Arbitration is a private, consent-based process. As per Section 7 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as "the Act"), there must be consensus ad idem between the parties for a valid arbitration agreement to exist i.e. the parties must agree to the same thing in the same sense and must have the common intention to settle the dispute through an arbitral tribunal. To bind non-signatories to an arbitration agreement, a variety of legal concepts have been employed, albeit infrequently, to prove such assent. The "group of companies" theory is one such legal doctrine examined in this article.
The "group of companies" philosophy has gotten a lukewarm reception, with a few exceptions. Most civil and common law jurisdictions have given it a warm welcome, despite the fact that it has been criticised for ignoring the idea of separation of powers. Separate legal personality and the ability to treat several corporate units within a group as a single economic entity unit. Indian courts have shown a greater propensity for the rule of law than their common-law counterparts.
The "group of companies" theory states, in basic words, that a non-signatory may be bound by an arbitration agreement if it is a member of the same group of companies as the signatory and all of the arbitration agreement's parties mutually intend that the non-signatory be bound by it. The parties' intents are usually determined by their actions, which include determining if the non-signatory engaged in the contract's negotiation, performance or termination. The mere presence of an affiliate relationship between a signatory and a non-signatory cannot be used as a foundation for consent, according to authorities. The "group of companies" concept, unlike other non-signatory theories that are based on domestic law principles, is based on international arbitration jurisprudence.
GENESIS OF THE DOCTRINE
Dow Chemicals v. Isover Saint Gobain1 (hereinafter referred to as "Dow Chemicals") was the first case to adopt and apply the "group of companies" doctrine. The doctrine has mostly been met with scepticism outside of the French courts and select arbitral tribunals operating under the regulations of the International Chamber of Commerce ("ICC"). The doctrine's apparent disregard for the norms of privity of contract and independent legal personality, which blurs the requirement of consent in international arbitration, is the subject of the most serious critiques.
Dow Chemicals initiated Arbitration proceedings against Isover Saint Gobain (hereinafter referred to as "Isover"). Isover objected to the jurisdiction on the grounds that some of the subsidiaries of Dow Chemicals were not signatories to the Arbitration Agreement. Isover's objection was rejected by the ICC on two grounds: first, the subsidiaries played a significant role in carrying out the terms of the contract between the parent company and Isover; and second, the subsidiary companies were under the control and direction of the parent company, making them eligible to pursue their claims in arbitration.
It is relevant to note that, in this instance, the non-signatories did not raise a challenge to being held accountable under the arbitration clause. Thus, the genesis of the "group of companies" doctrine lies in this case.
On the basis of the "group of companies" doctrine, French courts have later upheld arbitral verdicts wherein the arbitration agreement has been expanded to bind non-signatories, either explicitly or implicitly. For instance, the Court of Appeal of Pau upheld the lower court's choice to select an arbitrator for a party that was a non-signatory in Sponsor A.B. v. Lestrade.2 The Court, applying the "group of companies" doctrine, noted that the non-signatory had contributed significantly to the conclusion, non-performance, and termination of the underlying contract, making them "the soul, the inspirer and, in fact, in a word, the brains of the [signatory] party".
INDIAN APPROACH: NECESSITY FOR THE DOCTRINE?
The main purpose behind bringing the 'group of companies' doctrine in India was to prevent fragmentation of disputes in composite transactions i.e., disputes consisting of several parties and multiple contracts. Although this concept has not been expressly recognized in the Arbitration Act however, the judiciary has developed and justified this doctrine by relying on the phrase "party and any person claiming through or under him" in Sections 8, 35, and 45 of the Arbitration Act through the plethora of judgments, which are discussed below.
This doctrine was first recognized by the Hon'ble Supreme Court in Chloro Controls (I) P. Ltd. v. Severn Trent Water Purification Inc. & Ors3 . This case was in reference to arbitration under Section 45 of the Arbitration Act and it was held that a "non-signatory forming part of the same corporate group as a signatory could be made a party to the arbitration where it is clear from circumstances surrounding the transaction that the mutually held intent was to bind the signatory as well as the non-signatory to the arbitration agreement." Furthermore, the Court elucidated four important points which guide this principle: "direct relationship between the signatories and the non-signatories, direct commonality of the subject matter, the composite nature of the transaction between the parties, and whether the ends of justice would be served by referring the disputes to arbitration." Before Chloro Controls, the Indian Judiciary was following a very restrictive approach towards arbitration as can be seen from the judgment of Sukanya Holdings v. Jayesh H. Pandya4 . This case was in reference to arbitration under Section 8 of the Arbitration Act and it was observed by the Hon'ble Supreme Court that any matter in which a claim falls beyond the scope of the arbitration agreement and few of the parties are not signatories to the arbitration agreement then such matter cannot be referred to arbitration. The Hon'ble Court in Chloro Controls has swayed the paradigm from a restrictive approach towards arbitration to a more pro-arbitration approach.
The ratio of Chloro Controls has been followed and applied in several judgments which are mentioned hereinafter. In the case of Ameet Lalchand Shah5 , the ratio was followed in the context of domestic arbitration wherein, it was observed that an arbitration agreement in the mother agreement would also bind the non-signatory if the said non-signatory is a party to any inter-connected agreement which has been executed to achieve the similar commercial purpose. In Cheran Properties6 , this doctrine was applied to enforce an award against a non-signatory even when the non-signatory was never sought to be joined as a party to the arbitration and there was no composite transaction. Moreover, the Hon'ble Supreme Court has further broadened the horizon of this doctrine in the MTNL7 case, wherein the court has stated that a non-signatory can be bound which forms part of the single economic group. The Court also went ahead and stated that a non-signatory can also be bound on a consensual theory (agency or assignment) or a non-consensual basis (the doctrine of estoppel or alter ego of parties).
Recently, a three-judge bench of the Supreme Court in the judgment of Oil and Natural Gas Corporation Ltd. v. M/s Discovery Enterprises Pvt. Ltd. & Anr., 8 has upheld the 'group of companies' doctrine which binds non-signatory to arbitration if such non-signatory is an alter ego of a signatory company. The Court further pointed out certain points which is relevant in deciding the application of this doctrine. They are as follows:
- Mutual intent of parties;
- Relationship of a non-signatory to a signatory;
- Commonality of the subject matter;
- Composite nature of the transaction; and
- Performance of the contract.
Even though this doctrine has avoided fragmentation of dispute in composite transactions and has increased efficiency in arbitration proceedings, it has certain drawbacks and pitfalls which are mentioned hereinafter.
GROUP OF COMPANIES DOCTRINE: A DOCTRINE NOT IN TANDEM WITH THE OBJECT OF THE ARBITRATION ACT
The recognition of the 'group of companies' doctrine in Chloro Controls has over expanded the ambit of this doctrine which has given rise to a number of concerns which are discussed below:
First, the reliance of the Court on the phrase "claiming through or under" in Sections 8 and 45 of the Arbitration Act to implement the 'group of companies' doctrine is dubious. The 'group of companies' doctrine, on the one hand, is based on the understanding between the signatory and non-signatory that there is a mutual intent amongst them to be bound by the arbitration agreement and the non-signatory is bound in its own capacity with its own rights and obligations under the arbitration agreement whereas, the phrase "claiming through or under", on the other hand, is based on the assumption that a party is deriving their rights by claiming through or on behalf of some other party to the arbitration agreement. Therefore, the use of this doctrine in the context of the phrase "claiming through or under" creates a risky precedent to enforce awards against non-parties to arbitration proceedings9 as held in the Cheran Properties10 case.
Second, the applicability of the 'group of companies' doctrine is against the very principle and touchstone of arbitration. The fundamental premise on which arbitration is based is the principle of the party's autonomy and consent. However, this doctrine compels the non-signatories to join an arbitration proceeding that they have no intention to join, thereby going against the object of the Arbitration Act.
Third, the Courts apply several other corporate law principles while applying the 'group of companies' doctrine for instance, the doctrine of alter ego, the principle of agency, lifting of corporate veil and doctrine of estoppel etc. This has led to the distortion of the concept of a separate legal entity and the non-signatories may be compelled to take up the risk that they have not envisioned at the time of execution of contract.11 The Delhi High Court in its recent judgment Shapoorji Pallonji and Co. Pvt. Ltd. v. Rattan India Power Ltd.,12 has applied group of companies doctrine along with principles of alter ego and lifting of the corporate veil.
Fourth, the Courts have determined parties' mutual intent on the basis of vague points such as the use of a common letterhead, addresses or email id, negotiations by representatives having authority in multiple capacities, or financial support given by entities in the same corporate group to one another.13 Using of such vague points often led to undermining of commercial realities of business transactions and complex corporate structures which were used to implement them. The Madras High Court in SEI Adhavan Power Private Limited & Ors. v. Jinneng Clean Energy Technology Limited14, wherein the non-signatories were made parties to an arbitration on the basis of the fact that they were part of the same economic group as the signatory to the undertaking, having common centralised control, common email ids, common premises, and the transactions were undertaken in relation to a common project.
Fifth, the over-expansion of the doctrine by the Hon'ble Supreme Court has led the High Courts to apply this doctrine without even trying to figure out the mutual intention of the parties provided that the transaction is of a composite nature or the concept of tight group structure are satisfied. The Delhi High Court in Magic Eye Developers Pvt. Ltd. v. Green Edge Infra Private Limited15 has joined two non-signatory in the arbitration proceeding on the basis of them being the group companies of the signatory companies.
Lastly, the three-judge bench of the Supreme Court in the recent judgment of Cox and Kings Ltd v. Sap. India Pvt. Ltd.16 on May 6, 2022 has expressed serious concern about the correctness of the 'group of companies' doctrine in arbitration law in India as decided in the case of Chloro Controls. The judges have referred certain issues in relation to the said doctrine to a larger bench which are as follows:
- Whether phrase 'claiming through or under' in Sections 8 and 11 could be interpreted to include the 'Group of Companies' doctrine?
- Whether the 'Group of companies' doctrine as expounded by the Chloro Control Case (supra) and subsequent judgments valid in law?
- Whether the Group of Companies Doctrine should be read into Section 8 of the Act or whether it can exist in Indian jurisprudence independent of any statutory provision?
- Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of 'single economic reality'?
- Whether the Group of Companies Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?
- 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 Authors have already dealt with the pitfalls in relation to the said doctrine and agree with the decision of the three judge bench as the 'group of companies' doctrine is diluting the very objective and touchstone of arbitration.
The Indian approach to the doctrine of "group of companies" reflects a basic, pragmatic aim to handle related or linked conflicts in a single forum. The rationale and dimensions of the "group of companies" concept appear to have expanded beyond the doctrine's initial purview in its application by Indian courts, risking and compromising the core need of consent in international arbitration. As a result, it would be appropriate for a larger bench of the Indian Supreme Court to revisit the theory to see if it still has a jurisprudential grounding in Indian law and, if so, what the doctrine's limitations are. While a rigid formula for the doctrine's applicability would be removed from commercial and economic realities, if the Court's larger Bench upholds the doctrine's validity in Indian Arbitration Law, clear guidelines on its applicability would undoubtedly aid its effective implementation by Indian courts.
1 Dow Chemical France, the Dow Chemical Company & Ors. v. Isover Saint Gobain, ICC Case No. 4131, IX Y.B. COMM. ARB. 131 (1984).
2 Sponsor AB v Lestrade Pau, 26 November 1986  Rev arb 153
3 Chloro Controls (I) P. Ltd. v. Severn Trent Water Purification Inc. & Ors, (2013)1 SCC 641
4 Sukanya Holdings v. Jayesh H. Pandya, (2003) 5 SCC 531
5 Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Anr., (2018) 15 SCC 678
6 Cheran Properties Ltd. v. Kasturi & Sons Ltd. & Ors., (2018) 16 SCC 413
7 MTNL v. Canara Bank & Ors., (2020) 12 SCC 767
8 Oil and Natural Gas Corporation Limited v. M/s Discovery Enterprises Pvt. Ltd. & Anr., Civil Appeal No. 2042 of 2022
9 The Group of Companies Doctrine – Assessing The Indian Approach, IJAL by Charlie Caher, Dharshini Prasad & Shanelle Irani, Vol. 9, Issue 2, Page. 44.
10 Cheran Properties Ltd. v. Kasturi & Sons Ltd. & Ors., (2018) 16 SCC 413
11 Available at http://arbitrationblog.kluwerarbitration.com/2021/06/24/twos-company-threes-a-crowd-revisiting-the-group-of-companies-doctrine/ . Accessed on 16.06.2022
12 Shapoorji Pallonji and Co. Pvt. Ltd. v. Rattan India Power Ltd, 281(2021)DLT246
13 Available at http://arbitrationblog.kluwerarbitration.com/2021/06/24/twos-company-threes-a-crowd-revisiting-the-group-of-companies-doctrine/ Accessed on 16.06.2022
14 SEI Adhavan Power Private Limited & Ors. v. Jinneng Clean Energy Technology Limited, 2018(4)CTC464
15 Magic Eye Developers Pvt. Ltd. v. Green Edge Infra Private Limited, 2020 SCC OnLine Del 597.
16 Cox and Kings Ltd v. Sap. India Pvt. Ltd, Arbitration Petition (Civil) No. 38 of 2020
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