model Law and the New York Convention, the written form requirement retains its importance for the validity of the arbitration agreement3. Indeed, Article 4 of the International Arbitration Law No. 4686 (see also Article 412/1 of the Code of Civil Procedure No. 61004) stipulates this as follows:

“The arbitration agreement shall be made in writing. For the written form requirement to be deemed fulfilled, the arbitration agreement must be a written document signed by the parties, or it must be communicated between the parties via a means of communication such as letter, telegram, telex, fax, or electronic medium, or the defendant must not object in their response to the claim to the existence of a written arbitration agreement claimed in the statement of claim. A valid arbitration agreement shall also be deemed to have been made if reference is made to a document containing an arbitration clause for the purpose of making it part of the main contract.”

According to the provision in Article 178/1 of the Swiss Code of Private International Law, “The arbitration agreement must be made in writing or any other means of communication allowing it to be evidenced by text”5.

In this context, the absence of a written arbitration agreement between the parties may, at first glance, be considered an obstacle to the extension of the arbitration agreement to third parties. However, according to the prevailing view in doctrine, the issue of whether an arbitration agreement can be extended to third parties should be evaluated on its merits, based on the nature of the relationship established between the parties to the dispute on a substantive level, rather than within the framework of the written form requirement6. This is because the extension of arbitration agreements to third parties is a matter concerning the substantive binding nature of the arbitration agreement for the third party7.

Furthermore, the extension mechanism is a specific legal mechanism that examines whether third parties who are not parties to a written arbitration agreement can be evaluated within the scope of the existing arbitration agreement. If there is already a direct written arbitration agreement with the person subject to extension, that person is included in the arbitration proceedings as a direct party, and in this case, there is no need to apply the extension mechanism8. Therefore, the written requirement and the extension mechanism are completely different and independent in terms of their function and scope of application.

While the written requirement is an element related to the formal validity of the arbitration agreement and the constitutive will of the parties, the institution of third-party joinder refers to a separate and substantive legal examination aimed at assessing the substantive validity of an existing arbitration agreement with respect to a third party who is not a party to the agreement9.

In this context, the existence of a valid arbitration agreement to be extended to the third party is considered sufficient; since the existence and formal validity of the agreement in question provide an adequate level of protection and information for the person to whom it is to be extended, the third party is not expected to additionally declare a written arbitration intention. Therefore, the assessment of whether a third party is included by the arbitration agreement is not based on formal requirements, but rather on an examination of the substantive and legal facts of the specific case10.

2. The Principle of Relativity of the Arbitration Agreement

Regardless of how it is made, even if it is included as a clause within the main contract, an arbitration agreement generally constitutes an independent and separate contract from the main contract (International Arbitration Law Art. 4, Code of Civil Procedure Art. 412/para. 4). Therefore, the principle of relativity of contracts, which states that the rights and obligations arising from a contract governed by the law of obligations are binding only between the parties to the contract, is also binding in the case of arbitration agreements.

In this context, extending the arbitration agreement to third parties and including them in the arbitration proceedings not possible in principle11. Arbitration proceedings, due to their special legal structure based on agreement, differ significantly from court proceedings, and only the parties to the arbitration agreement are involved in the proceedings. In this context, the decisions made by the arbitral tribunal will also be binding only on the parties to the arbitration agreement12.

As the principle of relativity of contracts is based on the fact that the parties have formally concluded a contract between themselves, the doctrine of third-party effect addresses the enforceability of the arbitration agreement against third parties on the basis of substantive legal assessments, actual participation, and economic reality13. For this reason, the extension of the arbitration agreement to third parties is assessed not based on formal validity elements, but based on the nature of the contractual relationship, the degree of the third party’s participation in the performance process, and the substantive integrity of the relationship. A person who is not formally a party to the arbitration agreement cannot avoid legal liability and remain outside the arbitration proceedings simply on the grounds that their signature is not present; this has been clearly established both in doctrine and in various court decisions14.

In a decision rendered by the Swiss Federal Court on this matter, the principle of relativity of the contract was not strictly applied when making a legal assessment regarding the extension of the arbitration agreement to third parties; instead, the substantive reality of the specific case was taken as the basis. The Swiss Federal Supreme Court adopted that the active participation of a third party in the formation or performance of the contract could constitute evidence of their intention to become a party to the arbitration agreement. In the case in question, the Court emphasized that the formal requirement set forth in Article 178/1 of the Swiss Federal Act on Private International Law was only intended to demonstrate the parties’ intention to submit their disputes to arbitration, that this requirement was only applicable at the stage of establishing the arbitration agreement, and that this formal requirement did not apply in cases where extension to third parties was involved15.

B. The Concept of Extension to Third Parties

The extension of an arbitration agreement to third parties means that “persons who are not parties to the arbitration agreement participating in the proceedings as parties under this agreement in certain circumstances”16. The principles of substantive reality and fairness play an important role in the extension of an arbitration agreement to third parties. Excluding persons who are not formally parties but are actually at the center of the contractual relationship from the arbitration agreement is often considered an approach that disregards substantive reality and is contrary to fairness17. In particular, the organic link between the guarantor and the principal debtor, the principle of good faith, and the actual conduct of the parties may be decisive in accepting extension18.

Although arbitration agreements are binding between the parties to the agreement, under certain conditions, the provisions of the agreement may also apply to third parties who are not parties to the contract. The extension of the arbitration agreement to third parties is essentially assessed based on the actual role they play in the dispute and the legal reality that emerges in the specific case, rather than whether they are formally a party to the agreement19.

On the other hand, in corporate group relationships, group company structures, or cases where the veil of corporate personality is abused in violation of the principle of good faith, the arbitration agreement may also be applied to other legal entities or partners20. In this context, theories such as the prohibition of inconsistent conduct (Estoppel Principle) and the lifting of the corporate veil under the principle of good faith are among the main legal bases enabling the extension of the arbitration agreement to third parties, both in international arbitration practice and in Turkish legal doctrine. These views will be examined in detail below.

C. Legal Bases for Extension to Third Parties

Although the general rule is that the arbitration agreement will only produce effects and consequences for the parties, in practice, through certain legal theories and mechanisms, there may be situations where the arbitration clause is exceptionally extended to third parties. These situations are examined in detail below.

1. Principle of Succession

Succession refers to the transfer of a right or obligation from one person to another21. In arbitration agreements, succession is particularly important in cases of assignment of rights arising from a contract or statutory succession. If another person replaces a party to a contract, the arbitration agreement, as a rule, also passes to the new person along with that right. This is a consequence of the general principle that “the arbitration clause, which is an annex to the contract, passes to the transferee in the event of a transfer of the contract”22. For example, in the assignment of a claim, even if the creditor has changed, the debtor may raise an objection to arbitration before the court by asserting the obligation to comply with the arbitration clause in the contract against the new assignee. Similarly, the new creditor who has acquired the claim may also be obliged to resort directly to arbitration against the debtor, as there is a binding arbitration clause in the contract on which the right transferred to them is based.

In Turkish law, the concept of succession appears in two forms: partial succession and universal succession. Partial succession refers to the transfer of individual rights or the transfer arising from the law, while universal succession means the transfer of the entire estate as a whole23. For example, the transfer of assets through inheritance or company merger is considered universal succession. In cases of universal succession, such as when all rights and obligations are transferred to the acquiring company as a result of one company merging with another, the arbitration agreement is also deemed to have been transferred to the acquiring company24. Insurance law is a particularly good example of partial succession. In the case of succession by an insurer, the insurer paying the insurance indemnity becomes the legal successor to the insured’s rights to indemnity against third parties, pursuant to Article 1472 of Turkish Commercial Code No. 610225.

Other situations that should be considered in the context of succession are inheritance and company mergers. In the event of the transfer of rights arising from a contract by inheritance, the arbitration agreement concluded by the deceased will also bind the heirs. Similarly, in company mergers or divisions, the arbitration clauses in the transferred contracts are transferred to the legal successor company. In this case, in company mergers or transfers through inheritance, the arbitration agreement is also transferred to the new party, binding the person replacing the transferor. According to this approach, the fundamental issue to be resolved in the event of a transfer is whether the arbitration clause can be transferred in accordance with the main contract; whereas in the case of extension, the issue to be discussed is whether the third party has expressly or implicitly consented to the arbitration agreement26.

2. The Principle of Good Faith

The principle of good faith allows the arbitration agreement to be extended to third parties within the framework of the principles of economic reality and good faith. The principle of good faith is regulated in Article 2 of the Turkish Civil Code No. 4721, which states that “Everyone must comply with the principle of good faith when exercising their rights and fulfilling their obligations.” This provision is regarded as one of the fundamental principles of our legal system and applies to all private law relationships27.

Within the framework of the principle of good faith and the rule of honesty, evaluations aim to prevent a party from engaging in contradictory behavior, protect the other party’s trust, and prevent the abuse of rights. In the extension of arbitration agreements to third parties, this principle is applied in conjunction with theories such as the Doctrine of Estoppel (Prohibition of Inconsistent Conduct) and Implied Consent. For example, in its 2003 decision28, the Swiss Federal Court emphasized that Swiss law allows the extension of the arbitration clause to third parties within the framework of the parties’ true intent and the principle of good faith. The Court ruled that if the conduct of a third party involved in the performance of a contract demonstrates their intention to be bound by the arbitration clause, this clause may also be valid for that person.

3. The Group of Companies Doctrine

The Group of Companies Doctrine, which is evaluated within the scope of the extension of the arbitration agreement, is an institution that provides for the extension of the arbitration agreement between companies forming an economic whole on the basis of economic reality29.

This doctrine emerged particularly in international commercial arbitration practice and is an extension theory developed based on the relationships within a group of companies30. According to the Group of Companies Doctrine, if there is economic and functional unity between a company that is a party to a contract containing an arbitration clause and another company belonging to the same group, and if this other company has played an active role in the conclusion, implementation, or termination of the contract, it is possible to extend the arbitration agreement to this company within the group31.

The doctrine first came to the fore in the case of “Dow Chemical v. Isover Saint Gobain (1983)”32; the ICC arbitral tribunal’s decision to recognize unsigned companies within the group as parties was upheld and supported by the Paris Court of Appeal33. This approach has been debated in some legal systems, particularly in France, and has been accepted especially in cases where multinational companies act under a unified economic will34.

However, the Group of Companies Doctrine has not been universally accepted by every legal system. The Swiss and Turkish legal systems emphasize that the existence of a group of companies alone does not constitute sufficient grounds for extending an arbitration agreement35.

Indeed, the Swiss Federal Court requires that, even if there is economic unity and a control relationship between the companies belonging to the group, the parent company must have played a concrete, continuous, and active role in the performance of the contract in order to be considered a party to the arbitration agreement36.

Similarly, under Turkish law, the mere fact of being a group company does not constitute evidence of an arbitration intention unless an explicit or implicit intention is demonstrated37. However, there is also a difference between the Group of Companies Doctrine and the theory of piercing the corporate veil. The Group of Companies Doctrine relies on economic unity and behavioral facts without requiring fraud or bad faith, while the theory of piercing the corporate veil is applied more specifically to exceptional cases where legal personality is abused38. As a result, while the Group of Companies Doctrine plays an important role, particularly in international arbitration practice, it has not been accepted to the same degree in every legal system and has been subject to different approaches in terms of conditions of application.

4. Piercing the Corporate Veil

The theory of Piercing the Corporate Veil is an approach that envisages the temporary disregard of a company’s separate legal personality in the event of fraud, deception, insufficient capital, or similar exceptional circumstances39. This theory has been developed to prevent companies from evading justice by hiding behind their independent corporate veil.

In the context of arbitration law, this theory arises particularly when a company is used solely to avoid arbitration obligations. For example, in a scenario where Company A, as a party to a contract, accepts an arbitration clause but then attempts to evade its obligations by transferring its assets and becoming an empty shell before the contract is performed, the creditor may request the arbitrators in the arbitration proceedings to pierce the veil of Company A and treat the company or individual actually controlling it as a party40.

Although the mechanism of piercing the corporate veil is fundamentally a concept of liability law, its applicability is also recognized within the field of arbitration law. However, the application of this theory in the context of arbitration is highly exceptional and subject to strict conditions. Piercing the corporate veil is, as a rule, limited to extraordinary circumstances such as fraud, deception, abuse of legal personality, or breach of legal obligations. The mere fact that companies have economic ties, joint capital relationships, or intertwined assets is not sufficient grounds for extending an arbitration agreement41.

In this context, there are also decisions in foreign court and arbitration awards stating that the corporate veil should not be lifted except in special circumstances such as fraud or complete control and unity of personality (alter ego). For example, the Paris Court of Appeal’s decision in the “Orri” case clearly highlights this distinction. While reviewing a request for partial annulment of an arbitral award, the court annulled the request on the grounds that the conditions of the Group of Companies Doctrine were not met, but upheld the extension of the arbitral award to the parent company based on the theory of Piercing the Corporate Veil42. This decision demonstrates that the Group Companies Doctrine and the theory of Piercing the Corporate Veil are distinct from one another, and that the latter may apply – if the conditions are met – in cases where the former does not exist.

In Turkish law, while the theory of Piercing the Corporate Veil is adopted43, there is no explicit court decision regarding the application of this theory to arbitration law. However, the prevailing view in doctrine argues that if the corporate structure has been abused to avoid arbitration obligations, the arbitrator or court cannot remain indifferent to this situation and must take into account the factual identity between the parties44. However, given the contractual nature of arbitration, including a third party in arbitration by merely lifting the veil without express or implied consent or a representative relationship is a highly exceptional remedy. Resorting to this method should also be approached with caution in terms of legal certainty and predictability. Therefore, Piercing the Corporate Veil to extend the arbitration agreement to a third party should be considered in the most extreme cases of abuse and within the jurisdiction of the arbitrator or court.

5. Implied Consent

Implied consent is one of the flexible interpretation tools that allows the scope of an arbitration agreement to be extended to include third parties who are not parties to the agreement45. When interpreting the text of an arbitration agreement, if it is concluded that the parties’ intent extends to third parties, those persons may also be deemed bound by the arbitration agreement46. For example, in some contracts, the arbitration clause may be drafted to cover not only the parties to the contract but also “all affiliates and subsidiaries benefiting from or obtaining benefits under this contract”. Where such broad and inclusive language is used, it may be considered that there is an implied arbitration intention with respect to third parties. Furthermore, in practice, it may also be possible to extend the arbitration agreement to third parties by interpreting their conduct and behavior as indicating consent to the arbitration agreement.

In particular, if the third party in question has actively participated in the contract negotiations, has actually undertaken the performance of the contract, or has been directly or indirectly involved in the arbitration proceedings, this situation may be interpreted as that person’s implied consent to the arbitration agreement47. In this context, implied consent is an important complementary assessment tool for the extension of the arbitration agreement.

The Swiss Federal Court, in one of its decisions, stated that a company that has not signed a contract may, in accordance with international commercial practices, be bound by the arbitration clause if it has been involved in the formation or performance of the contract in a practical and continuous manner48. In such cases, what is essentially done is to infer an implied declaration of intent from the behavior and attitude of the relevant third party and to extend the arbitration agreement to that person.

6. Prohibition of Inconsistent Conduct (Estoppel Principle)

The estoppel principle is a rule of equity specific to the Anglo-Saxon legal system that prevents a person from making a claim that conflicts with their previous conduct and behavior49. In the context of arbitration law, estoppel may manifest itself in the form of presuming that a party has accepted the arbitration agreement in accordance with their conduct and behavior, or, conversely, preventing the abuse of a right. For example, if a third party who is not a party to the arbitration agreement acts as if they were a party when asserting rights arising from the contract or participating in the arbitration proceedings, they may be prevented from subsequently going to court claiming that they are not a party to the arbitration agreement under estoppel. This is parallel to the “principle of good faith”50 and the “principle of legitimate expectations” in Turkish law; a person cannot claim a right contrary to their previous conduct.

Although the term estoppel is not explicitly used in Turkish law, the corresponding principles of “prohibition of contradictory conduct” and “prohibition of abuse of rights” serve a similar function. In the practice of the Court of Cassation, if a party fails to raise an objection to arbitration within the time limit or attempts to withdraw their consent after agreeing to arbitration, it is adopted that this objection cannot be heard under the principle of good faith. In summary, the doctrine of estoppel is largely similar to the doctrine of implied consent in terms of both its conditions and consequences. Indeed, under estoppel, a party’s benefit from the substantive provisions of the contract is also considered as implied consent to the entire contract, including the arbitration clause. Both doctrines are based on the principle of good faith and its specific reflection, the prohibition of contradictory conduct51.

III. The Applicability of Estoppel to Third Parties in Turkish Law

Turkish law does not contain explicit legal provisions regarding the effect of arbitration agreements on third parties.

The International Arbitration Law No. 4686 and the Civil Procedure Law No. 6100 do not contain any provisions directly related to third parties when defining the parties to an arbitration agreement; they do not provide for the resolution of disputes arising in this regard within the framework of the principles and rules of general contract law. The generally adopted principle, as stated above, is that arbitration agreements are subject to the principle of relativity. Accordingly, an arbitration agreement is binding only on the person who signed it. Extension to third parties is only possible in exceptional cases and if the legal justification can be substantiated in concrete terms. In particular, where the written form and special authority requirements prescribed by law for the establishment of the arbitration agreement have not been met in relation to the third party, judges do not uphold the objection to arbitration.

For example, in a decision rendered by the 11th Civil Chamber of the Court of Cassation on April 9, 2004, it was ruled that if it is understood that the representative authority of the person signing the contract on behalf of the company does not cover arbitration (no special authority was granted), even if this deficiency is subsequently attempted to be remedied by conduct, the arbitration clause must be deemed invalid. The decision stated as a reason that “due to the exceptional nature of arbitration, arbitration cannot be established based on the implied or hypothetical will of the parties”52. This approach demonstrates that the Turkish judiciary strictly adheres to the principle of consent in arbitration.

From the perspective of the Group Companies Doctrine, there is no established case law in Turkish courts reflecting the explicit adoption of this principle. Although the provisions of the Turkish Commercial Code relating to groups of companies recognize certain intervention and direction rights of the controlling company in intra-group relations, they do not permit group companies to be treated as a single will in the full sense. The approach of the Turkish Commercial Code aims to protect the separate legal personality of each company and to protect the interests of creditors, even in parent-subsidiary relationships. Therefore, the mere existence of economic unity and organic ties is not considered sufficient under Turkish law for the extension of an arbitration clause to a non-signatory company within the group. Indeed, many authors in the doctrine take a cautious approach to the application of the group companies doctrine in Turkish law; some authors state that the criterion for extending the arbitration agreement to third parties should be the role of the relevant third party in the specific case and the reasonable expectations of the parties, and that the mere fact of a group of companies cannot create an arbitration will on its own.

In contrast, one of the prevailing trends in doctrine argues that the phenomenon of group companies cannot be ignored in today’s commercial life and that, if the conduct of intra-group companies effectively constitutes a single entity, the arbitration clause must be interpreted in accordance with this reality. However, no definitive acceptance has been established in the Supreme Court’s case law to date in line with the aforementioned view. In this regard, in cases where a group company structure exists, if an objection to arbitration is raised against another company within the group based on the arbitration clause, Turkish courts will proceed to evaluate the specific dispute in light of the applicable legal rules and the provisions of the agreement between the parties.

Although Turkish judicial practice does not explicitly refer to the principles of estoppel or the prohibition of inconsistent conduct, it has been observed that these principles are indirectly relied upon, particularly in the context of procedural objections. Indeed, the Supreme Court has ruled that it is not considered sincere for a party to raise an objection to arbitration after participating in the arbitrator selection process and that such behavior should be considered an abuse of rights53. Regarding third parties, although the concept of estoppel has not yet been explicitly mentioned in Turkish case law, similar assessments are possible under the principle of good faith set forth in Article 2 of the Turkish Civil Code.

In summary, the approach followed in Turkish law regarding the extension of arbitration agreements to third parties is based on striking a reasonable balance between preserving the consent-based nature of the arbitration agreement and resolving the specific case in a manner consistent with fairness and meeting the actual needs of commercial life. In this context, it is acknowledged – particularly within the doctrine – that a broader and more flexible approach has been adopted; accordingly, in addition to situations where party consent is legally presumed, such as in cases of succession, implicit consent claims based on the integrity of the commercial network or the requirements of economic unity may also, under certain conditions, be suitable for the extension of the arbitration agreement. Thus, it is seen that third-party enforcement is defended more broadly in doctrine in order to both preserve the essence of contractual freedom and respond to the dynamic needs of commercial life.

IV. CONCLUSION

The extension of arbitration agreements to third parties is a challenging issue concerning the balance between the limits of the arbitration intention and effective and equitable dispute resolution. On the one hand, it would be desired that all relevant parties be resolved in the same forum for arbitration to function successfully; on the other hand, subjecting someone who has not consented to arbitration may be contrary to both contractual freedom and legal predictability. Therefore, the development of law in this area has manifested itself as an effort to strike a balance between these two extremes.

While the issue of “extension of the arbitration agreement to third parties” is an exceptional area that must be carefully considered in each specific case, the prevailing view in the doctrine of Turkish law tends to interpret this exception more broadly. Although current case law shows a strong will to protect the arbitration intent and mostly limits the extension to third parties to obvious situations such as succession, the doctrine argues that extension may be equitable in situations such as group company structures, economic integrity, and the actual functioning of contractual relationships. In Swiss and similar legal systems, a conservative approach preserves the basic line, but more flexible interpretations are also possible.

International arbitration practice, meanwhile, endeavors to ensure compliance with rules and case law as much as possible, observing the needs of commercial life without undermining contractual freedom.