Validity of the ‘Group of Companies’ Doctrine in the Jurisprudence of Indian Arbitration

Introduction:

The ‘Group of Companies’ doctrine provides that an arbitration agreement which is entered into by a company within a group of companies may bind non-signatory affiliates, if the circumstances are such that they demonstrate the mutual intention of the parties to bind both signatories and non-signatories. This doctrine has been questioned purportedly on the ground that it interferes with the established legal principles such as party autonomy, privity of contract, and separate legal personality.

In the recent case of ‘Cox and Kings Ltd. Vs. SAP India Pvt. Ltd. and Ors.’a reference was made to thelarger bench of the Hon’ble Supreme Court, to clarify the issues regarding the interpretation of the phrase “claiming through or under” appearing in sections 8, 35 and 45 of the Arbitration & Conciliation Act, 1996 (“Act”).

Relevant Provisions of the Act:

Section 2(1)(h) of the Act defines a “party” to mean “a party to an arbitration agreement“. An “arbitration agreement” is defined under section 2(1)(b) to mean “an agreement referred to in Section 7“. Section 7 lays down the essential elements of a valid and binding arbitration agreement, as an agreement by the parties to submit to arbitration all or certain disputes which have arisen, or which may arise between them in respect of a defined legal relationship, whether contractual or not. Section 7(5) further stipulates that the reference in a contract to a document containing an arbitration Clause constitutes an arbitration agreement if two conditions are satisfied, i) that the contract is in writing; and ii) that the reference is such as to make the arbitration clause part of the contract.

Generally, a party to an arbitration agreement is determined on the basis of persons or entities who are signatories to the arbitration agreement or the underlying contract containing the arbitration agreement. However, over the past two decades the law on joinder of non-signatory parties has evolved substantially. This evolution can roughly be classified into two stages: Before Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. and After Chloro Controls (P) Ltd. v. Severn Trent Water Purification Inc.

Pre Chloro Controls Era:

Some of the significant decisions of this era were given in the cases of Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, Sumitomo Corporation v. CDC Financial Services (Mauritius) Ltd., and Indowind Energy Ltd. v. Wescare (I) Ltd.

In the pre Chloro Controls era, the Hon’ble Supreme Court construed “parties” by limiting it only to the signatories to the arbitration agreement and this position was characterized by three underlying precepts:

• arbitration could be invoked at the instance of a signatory to the arbitration agreement only in respect to disputes with another signatory party;
• the court would adopt a strict interpretation of the provisions of the Arbitration Act, particularly the unamended Section 8 which only allowed reference of “parties” to an arbitration agreement; and
• there was an emphasis on formal consent of the parties, thereby excluding any scope for implied consent of the non-signatories to be bound by an arbitration agreement.

This position of law underwent a significant change when the Bench of three Judges of the Hon’ble Supreme Court in Chloro Controls (supra) allowed joinder of non-signatory parties to the arbitration agreement on the basis of the ‘Group of Companies’ doctrine.

The Chloro Controls Case:

In Chloro Controls (supra) the Supreme Court was called upon to determine an arbitral reference in case of multi-party agreements where performance of the ancillary agreements was substantially dependent upon effective execution of the principal agreement. In that case, a foreign entity and an Indian entity incorporated a joint venture company to market and distribute chlorination equipment. With respect to the joint venture, the related companies of both the Indian and foreign entity were also involved. Consequently, the parties concluded several ancillary agreements such as a Shareholders’ Agreement which contained an arbitration clause. All the contracting parties were not signatories to all the agreements, including the Shareholders’ Agreement. When disputes arose between the parties, the foreign entities sought to terminate the joint venture. The primary issue that came up for consideration before the Apex Court pertained to the ambit and scope of Section 45 of the Act. The Court framed the issue in the following terms:

“Whether in a case where multiple agreements are signed between different parties and where some contain an arbitration Clause and others do not and further the parties are not identically common in proceedings before the court (in a suit) and the arbitration agreement, a reference of disputes as a whole or in part can be made to the Arbitral Tribunal, more particularly, where the parties to an action are claiming under or through a party to the arbitration agreement.”

In view of the language of Section 45 of the Act, the Court held that the expression “any person” reflects a legislative intent of enlarging the scope beyond “parties” who are signatories to the arbitration agreement to include non-signatories. However, the court noted that such non-signatory parties are required to claim “through or under the signatory party.” Thus, the Supreme Court accepted that arbitration is possible between a signatory to an arbitration agreement and a third party or non-signatory claiming through a party.

The next issue before the Court was then to determine whether there was any legal relationship between the signatory and the non-signatory for the latter to ‘claim through or under’ the former. The court noted that the ‘Group of Companies’ doctrine has been developed by courts and tribunals in the international context to bind a non-signatory affiliate or sister concern within the same corporate group as the signatory party, to an arbitration agreement provided there was a mutual intention of all the parties. The Court emphasized that the “intention of the parties” is the underlying principle for the application of the Group of Companies doctrine. The court thus held that a non-signatory could be subjected to arbitration ‘without their prior consent’ in ‘exceptional cases’ on the basis of four determinative factors:

• A direct relationship to the party which is a signatory to the arbitration agreement;
• A direct commonality of the subject-matter and the agreement between the parties being a composite transaction;
• The transaction being of a composite nature where performance of the mother agreement may not be feasible without the aid, execution, and performance of supplementary or ancillary agreements for achieving the common object and collectively have a bearing on the dispute; and
• A composite reference of such parties will serve the ends of justice.

The case of Chloro Controls (supra) was dealing with a situation where the success of the joint venture agreement was dependent upon the fulfilment of all the ancillary agreements. In this context, the Supreme Court observed that all the ancillary agreements were relatable to the parent agreement and the ancillary agreements were intrinsically linked with each other, to the extent that they could not be severed. This in the view of the court indicated the intention of the parties to refer all disputes arising out of the parent agreement and ancillary agreements to the arbitral tribunal. The phrase ‘legal relationship’ was explained as being part of the same corporate group, the interests of the non-signatory companies were not averse to the interest of the principal company and the joint venture company.

Post Chloro Controls Era:

In 2016, the legislature amended Section 8 of the Act to bring it in line with Section 45 of the Arbitration Act. The amended Section 8(1) provided that “a party to an arbitration agreement or any person claiming through or under him” could seek a reference to arbitration. However, the legislature did not bring about any change in the language of Section 2(1)(h) or Section 7 of the Act. Since the Chloro Controls (supra) and the amendment to Section 8, subsequent decisions of the Supreme Court have referred to the ‘Group of Companies’ doctrine to join non-signatory persons or entities to arbitration agreements.

The decision in Cheran Properties Ltd. v. Kasturi and Sons Ltd. held that the ‘Group of Companies’ doctrine is applied to bind a non-signatory party upon a construction of the arbitration agreement, circumstances which exist at the time of entering into the contract, and the performance of the underlying contract. Nevertheless, it must be noted that Cheran Properties (supra) did not apply the ‘Group of Companies’ doctrine to make the non-signatory a party to the arbitration agreement. Rather, this Court made the arbitral award binding on a non- signatory under Section 35[1] on the ground that it was claiming under a party which was a signatory to the arbitration agreement.

Over time, the Supreme Court identified certain additional factors for the invocation of the ‘Group of Companies’ doctrine. In Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India, it was held that the non-signatory party, even though a constituent part of the corporate group, did not have any causal connection with the process of negotiations preceding the agreement or the execution thereof, whatsoever. Thus, the participation of the non-signatory party in the negotiation and performance of the underlying contract was held to be the key determinant of the intention of the parties to be bound by an arbitration agreement.

In Mahanagar Telephone Nigam Ltd. v. Canara Bank, the Supreme Court emphasized that the Group of Companies doctrine could be invoked on the basis of the principle of “single economic unit“. The Court noted that the doctrine could also be invoked “in cases where there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit, or a single economic reality.”

The last in the series of decisions dealing with the Group of Companies doctrine is a three-Judge Bench decision of this Court in Oil and Natural Gas Corporation Ltd. v. Discovery Enterprises Pvt. Ltd. The Court held that in addition to the cumulative factors laid down in Chloro Controls (supra), the performance of the contract was also an essential factor to be considered by the courts and tribunals to bind a non-signatory to the arbitration agreement. In this case the Court refined and clarified the cumulative factors that the courts and tribunals should consider in deciding whether a company within a ‘Group of Companies’ is bound by the arbitration agreement:

• The mutual intent of the parties;
• The relationship of a non-signatory to a party which is a signatory to the agreement;
• The commonality of the subject-matter;
• The composite nature of the transactions; and
• The performance of the contract.

Finality on the issue in Cox and Kings:

In view of the above decisions and discussions in respect thereto, the Hon’ble Supreme Court arrived at the following conclusions in Cox and Kings (supra):

• The definition of “parties” under Section 2(1)(h) read with Section 7 of the Act includes both the signatory as well as non-signatory parties;
• Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement;
• The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties;
• Under the Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement;
• The underlying basis for the application of the ‘Group of Companies’ doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non- signatory party to the arbitration agreement;
• The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the Group of Companies doctrine;
• The Group of Companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act;
• To apply the Group of Companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Discovery Enterprises (supra). Resultantly, the principle of single economic unit cannot be the sole basis for invoking the Group of Companies doctrine;
• The persons “claiming through or under” can only assert a right in a derivative capacity;
• The approach in Chloro Controls (supra) to the extent that it traced the Group of Companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law;
• The Group of Companies doctrine should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements;
• At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and
• In the course of this judgment, any authoritative determination given by this Court pertaining to the Group of Companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.

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[1] Finality of arbitral awards. – Subject to this Part an arbitral award shall be final and binding on the parties and persons claiming under them respectively.