A new set of rules: Regulations revised to make parties in group structures more accountable

Groups of companies, rather than single entities, have traditionally emerged in the Gulf, which means that stakeholders can partition assets and segregate riskier ventures, thereby shielding the group as a whole from liabilities. Particularly when companies are dispersed across GCC jurisdictions, the group structure allows owners greater flexibility to structure major assets out of the reach of creditors. In the construction industry, for example, deep-pocket shareholders have on occasions sought shelter behind undercapitalised or controlled subsidiaries.

CHANGING TRENDS: In the international arbitration context, salient legal issues arise about piercing the corporate veil, which entails joinder of parties that have not signed an arbitration agreement. Moreover, the changing trends of Gulf business make the issue of joinder of non-signatory parties in international arbitration more acute. Under civil law jurisdictions such as Kuwait and Bahrain, shareholders are liable to the extent of their share capital investment, according to the 1960 Kuwait Law No. 15 and 2001 Bahrain Decree Law No. 21. Thus far, in these civil law jurisdictions, courts are reluctant to pierce the corporate veil or to pursue the assets of shareholders at all, except where fraud is evident. However, elsewhere in the Gulf where real estate development and foreign investment have been booming, post credit crisis disputes have increasingly involved multiple parties. The credit crisis itself has also enticed more international business transactions within the Gulf region that involve multiple parties. In the post credit crisis era, non-signatory joinder is an increasingly relevant issue. Several decisions in the International Chamber of Commerce (ICC) are building authority for joinder of non-contracting parties. The ICC’s test for the joinder of non-signatory parties is either the non-signatory company impliedly consented to the arbitral agreement, or a parent company and the subsidiary lack a distinct corporate personality such that the subsidiary was formed merely to shield improperly the parent company from liability. For example, in ICC Case No. 2879, called the Westland Helicopters case, the tribunal found that a legally transparent umbrella organisation’s true liability rested with the Arab countries that formed the organisation. Likewise, in a 2002 ICC case, non-signatory companies were held liable because they played a critical role in concluding the contracts and the signatory company was formed simply for tax benefits.

CONTRACTS: Importantly, the ICC decisions may find legal support in the concept of a de facto contract in civil law jurisdictions such as Kuwait. That is, in Kuwait, a non-contractual signatory can be joined to a contract, and thereby arguably to an arbitral agreement, where a de facto contract can be established.

Significantly, a non-signatory company’s consent to a contract may be expressed verbally, in writing, or by “signs in general use, by actual exchange indicating mutual consent, or by other conduct” according to the 1980 Kuwait Decree Law No. 67. Where a non-signatory party promised to contract with a counter-party, performed material contractual obligations, and/or made or received payments, a de facto contract may be established.

MULTIPLE PARTIES: Furthermore, recent changes in the 2012 ICC Rules of Arbitration have introduced new regulations for the joinder of additional parties after arbitration proceedings are commenced, expressly allowing for claims between multiple parties to be introduced, as well as new rules for appointing a tribunal where multiple parties are involved. Additionally, the new rules highlight that claims arising out of, or in connection with, more than one contract may be made in a single arbitration. The changes to the ICC rules reflect the increasing complexity of international business transactions and demand for multi-party dispute resolution. Changing business trends in the Gulf, and important legal reform in international arbitration rules are laying the groundwork for new opportunities to bring an action against a non-contracting parent company of a contracting subsidiary.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Kuwait 2012

Legal Framework chapter from The Report: Kuwait 2012

Cover of The Report: Kuwait 2012

The Report

This article is from the Legal Framework chapter of The Report: Kuwait 2012. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×