DISSECTING THE ‘GROUP OF COMPANIES’ DOCTRINE UNDER ARBITRATION LAW VIS-À-VIS THE COX & KINGS CASE
Updated: Aug 22, 2022
This post is authored by Punit Sanwal, fourth-year student of B.B. A. LL.B. (Hons.), at Gujarat National Law University.
Image source: https://www.thehindubusinessline.com/
Recently, a three-judges bench of the Supreme Court (“SC”) in Cox & Kings Ltd. v. SAP India Pvt. Ltd. (“Cox & Kings Case”) casted its doubts on the legal correctness of the ‘Group of Companies’ doctrine under the Arbitration Law and said that there is a clear need for a relook at the doctrine. The Group of Companies doctrine allows the joinder of a non-signatory party to an arbitration agreement. This doctrine emerged from the International Chamber of Commerce case of Dow Chemicals Company v. Isover Saint Gobain (“Dow Chemicals Case”). It was held in this case that a company which is non-signatory to an arbitration agreement could become bound by it if a mutual intention can be made out amongst all the parties to the arbitration agreement. However, a condition was laid down according to which such parties should belong to a group that is closely related and forms a ‘single economic reality’.
In India, this doctrine was first recognized by the SC in the case of Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. (“Chloro Controls Case”) wherein the court applied this doctrine to bind certain group companies of the signatory company and forced them to participate in the arbitration proceedings even when they were not a signatory to the arbitration agreement. Arbitration as a concept is based on the principles of party autonomy and the express consent of the parties. However, the court in Chloro Controls Case looked for subjective intention of the non-signatory parties by looking at their prior conduct instead of considering the fact that such parties are clearly not a signatory to the arbitration agreement.
It is strictly based on the premise that two parties mutually and voluntarily agree to resolve their dispute via arbitration by providing their express consent. Section 7(3) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) clearly mentions that an arbitration agreement should be in writing implying that two parties who are willing to arbitrate their disputes should reduce such an intention in writing for a valid arbitration agreement. Thus, such a doctrine goes manifestly against the foundational principles of arbitration. The SC has thus cast its doubt on the legal validity of this principle. This article analyses how the scope of the Group of Companies doctrine has been expanding in the past few years and how it is undeniably against the fundamental principles of arbitration in light of the recent SC judgment in the Cox and Kings Case.
2. UNDERLYING STATUTORY BACKING
Various questions referred to the larger bench in the Cox and Kings Case were regarding the interpretation of Section 8 of the Arbitration Act and whether it can be interpreted in a way that the Group of Companies doctrine is read into this provision. Section 8 puts a limitation on the intervention of the judiciary in cases where a valid arbitration agreement exists. This section was amended in the aftermath of the Chloro Controls Case wherein the SC recognized the legal validity of the Group of Companies doctrine for the first time. By this amendment, the Legislature extended the scope of reference of parties to an arbitration by adding the phrase ‘any person claiming through or under them’ thereby effectively allowing non-signatories to become a part of the arbitration agreement. This was evident in the case of Ameet Lalchand Shah v. Rishab Enterprises wherein the SC placed reliance on this amended provision to extend the arbitration agreement to parties who were non-signatories.
However, it is important to point out that even though the legislature amended Section 8 they did not amend Section 2(1)(h) of the Arbitration Act which defines the term ‘party’. This definition has no mention of a person claiming through or under him and defines party as ‘a party to an arbitration agreement’. This essentially means that even though the court can refer a party to arbitration under Section 8, such a party would not have any remedy which might otherwise be available to a signatory party. The Law Commission of India in its 246th report had recommended a similar amendment in Section 2(1)(h) as well, so as to enable a non-signatory to exercise remedies which might be available to a signatory party. However, the legislature chose not to change the definition of ‘party’ under the Act. The SC noted in the Cox and Kings Case that this omission will be significant in determining the validity of the Group of Companies doctrine.
3. FLAWS IN THE GROUP OF COMPANIES DOCTRINE
The first and the foremost argument against the Group of Companies doctrine is that from Article 7 of the UNCITRAL Model Law and Article II of the New York Convention, 1958, it is very clear that parties who intend to arbitrate any matter should reduce such an intention in writing for a valid arbitration agreement. Moreover, Section 7 of the Arbitration Act clearly states that for an arbitration agreement to be valid, it should be in writing. Further, in Delhi Iron & Steel Ltd. v. UPSEB, the Delhi High Court held that an intention to arbitration is only discernible if the arbitration agreement expressly manifests in the underlying contract. The Group of Companies doctrine is completely in contravention to this provision as most of the non-signatories who are forcefully made a party to the arbitration had not reduced any such intention in writing.
The Group of Companies doctrine also undermines one of the foundational principles of arbitration which is ‘party autonomy’. Most of the times when these commercial contracts and the arbitration agreements are entered into, the corporate entities signing the contracts are consciously chosen to not include other group companies/entities. When any of the group companies are roped into arbitration without their consent, it is patently against the principle of party autonomy. It also takes away the benefit of having separate corporate entities which are incorporated for such purposes. This was also mentioned by the SC in the Cox and Kings Case wherein it was stated that the broad-based understanding of this doctrine created in the Chloro Controls Case clearly goes against the principles of distinct legal entities and party autonomy itself.
The courts have applied the Group of Companies doctrine on the basis of the existence of a ‘tight group structure’ or a ‘single economic reality’ as in the case of Mahanagar Telephone Nigam Limited v. Canara Bank and also the Chloro Controls Case. This means that the Group of Companies doctrine could be invoked in order to bind a non-signatory affiliate company or a third party to arbitration if they have a direct relationship with the signatory party. Courts can also bind them to an arbitration if the transaction between them and the signatory party is of a composite nature. A composite transaction means a transaction which is undertaken to achieve a common object and is so interlinked in nature that its performance may not be feasible without the performance of the supplementary agreements. However, the court in Cox and Kings Case casted its doubts on the legal correctness of this concept by stating that this position laid down by the court in Chloro Controls Case was based more on economics and convenience rather than law.
4. SUGGESTION WHILE RECONSIDERING THIS DOCTRINE
Since the recognition of the Group of Companies doctrine in the Chloro Controls Case, the scope of this doctrine has been continuously expanding with each judgment of the SC. The court in Cheran Properties Ltd. v. Kasturi and Sons Ltd. widened the scope to the extent of enforcing an arbitration award against a non-signatory party. Recently, the SC in the case of ONGC Ltd. v. M/s Discovery Enterprises Pvt. Ltd. upheld the Group of Companies doctrine and said that the Group of Companies doctrine is deeply rooted in the Indian jurisprudential context. However, after the Cox and Kings Case, the SC has a great opportunity and it is suggested that the SC should finally settle the law by narrowing down the scope of this doctrine so as to uphold the foundational principles of arbitration.
It might be true that non-signatories can be included in an arbitration by the phrase ‘claiming through or under’ mentioned in Section 8. However, it is suggested that this should be done only on the basis of the existence of a sufficient legal and contractual relationship between the signatories and the non-signatories. It is necessary that the SC limits the scope of this phrase because the words of this phrase convey a derivative element. It means that when a non-signatory is being included in an arbitration, it should be first established that the right is derived contractually from the signatory. For example, non-signatories could be included in arbitration after establishing legal relationships with the signatories like agency, assignment, or sub-contracts. This will not be against the principles of party autonomy and mutual consent but based on a contractual relationship. It is also recommended that the legislature amends the definition of the term party under Section 2(1)(h) to bring it in harmony with Section 8 of the Arbitration Act.
Since its recognition in the Chloro Controls Case, the ambit of the Group of Companies doctrine has been continuously widening. Therefore, it is important that the SC restricts the broad-based understanding of this doctrine and apply it only in cases where a contractually derivative relationship exists and avoid including any other non-signatory parties in an arbitration. This doctrine goes directly against various long standing legal principles such as party autonomy and separate legal personalities of companies. It also goes against the abundant jurisprudence emphasizing on the importance of mutual consent in an arbitration. Therefore, the referral bench while answering the questions raised in the Cox and Kings Case should see to it that the scope of this doctrine is properly defined on the basis of law and not on ‘economics-driven logic’.