The Validity Of The ‘Group Of Companies’ Doctrine

27/Apr/2021, 11:16 AM, Authored by Hiroo Advani, Kanika Arora & Surbhi Ahuja
  1. Introduction

One of the most important facets of arbitration is mutual consent of the disputing parties to resort to arbitration as means of resolution of disputes. In fact, requirements for a valid arbitration agreement are also expressly provided for under Section 7 of the Arbitration & Conciliation Act, 1996 (“the Act”). In other words, for a valid arbitration agreement to exist, there must be consensus ad idem, which simply means that the contracting parties must have the common intention to take the dispute to an arbitral tribunal to claim relief. However, in establishing this doctrine of mutual consent in arbitration law, one must consider a variety of other legal doctrines that may come about to play a role in fair adjudication of the dispute. The ‘group of companies’ doctrine is one such doctrine that has raised eyebrows throughout jurisdictions, in terms of its validity and correctness.

As the name suggests, the ‘group of companies’ doctrine, in broad and simple terms, allows a non-signatory to an arbitration agreement to be included as a party to the arbitration, as this non-signatory may form part of the same group of companies as one of the signatories to the arbitration agreement. Furthermore, the question of whether this non-signatory was intended to be bound by the arbitration agreement will also be taken into consideration in applying this doctrine.

However, at a glance, the ‘group of companies’ doctrine does seem to stand contrary to the basic principles of separate legal personality, that is embedded so deeply in both common and civil law jurisdictions. To sway away from this orthodox stance is bound to attract debate and controversy, as seen in the last few years in the Indian arbitration law scenario. Another area of controversy surrounding the wide adoption of the ‘group of companies’ doctrine is the fundamental principle of international law to impose arbitration only on those parties that expressly provided agreement for the same.

  1. The ‘group of companies’ doctrine: International perspective

The ‘group of companies’ doctrine was first elaborately discussed in the International Chamber of Commerce (“ICC”) case of Dow Chemicals Company & Ors v. Isover Saint Gobain (“Dow Chemicals”). According to the award rendered in the Dow Chemicals case, it was well-established, although being a novel concept, that a non-signatory can in fact be bound by an arbitration agreement and can be obliged under such arbitral proceedings. Furthermore, it was stated that the position of this doctrine is further strengthened if the non-signatory has participated effectively in the performance, conclusion and termination of the underlying contract. The arbitral tribunal in this case rendered its judgment by stating that “By virtue of their role in the conclusion, performance or termination of the contracts containing said clauses, and in accordance with the mutual intention of all parties to the proceedings, appears to have been veritable parties to these contracts or to have principally concerned by them and the disputes which they give rise”. This award was thereafter upheld by the Cour d’Appel de Paris, and has since acted as a precedent for a number of arbitral tribunals across jurisdictions, on the issue of non-signatories being bound by arbitration agreements.

A reading of the aforementioned award suggests that the arbitral tribunal is bound to determine effects and scope of a valid arbitration agreement, thereby reaching a conclusion in deciding the ambit of the arbitration agreement by taking into account factual circumstances and performance of the underlying contract. As part of this, the arbitrator is also required to take into account adherence to policies of international commerce, in particular, the function of a group of companies.

The Dow Chemicals case has been a precedent for a number of subsequent ICC cases, however, the same has not taken place without its critics. Those opposing the establishment of the ‘group of companies’ doctrine advocate a traditional approach towards the basic principle of national proper law. As a result, the argument suggests that the question of whether an arbitration agreement binds not just the signatory to the arbitration agreement, but also a non-signatory which belongs to the same group of companies, should be determined by reference to proper law of the contract. Nevertheless, at this juncture it is important to note Professor Sanrock who states, “the exceptions to the principle of privity of contract have to be derived from precise, well-defined largely recognized rules of respective domestic law to which the arbitration agreement in question is subject“.

  1. The ‘group of companies’ doctrine: Indian perspective

The ‘group of companies’ doctrine is relatively a novel concept in Indian jurisprudence, largely having evolved from the need to avoid fragmentation of disputes in multi-contract and / or multi-party scenarios. However, like most jurisdictions, the Act does not expressly recognize this doctrine. In India, the jurisprudential basis for extension of non-signatories to be obliged under an arbitration agreement has been largely established by the judgment in Chloro Controls v. Severn Trent Water Purification Inc. & Ors. Indian courts have often been vexed with this question of extension of the arbitration agreement to non-signatories. While this judgment has introduced the doctrine in Indian jurisprudence, the doctrine is yet to be fructified in the system of Indian courts.

In the case of Chloro Controls, the Court while recognizing the fact that the ‘group of companies’ doctrine has in the past few years been widely adopted in jurisdictions such as England, US and France, noted that, “definite reference to the language of the contract and intention of the parties” must be ascertained with great caution. Furthermore, the Court also stressed that, “intention of the parties is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties“. In deciding the ambit of the doctrine, the Court set out four factors that need to be taken into consideration, namely: (i) the ‘direct relationship’ of the non-signatory to the signatory to the arbitration agreement; (ii) the ‘direct commonality of the subject matter and agreement’ between the parties; (iii) the transaction should be of a ‘composite nature where performance of [the principal] agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements’; and (iv) whether referring disputes under all agreements would ‘serve the ends of justice’.

As a conclusion, the Court stated that, “An arbitration agreement entered into by a company within a group of companies can bind its non-signatory affiliates, if the circumstances demonstrate that the mutual intention of the parties was to bind both the signatory as well as the non-signatory parties“. This judgment did alter the outlook of Indian courts towards the doctrine, as prior to the Chloro Controls judgments, in Sukanya Holdings v. Jayesh H. Pandya the Supreme Court had refused to refer a dispute to arbitration on the grounds that the claims fell outside the ambit of the arbitration agreement, primarily because some of the parties were non-signatories to the arbitration agreement. However, the decision of Sukanya Holdings can be distinguished from Chloro Controls as at the time Section 8 of the Act did not contain the phrase “claiming through or under”.

 

The judgment of Chloro Controls has set precedent for a number of cases where the Courts in India have taken a progressive approach, an example being the judgment rendered in Ameet Lalchand Enterprises & Ors. v. Rishabh Enterprises & Anr., where the Supreme Court held that even non-signatories to an arbitration agreement would be bound by it under the ‘group of companies’ doctrine. Similarly, in Cheran Properties Limited v Kasturi and Sons Limited, the Supreme Court held that an arbitral award can be enforced against a non-signatory, depending upon the specific facts and circumstances of the case. The Supreme Court noted that the ‘group of companies’ doctrine facilitates fulfilment of common intention of the parties that was to bind both signatories and non-signatories to the arbitration agreement. The Supreme Court, whilst passing this judgment, also noted the exceptional nature of this doctrine and held that its application largely depends on the construction of the arbitration agreement and the factual context of the dispute. The Court also relied on Section 35 of the Act which provides that an arbitral award “shall be final and binding on the parties and the persons claiming under them respectively”. In establishing this doctrine, while the judgment of Ameet Lalchand was focused on identifying a principal agreement in a network of agreements and their relationship, the judgment of Cheran Properties identified the importance of common intention of the parties to bind signatories and non-signatories to the arbitration agreement.

Recently on March 5, 2021, the High Court of Bombay further clarified on the doctrine in the case of Kotak Mahindra Bank v. Williamson Magor & Co. Ltd. & Anr., where the judgment discusses transactions carried out within a group of companies. The Court discussed that, “The circumstances in which they have entered into them [the transactions] may reflect an intention to bind both signatory and no-signatory entities within the same group. In holding a non-signatory bound by an arbitration agreement, the court approached the matter by attributing to the transactions a meaning consistent with the business sense which as intended to be ascribed to them. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of subject-matter and the composite nature of the transaction weigh in the balance“. Furthermore, the Court was of the opinion that, “The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangement, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of the signatory“.

In one of the major dispute making headlines today, that is the Amazon and Future Group arbitration, Future had filed a proceeding against Amazon to seek injunction from interfering with the transaction with Reliance. In this proceeding Future had not seriously questioned the applicability of the group of companies doctrine applied extensively by the emergency arbitrator but argued that Future Retail was not a signatory to the agreement. However, Justice Mukta Gupta on 21 December 2021 denied the injunction to Future and also denied their contention. Future Retail Ltd then filed an appeal before a division bench comprising of Chief Justice D.N. Patel and Justice Jyoti Singh. The bench on 8 February 2021 passed an order and granted the Appellant an interim relief by stating that prima facie Future Retail Ltd. is not a party to the agreement and therefore the Group of Companies doctrine cannot be invoked.

On 18 March 2021, the Single Judge, Justice J.R. Midha, at the Delhi High Court has in fact upheld the interim order passed by the Emergency Arbitrator. The judgment recognizes that the Emergency Arbitrator has applied the well-settled law laid down by the Supreme Court on the ‘group of companies’ doctrine in Chloro Controls and Cheran Properties and MTNL, to the present case. All the tests laid down by the Supreme Court of India have in fact been satisfied for the application of the doctrine and in view of the same, the Delhi High Court is in complete agreement with the findings of the Emergency Arbitrator. The order passed by the Emergency Arbitrators lists out detailed reasons for the application of the ‘group of companies’ doctrine in the present case, such as (i) Direct relationship of the non-signatory company to the signatory company of the Group, direct commonality of the subject-matter and the composite nature of the transaction between the parties; (ii) The funds of the signatory company being used to financially support the non-signatory company of the Group; (iii) The agreements being so intrinsically intermingled that their composite performance only shall discharge the parties of their respective mutual obligations; (iv) Similar dispute resolution clauses in all the agreements, reflecting common intention of all the parties, both signatory as well as non-signatory, to arbitrate; and (v) The composite reference of disputes of all the parties including non-signatory serving ends of justice.

On 7 March 2021, in Shapoorji Pallonji and Co. Pvt. Ltd v. Rattan India Power Ltd & Anr, the main issue in question was whether a non-signatory can be compelled to be a party in an arbitration. The Delhi High Court, dove in the concept of group of companies doctrine, cited a number of case laws both International and domestic, a number of which are discussed in this article. The Court also cited Gary B. Born (International Commercial Arbitration, Vol. I) stating that the principal legal basis for holding a non-signatory bound by an arbitration agreement is to include both purely consensual theories such as agency, assignment or non-consensual theories such as estoppel or alter ego. The court held that Elena, Respondent No.2 a wholly owned subsidiary, was an alter-ego of Indiabulls, Respondent No.1 and that even though Indiabulls had not signed the contract was compelled to be a party to the arbitration.

  1. Conclusion

In light of the aforesaid, while the academic debate surrounding the applicability of the ‘group of companies’ doctrine is worth pondering over, it should not dilute the significance of the growing acceptance of the doctrine across courts in India. The Supreme Court of India, across a number of judgments, has struck the right note by emphasizing on fundamental principles of mutual intention and implied consent. It is also important to distinguish the ‘group of companies’ doctrine from ‘piercing of the corporate veil’, a question that is dealt very often in arbitral proceedings.

It is without doubt that the notion that an award can be enforced against a non-signatory does raise serious concerns regarding due process. If a non-signatory is included as a party to the arbitration, the appropriate due process would be to give the non-signatory an equal opportunity to be heard and to properly defend its claims. Furthermore, the judgment in Cheran Properties  also expands the doctrine beyond its original purpose, which was simply to bind non-signatories to an arbitration agreement. Taking into consideration the precedent set out in Chloro Controls and Cheran Properties creates a dangerous scope for the use of the doctrine to enforce awards against non-parties to the arbitral proceedings. In fact, the threshold of ‘common intent’ also seems to have lowered in the case of Mahanagar Telephone Nigam Ltd. v. Canara Bank, wherein the Supreme Court while building on Chloro Controls stated that, “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 doctrine, being strongly embedded with the principle of implied consent is purely based on parties’ intentions that a particular entity be bound by the arbitration agreement. However, the doctrine does have a complex relationship with international arbitration law. Whilst some courts and tribunals have embraced it, most have been more critical of it. Yet, a bare reading of the judgments passed by Indian courts with regard to the applicability of this doctrine, does create space for critique that maybe the courts appear to have expanded beyond the doctrine’s original ambit. It would be essential for the Supreme Court of India to revisit the doctrine to determine whether it continues to have jurisprudence basis in Indian law, and if so, what are the parameters for the same.