Group of Companies Doctrine in Indian Arbitration

Can a related third party be made accountable under an arbitration agreement to which it is not a party? This article aims to find the position of Indian arbitration law in this regard.

In India, related third party can be made accountable in India as India has adopted the ‘group of companies’ doctrine. The Group of Companies doctrine was discussed recently by the Supreme Court in the case of Cox and Kings Limited v. SAP India Private Limited and Anr. (2022 Livelaw (SC) 455) by Chief Justice of India, N.V. Ramana, Justices Surya Kant and AS Bopanna.

What is Group of Companies doctrine?

When there is a tight group structure with strong organisation and financial links in a sense creating a single economic unit or a single economic reality then the signatory and non-signatory (other related companies) have been bound together under the arbitration agreement, i.e. a non-signatory to the arbitration agreement can also be made party to the proceedings.

In Cox and Kings Limited, the following questions were considered by the Bench-

1. Whether phrase ‘claiming through or under’ in Sections 8 and 11 could be interpreted to include ‘Group of Companies’ doctrine?
2. Whether the group of companies doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?
3. Whether the group of companies doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?
4. Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the Group of Companies doctrine into operation even in the absence of implied consent?  

The bench doubted the decision in Chloro Controls and subsequent decisions that followed on the same ratio. The bench noted the inconsistencies in terms of judicial decisions and legal provisions. After the decision of Chloro Controls case, the 246^th Law Commission Report had recommended to amend Section 2(1)(h) and Section 8 of the 1996 Act to modify the definition of ‘party’ under Part I of the 1996 Act to ‘a party to an arbitration agreement or any person claiming or through or under such party’ to cure the anomaly pointed out by the Apex Court in Chloro Controls Case. It is pertinent to note that the Law Commission did not interpret the meaning of ‘claiming through or under’.

Thereafter, in 2015 the Act was amended wherein 4 major amendments were introduced to Section 8(1) of the 1996 Act.

1. Scope of ‘party’ was expanded to include persons claiming ‘through or under’.
2. Restricted the scope of judicial interference only to the prima facie examination regarding existence of arbitration agreement.
3. Cut off for submitting an application under Section 8 of the Arbitration has been stated to be ‘the date of’ submitting the first statement on the substance of the dispute.
4. The aforesaid amendment shall apply notwithstanding prior judicial precedent.

But the Parliament has not carried out any amendment to Section 2(1)(h) of the 1996 Act. This creates an anomaly that a party ‘claiming through or under’ could be referred to an arbitration but it will not have the right to seek relief under Section 9 of the 1996 Act.

Relevant Sections from the Act are as follows:

1. Section 2(h) provides that a party means a party to an arbitration agreement.
2. Section 8 provides for power to refer parties to arbitration where there is an arbitration agreement under which a judicial authority may subject to an arbitration agreement, if a party to the agreement or any person claiming through or under him, applies to refer the parties to arbitration, refer them to arbitration.
3. Section 9 provides that a party may seek interim measures from the Court.

What is the rationale behind adopting the ‘group of companies’ doctrine?

1. This novel concept has evolved through the need to avoid fragmentation of disputes in multi-contract or multi-party situations.
2. Further, it helps in simplifying complex commercial arrangements and business structures and clearly identifies the parent company and its subsidiaries.
3. Bombay HC in 2021 in the case of Kotak Mahindra Bank v. Williamson Magor & Co. Ltd. & Anr. Discussed that the circumstances in which the parties have entered into a transaction may reflect an intention to bind both signatory and no-signatory entities within the same group. Court noted that it is pertinent to know the true essence of the business arrangement and to simplify the layered structure of the commercial arrangement.
4. Similarly, in the dispute between Amazon and Future group, Future Group had filed a proceeding against Amazon seeking an injunction from interfering with its transaction with Reliance on the ground that Future group was not a party to the agreement but this injunction was denied to Future Group by the Emergency Arbitrator. Then an appeal was preferred by the Future Group in which the appellant was granted interim relief by stating that prima facie Future Group was not a party to the agreement and therefore the Group of companies doctrine cannot be invoked. However, a single Judge upheld the interim order passed by the emergency arbitrator by upholding the principles of the ‘group of companies’ doctrine in Chloro Controls.

What is the rationale behind rejecting the ‘group of companies’ doctrine?

1. Arbitration as a dispute resolution mechanism is based on the notion that parties to the agreement are being bound by consent. The parties are free to decide the arbitrator, the law to be governed by, the place of arbitration, the language of arbitration, the procedure, etc. A great amount of liberty is given to the parties so that a timely and convenient resolution to the parties is reached after consensus ad idem is established. However, making a non-signatory party further liable under the arbitration defeats the purpose of arbitration.
2. Further, it targets the basic principles of separate legal personality.
3. Also, it is a general practice in India and abroad that arbitration can be resorted to based on written agreement only so can a party that is not party to the agreement be made liable. 
4. Further, the Act doesn’t provide for an interpretation similar to ‘group of companies’. 
5. A growing acceptance of the applicability of this doctrine subjects the principle of consensus ad idem and being bound by the agreement upon consent at risk as the common threshold to determine ‘common intent’ is diminishing.
6. Adoption of the doctrine that emerged in France may not be suited for Indian jurisdiction but is rapidly being promoted without being clearly provided for in the Act.

Ratio in the Chloro Controls Case (2013) 1 SCC 641

1. In Chloro Controls case, the Court noted that the group of companies doctrine is being widely adopted by jurisdictions of US, England, France and that ‘definite reference to the language of the contract and intention of the parties’ must be ascertained carefully while implementing the doctrine. 
2. The court had also stressed on the point 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’.
3. Court came up with a test to determine whether non-signatory can be made a party to the agreement-
   1. Whether there is a direct relationship between the non signatory and signatory to the arbitration agreement?
   1. Whether there is a direct commonality of subject matter and agreement between the parties?
   1. Transaction should be of composite nature such that performance of the principal agreement is not feasible without aid, execution and performance of the supplementary or ancillary agreements.
   1. Whether doing so will serve the ends of justice?
4. Court noted that non-signatory can be made party if circumstances demonstrate that the mutual intention of the parties was to bind both the signatory as well as the non-signatory parties.
5. The judgment in Chloro controls was extensively relied upon by the Apex Court and other courts in judgments like Ameet Lalchand Enterprises & Ors. v. Rishabh Enterprises & Anr., Cheran Properties Limited v. Kasturi and Sons Ltd., to bind even the non signatories to an arbitration agreement by virtue of ‘group of companies’ doctrine.
6. The Court had also relied on Section 35 of the Act which provides that arbitral award shall be final and binding on the parties and the persons claiming under them respectively.
7. Similarly, in the case of Mahanagar Telephone Nigam Ltd. v. Canara Bank, it was noted that group of companies doctrine can be used to bind a third party to an arbitration if a tight corporate group structure constituting a single economic reality existed.

Position of International Law on group of companies doctrine?

It was discussed by the International Chamber of Commerce (ICC) in the case of Dow Chemicals Company & Ors. v. Isover Saint Gobain, wherein a nonsignatory can be bound by an arbitration agreement and be made liable under such proceedings. It also noted that this doctrine is further strengthened by facts like the non-signatory participating effectively in the performance, conclusion, and termination of the underlying contract. This award was upheld by the Cour d’Appel de Paris (Paris Appellate Court).

Further, there is a contradictory view in different jurisdictions around the world.

Case analysis of Cox and Kings Limited v. SAP India Pvt. Limited & Anr.

Facts:

1. Applicant and Respondent no.1 entered into an SAP software end-user license agreement where the applicant was a licensee and software was developed by respondents.
2. There were some lapses in project implementation by Respondent no.1 so Applicant asked Respondent no.2 to intervene who in turn gave assurance to Applicant.
3. The project could not be completed and the matter could not be resolved amicably. The applicant initiated arbitral proceedings under the agreement to which Respondent no.2 was not made a party.
4. A subsequent fresh notice to invoke arbitration was sent in which Respondent no.1 &2 were included but there was no response from the respondents so the applicant approached the court under Section 11.

 Arguments on behalf of the Applicant:

1. The applicant stated that Respondent no.1 is a wholly owned subsidiary and proprietary concern of Respondent No.2 and that Respondent no.1 could not have done the customization without the aid of Respondent no.2.
2. Further, the communications via email show that all three parties were in ad idem for the implementation and execution of the agreements. The Applicant relied on the ratio given in Chloro Controls Case.

Arguments on behalf of the Respondent:

1. Respondent no.2 is neither a signatory nor did it ever agree impliedly or expressly to be bound by the agreement between the applicant and respondent no.1.
2. Further, Respondent no.2 being a foreign entity doesn’t have any business dealings in India and is a separate and independent legal entity from Respondent no.1.
3. Respondent no.2 cannot be bound by the group of companies doctrine as Respondent no.2 is not only a non-signatory but also never participated in the negotiation process.

The decision of the court:

1. Arbitration is a creature of contract. It is aimed to usher in party autonomy, quick disposal, and an efficacious alternative remedy.
2. Multi-party and multi-claim proceedings make arbitration complex and time-consuming.
3. Quoted a judgment which notes that the term ‘non-signatory’ remains useful for what might be called ‘less than obvious’ parties to an arbitration clause: individuals and entities that never put pen to paper, but still should be part of the arbitration under the circumstances of the relevant business relationship.
4. Court noted that the group of companies doctrine has to be applied with caution and the mere fact that a non-signatory is a member of a group of affiliated companies will not be sufficient to bind the third party.
5. Further, as the doctrine has been applied in a limited manner by the jurisdictions of France and India in the context of international arbitration the Court deems it fit to be referred to a larger bench.

Conclusion

Court noted that the ratio in Chloro Controls is a matter of economic convenience and not based on the correct application of the law. Court noted that the application of the ‘group of companies’ doctrine tends to overlook the principle of separate legal entity and seems to dispense almost entirely with the intent and/or consent of parties. The case has been referred to a higher bench for the decision to resolve the contradictory opinions and find a better resolution as this can hinder India from becoming an arbitration hub of the world.