Please advise the parties whether Sunny Construction Group Holdings can be validly joined in this arbitration

Happy Construction Ltd is a small construction company registered in Aberdeen, UK; it is 100% subsidiary of a major international company Sunny Construction Group Holdings registered in Estonia. Happy was created in 2014 with a modest capital of £10,000 in order to enter the highly competitive Scottish market. It keeps its own books and has its own employees, mostly former employees of Sunny. The majority of Happy’s assets are either on loan directly or indirectly from Sunny, or directly financed by the latter. Mr Smiley, the CEO of Happy, is also the former employee of Sunny; Mr Gentley, the CEO of Sunny, often visits Aberdeen and advises Mr Smiley on business matters.

In January 2015 Happy Construction secures its first ever contract with Gloomy Granite Ltd, one of the major players on Aberdonian market. The contract is for the new multi-storey headquarters of Quahog Oil and it has very tight detailed deadlines. The negotiations from Happy’s side were conducted jointly by Mr Smiley and Mr Gentley who made it clear that Sunny Construction Group Holdings is fully backing the activities of Happy, and is prepared to provide it with any required assistance in the performance of the contract. Mr Banshee, the CEO of Gloomy Granite, strongly insisted during negotiation that either Sunny Construction becomes a party to the contract itself, or at least it must provide some financial guarantee; Messrs Smiley and Gentley insisted that Happy should become a sole party to the contract. In the end the parties signed the contract on 21 January 2015 and agreed to this solution: only Happy and Gloomy Granite are named as parties to the contract, but Sunny Construction will make an endorsement on the contract under the parties’ signature. Neither of the parties was very clear on what this “endorsement” entails in legal terms, but they shared the same vague idea that it constituted some kind of financial guarantee. Article 21 of the contract provided for arbitration in Edinburgh in accordance with ICC Rules.

Happy Construction started performance of the contract, but parties’ relations soon deteriorated, despite Mr Gentley’s efforts to find a solution; Sunny even made several small payments by way of liquidated damages that were due from Happy. In a month after the works started Gloomy Granite came to the conclusion it can now lawfully discontinue the contract and is entitled to compensation from Happy Construction in the amount of £4 million. Needless to say, Happy disagreed strongly with such a proposition. It was clear to Gloomy’s lawyers that Happy does not have enough assets to pay such an amount, even if claimants are successful on the merits; Sunny, on the other hand, had sufficient funds. Therefore they decided to name Happy and Sunny as joint respondents in the action. Sunny’s lawyers strongly opposed the idea of being bound to arbitrate in this matter.

Please advise the parties whether Sunny Construction Group Holdings can be validly joined in this arbitration. They might use your advice as a tool to reach settlement, e.g. in further negotiation or mediation, once they know their respective chances of success on this particular issue.

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