An Analysis of Group of Companies Doctrine – Bridging Arbitration And Corporate Connectivity

ABSTRACT

CJI Chandrachud defined “group of companies” in the Indian context as “an agglomeration of privately held and publicly traded firms operating in different lines of business, each of which is incorporated as a separate legal entity, but which are collectively under the entrepreneurial, financial, and strategic control of a common authority, typically a family, and are linked by trust-based relationships forged around a similar persona, ethnicity, or community.” 

The Doctrine of Group of Companies emphasizes that even a non-signatory company can be made bound to the arbitration agreement. It is somewhat concerning, as the whole concept of arbitration depends upon the consent and autonomy of the parties. However, the position of application of a group of companies doctrine has been clarified by the Supreme Court. According to the bench, even a non-signatory company can be made bound to the arbitration agreement if it is a member of the same group of companies as a signatory and the parties to the agreement intended to bind the non-signatory. The intention of the parties to bind the non-signatory company can be ascertained through different factors such as participation in negotiation, performance or termination of the contract, and terms of the arbitration agreement. The mere presence of a relationship between the signatory and the non-signatory company cannot be considered as an intention to bind the non-signatory party. This article provides an insight into the evolution of the doctrine and the current application of the doctrine in India. It not only explains the application of the doctrine but also discusses the challenges.

KEYWORDS:- 

Group of Companies, Arbitration, Signatory, Non-Signatory, Arbitration agreement. 

INTRODUCTION 

1.1 Evolution of doctrine of Group of Companies in the context of arbitration

• The Problem

Whether an arbitration agreement signed by a company that is a member of a group of companies is binding upon a non-signatory company that is also a member of that group of companies, was an open question before. Different persons had seen the question from different perspectives. Now, the position of application of doctrine in India is clarified by the Hon’ble Supreme Court. However, to understand the evolution of the doctrine, let us see the position of the application of the doctrine before clarification in India. Few arbitral awards and judgments of courts had affirmatively answered the question. Some awards and judgments had answered negatively. Due to same, the question became controversial and it became a necessity to address the issue. 

In terms of facts, one has to differentiate between three situations:

1) A parent company or individual holding the shares of and with one or more subsidiaries, signs an arbitration agreement then the question arises whether those subsidiary companies should be bound by the arbitration agreement. One way of answering the question was, the powers of the company were not only to obligate but also to entitle the subsidiaries which are attached to it to an arbitration agreement signed by the parent company.[1] If one takes this approach then, even a non-signatory subsidiary company will be bound to the arbitration agreement signed by the parent company.

2) The same question can be seen in a reverse situation. A subsidiary company member of a group of companies is the signatory of the arbitration agreement. Later, the party to the agreement invoked arbitration against the parent company. In this situation, the rights and duties of the parent company derived from the arbitration agreement have to be determined.

3) Lastly, let us consider another factual situation where a sister company signs an arbitration agreement. The question again arises whether the other affiliated companies belonging to the same group of companies will also be bound by the arbitration agreement. In practice, this situation seems to occur less frequently.  

• The Journey

The journey of evolution of the doctrine started through the case of Dow Chemicals V Isover Saint Gobain[2]. The brief of the case is, that Dove Chemicals initiated the arbitration proceedings against the Isover. However, objections have been raised because some subsidiaries of Isover were not signatories of the arbitration agreement.[3] The objections were rejected by the ICC on two grounds. One being, that the subsidiaries played a significant role in carrying out the terms of the contract between the parent company and Isover, and the other being the subsidiaries were in control and direction of the parent company which makes them eligible to pursue their claims in the arbitration agreement. Thus, it became the first case where the doctrine of a group of companies had been applied and it was held that even the non-signatories belonging to the same group of companies would be held liable for the arbitration agreement. 

It raised several speculations because of the doctrine’s apparent disregard for the norms of privity of contract and separate legal personality, which blurs the requirement of consent in arbitration. Through several awards and judgments, it became clear that in international arbitration, the doctrine of a group of companies can be applied to make the non-signatories bound to the arbitration agreement between the parent company and the other party, if the non-signatories contributed significantly to the contract. Then, comes the main question that is recognizance and applicability of the doctrine in India. 

Recognization of the doctrine in India

In Sukanya Holdings V Jayesh H. Pandya[4], the court applied a restrictive approach and held that a non-signatory cannot be made bound or cannot be claimed through an arbitration agreement. Later, It became a necessity to abide by the application of the doctrine in India because the main purpose behind bringing and applying the doctrine in India was to prevent the fragmentation of the disputes which consist of several parties and multiple contracts. The doctrine has been justified and developed by the judiciary by relying on the phrase “party and any other person claiming through or under him” mentioned in sections 8, 35, and 45 of the Arbitration Act. Slowly, there is a swift approach of the judiciary in case of arbitration from a restrictive approach to pro arbitratory approach.

The doctrine was recognized in India by the Supreme Court in Chloro Controls (I) P. Ltd. V Severn Trent Water Purification Inc. & Ors[5], where the Court held that the non-signatory company forming part of the same group of companies who are signatories can be made bound to the arbitration agreement if it is clear from the circumstances that the intention is to bind both signatory and non-signatory parties to the arbitration agreement. The court laid down the mutual intention test, and it provided for the distinction in the language used in section 45, 8 of the Act. To be precise, by doing it the court allowed the non-signatory parties to be bound by an arbitration agreement if fulfill the mutual intention test.[6] 

After this decision of the court, the Law Commission in its 246th Report delved into the definition of party under the Act as the definition is more restrictive and only limits the application to signatories to the agreement. A recommendation was made to amend section 8 of the Act and by the recommendation, an amendment was made. Post amendment, a reference to arbitration could be made “by a party to an arbitration agreement or any person claiming through or under him”. Later, the judgment pronounced in Chloro controls was reiterated in many cases. In Cheran Properties Ltd. V Kasturi and Sons Ltd[7], the court by applying the test laid down in chloro controls held that even non-signatory can be made liable if the parties intended so. 

• The Solution

Through the Chloro Control Ltd case, the court for the first time applied the doctrine and later the same was reiterated by the latter cases. The recent cases clarified the application of the doctrine in India. In ONGC Ltd. V Discovery Enterprises (P) Ltd[8], D.Y. Chandrachud, J examined the group of companies doctrine and by referring to the precedents ruled that while applying the doctrine in India, the following factors need to be considered. Mutual intentions of the parties, the relation between non-signatory and signatory to the arbitration agreement, commonality in subject matter, the composite nature of the transaction, and the performance of the contract. 

However, this view was criticized on the basis that the test of mutual intentions cannot be considered as one of the factors because it is the ultimate test to determine the application of the doctrine. Moreover, the mutual intention test is threefold and it comprises the relation between the non-signatories and signatories, commonality in the subject matter, and the composite nature of the transaction. Considering the performance of the contract as one of the criteria was also criticized as it creates ambiguity and differs from case to case. 

In 2023, Cox & Kings V SAP India (P) Ltd[9], the constitutional bench clarified the position concerning the application of the doctrine in India. The court held that if the question as to whether the non-signatories are bound by the arbitration agreement or not arises before the High Court or Supreme Court under section 11 of the Act then the same has to be left to the Tribunal to decide. Parties defined under section 2(1)(h) of the Act include both signatory and non-signatory parties, consent is an important factor, and the role, and relationship of parties determine the consent factor between them. Also, section 7 of the Act does not exclude the possibility of binding third parties. Also, the judgment in chloro controls was declared as erroneous to the extent it declares that the non-signatories can be bound to agreements by invoking the phrase “parties claiming through or under”. The court concluded by stating that the non-signatories to the agreement can be made bound to the arbitration if the parties intended so. The acceptance and implementation of the group of companies doctrine demonstrate a sophisticated comprehension of business partnerships and intricate trade deals involving numerous interconnected parties. This kind of strategy works towards reaching a pro-arbitration settlement.

CRITICISM 

2.1  Doctrine of a Group of Companies in India – Contrary to the concept of consent?

The doctrine is not free from criticism. The doctrine in a way contradicts the concept of consent. Arbitration is a creature of consent and the whole concept of arbitration comes into the picture with the consent of the parties.[10] If the concept of consent is followed then, only the signatory should be made bound to the arbitration agreement. But, by applying the doctrine of a group of companies even non-signatories are made bound to the arbitration agreement. It in such a way antithetical to the concept of consent. 

One of the requirements to enter into a contract is to have free consent. A third party cannot be made liable to be bound by the contract without his free consent. However, under Indian law consent may be implied and not always expressed. The party can be compelled to perform the obligations under the contract if the circumstances, and terms of the contract show that he is intended to be bound. The arbitration agreement is in a way similar to the contract. The only difference can be seen as the arbitration agreement needs to be in writing and the contract can be oral. 

Consent is a prerequisite condition to enter into an arbitration agreement. India has adopted the New York Convention. By doing this, we adopted the concept of autonomy and consent as a fundamental basis for arbitration. No doubt, we have to adhere to the policy but it is always possible for the legislature to amend the policy. But until it is done we have to follow the current law. Fortunately, despite the many contradictions in our earlier decisions, as highlighted in Cox & Kings, “the common understanding of the law appears to be that, in the context of joinder of third parties, intent to be bound by the arbitration agreement is paramount and must be established”. 

2.2 Beyond Corporate Veils: Doctrine of Group of Companies in India

The doctrine of alter ego and lifting of the corporate veil finds whether the corporation lacks a separate identity from an individual or corporate shareholder. The doctrine of alter ego has been used to pierce the corporate veil and determine the real players behind the agreement. 

The group of companies doctrine was further refined and crystallized in MTNL V Canara Bank[11]. In this case, Indu Malhotra, J. attempted to harmonize the principle of separate legal personality with the group of companies doctrine. On one hand, she stated that “each company is a separate legal entity which has separate legal rights and liabilities” and that “the company agreeing, would alone be bound by it”. On the other hand, concerning the group of companies doctrine, she stated that, non-signatory can be bound by an arbitration agreement if the intention is clear to bind the non-signatories also. 

• Alter Ego V Doctrine of Group of Companies

The main difference can be seen concerning consent. The doctrine of a group of companies is consent-based and the doctrine of alter ego is a sort of non-consent-based. The doctrine of alter ego does not rely on the intention of the parties but rather it depends on force of law. Alter ego pierces the corporate veil and disregards the separate legal entity. Whereas the doctrine of a group of companies identifies the intention of the party and does not affect the separate legal entity. The degree of control is high in the alter ego concept whereas, the degree of control in group of companies doctrine is less compared to alter ego. 

Further, “the principle of alter ego focuses on the identification of the actual owner behind the disguises of various corporate group entities. However, the group of companies doctrine determines the true parties to the arbitration agreement without disturbing the legal personality of the entity in question”. Therefore, the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine.

CONCLUSION

The application of the doctrine of a group of companies became a necessity in India. However, the position of application of the doctrine was complicated before. Now, through the different arbitral wards and judicial pronouncements, it was made clear that even non-signatories can be made bound to the arbitration agreement, if the parties intend to bind. Many criticisms have been raised concerning the consent and separate legal personalities. All those questions have been satisfactorily answered by the Hon’ble Supreme Court in Cox & King V SAP. In my opinion, the application of the doctrine of a group of companies is needed and it is in concurrence with the pro-arbitration approach. 

[1] Otto Sandrock, ‘Arbitration Agreements and Group of Companies’ (1993) 27(4) The International Lawyer <https://www.jstor.org/stable/40707109> accessed on 22 May 2024.

[2] Dow Chemicals V Isover Saint Gobain, ICC Case No. 4131, Interim Award dt. 23-9-1982.

[3] Gauri Anand, Akanksha Sinha, ‘Group of companies doctrine: An analysis in the context of arbitration’ (Mondaq 28 November 2022) <https://www.mondaq.com/india/arbitration–dispute-resolution/1217422/group-of-companies-doctrine-an-analysis-in-the-context-of-arbitration> accessed 20 May 2024.

[4] Sukanya Holdings V Jayesh H. Pandya, (2003) 5 SCC 531.

[5] Chloro Controls (I) P. Ltd. V Severn Trent Water Purification Inc. & Ors, (2018) 16 SCC 413. 

[6] Priyanshu Shrivastava and Fatema Kinkhabwala, ‘Cox and Kings and the group of companies conundrum’ (SCC Online 1 September 2022) <https://www.scconline.com/blog/post/2022/09/01/cox-and-kings-and-the-group-of-companies-conundrum> accessed 20 May 2024.

[7] Cheran Properties Ltd. V Kasturi and Sons Ltd, (2018) 16 SCC 413.

[8] ONGC Ltd. V Discovery Enterprises (P) Ltd, 2022 SCC OnLine SC 522.

[9] Cox & Kings V SAP India (P) Ltd, 2022 SCC OnLine SC 570.

[10] Kingshuk Banerjee and Nidhi Kulkarni, ‘The group of companies doctrine in India – Antithetical to Free Consent’ (SCC Online 23 March 2023) <https://www.scconline.com/blog/post/2023/03/23/the-group-of-companies-doctrine-in-india-antithetical-to-free-consent/> accessed 23 May 2024.

[11] MTNL V Canara Bank, (2020) 12 SCC 767.