The Evolution Of The Group Of Companies Doctrine In India.

Introduction

Party autonomy and consent lie at the core of arbitration, serving as the foundational principle that allows parties the freedom to contractually determine who may participate in the arbitration process. Naturally, it is presumed that only those who have given their express consent to be bound by an arbitration clause will be subject to its stipulations and within the scope of an Arbitration. Therefore, in order to take part in arbitration procedures, one must be a signatory party to the arbitration agreement. But in some situations, a non-signatory party can be impleaded to the arbitration proceedings. Several legal doctrines have been utilized to establish consent on behalf of non-signatories. A notable doctrine that has uniquely evolved from arbitral practice and precedents, is the "Group of Companies" doctrine.

The Group of Companies doctrine ("GOCD") is a legal principle that allows an arbitration agreement signed by one or more companies in a group to bind the parties which are non-signatory companies to arbitration.

It is based on the idea that the parties involved intended by mutual consent to bind both signatories and non-signatories. The application of GOCD in Indian arbitration has faced significant challenges, however, it has ultimately been embraced by Indian courts, fostering a pro-arbitration stance and strengthening the framework for resolving more complex disputes. This article will discuss the background of the doctrine and evolution of GOCD in Indian arbitration jurisprudence with the help of landmark cases like Chloro Controls (I) P. Ltd. vs. Severn Trent Water Purification Inc. & Ors.¹, Cox and Kings Ltd. vs. SAP India Pvt. Ltd. & Ors.²(Cox & Kings I) and Cox and Kings Ltd. vs. SAP India Pvt. Ltd. & Ors.³(Cox & Kings II).

Background

GOCD was first elaborated upon in the landmark case of Dow Chemical v. Isover Saint Gobain⁴ which was decided by the International Chamber of Commerce ("ICC") Tribunal in Paris, France. In this case, a French subsidiary, Dow Chemical France, along with its American parent organization, Dow Chemical USA, initiated arbitration proceedings against Isover Saint Gobain on the basis of an arbitration clause which was present in their Agreement. However, neither Dow Chemical France nor its parent company were signatories to this contract, as the arbitration clause was part of an agreement carried out between Isover Saint Gobain and additional Dow Chemical group affiliates. In light of certain disputes over the performance of the distribution agreements, all four Dow Chemical entities initiated arbitral proceedings against Isover. However, on the grounds that two of the claimants, Dow Chemical France and Dow Chemical Company, were not signatories to the contracts containing arbitration clauses, Isover contested the ICC's jurisdiction. The ICC tribunal determined that the arbitration clause extends to other companies within the group that demonstrate a shared intention to participate in the conclusion, execution, or termination of the contracts in question. This has been expressed by ICC as follows:

"the arbitration clause expressly accepted by certain of the companies of the group should bind the other companies which, 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, appear to have been veritable parties to these contracts or to have been principally concerned by them and the disputes to which they may give rise."

After that, the application of GOCD and its consequences in Arbitration jurisprudence was debated by Court. Arbitration is solely based on the parties' consent to enter into arbitration proceedings, but GOCD will be an exception in arbitration jurisprudence because even if the non-signatory party has not expressly agreed to participate in arbitration proceedings, it still binds them to the proceedings.

Evolution of the Doctrine in Indian Jurisprudence

Indian arbitral jurisprudence has seen a considerable transformation with respect to binding a non-signatory to an arbitration agreement. In Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya and Anr.⁵, multiple parties in the same transaction had disagreements but all the parties were not signatories to the arbitration agreement which contained the arbitration clause. The Hon'ble Supreme Court held that the non-signatories cannot be referred to the arbitration proceedings as they are not part of the arbitration agreement.

Further, the principle laid down in Sukanya Holdings (Supra) was followed in the case of Indowind Energy Ltd. v. Wescare (I) Ltd. and Anr.⁶. The decision in Indowind emphasized the need for formal consent too much, taking a very harsh and inflexible stance.

Ultimately, the position of law laid down in Sukanya Holdings (Supra and Indowind Energy (supra) regarding the joining of non-signatory parties to the arbitration proceedings was adjudicated by the Apex Court in Chloro Controls (I) P. Ltd. vs. Severn Trent Water Purification Inc. and Ors.. In this case, there was a Shareholders agreement i.e., 'parent' agreement between two parties and several other interlinked agreements under the parent agreement but parties were different in the said agreements. All of the aforementioned interconnected agreements originated from the aforementioned parent agreement since they were a part of a "Composite Transaction." The Hon'ble Court held that the case was governed came under the purview of Section 45 of the Arbitration & Conciliation Act, 1996 ("the Act"). By interpreting the phrase "person claiming through or under" written in Section 45 of the Act, the Court held that it possesses the authority to refer non-signatory parties involved in a multi-party agreement to arbitration, applying the Group of Companies Doctrine. It was further elucidated by the court:

69. We have already noticed that the language of Section 45 is at a substantial variance to the language of Section 8 in this regard. In Section 45, the expression "any person" clearly refers to the legislative intent of enlarging the scope of the words beyond "the parties" who are signatory to the arbitration agreement. Of course, such applicant should claim through or under the signatory party. Once this link is established, then the court shall refer them to arbitration.
70. A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases.⁷

There were inconsistencies in the judgment of the Hon'ble court regarding the basis on which they applied the GOCD doctrine. In the Chloro Controls (supra), the Supreme Court has adopted contradictory terms in the judgment. On the one hand, the Supreme Court put emphasis the intent of the parties to join arbitration proceedings, but on other, it also held that in "exceptional cases," a non-signatory may be added to the arbitration proceedings without their previous consent.

In the case of Cheran Properties Limited v. Kasturi & Sons. Limited⁸, the Hon'ble court enforced an award against a party that failed to participate in the arbitral proceedings by interpreting the phrase "persons claiming under them" in Section 45 of the Act to include such parties. This judgment marked a significant benchmark as the court in this case had initiated enforcement proceedings against a party which was not a part of the arbitration agreement.

This represents the most extensive application of the GOCD, wherein a party is bound by an arbitral award despite not having participated in the arbitral proceedings. This development has set a concerning precedent and raised significant due process issues regarding non-signatories. A three-judge bench of the Hon'ble Supreme Court, in Oil and Natural Gas Corporation Ltd. v. M/s. Discovery Enterprises Pvt. Ltd. and Anr.⁹, reaffirmed the well-established presence of the GOCD in Indian arbitration jurisprudence. The Court outlined that the mutual intent of the parties, the relationship between the non-signatory and a signatory, the commonality of the subject matter, the composite nature of the transaction, and the performance of the contract are all factors that determine whether a non-signatory entity within a group of companies can be bound by an arbitration agreement.

The lack of clarity or uniformity regarding the application of GOCD in Indian arbitration has led to confusion for both the parties, arbitrators and the non-signatories. Therefore, it is imperative for the Hon'ble Supreme Court to establish clear parameters governing the application of the doctrine. Thereafter, the Hon'ble Supreme Court in the case of Cox and Kings Limited v. SAP India Private Limited & Anr, (Cox & Kings I) has clarified the idea surrounding the essence of GOCD, and held that the joining of a non-signatory party to the arbitration should be based on implied consent which must be inferred from the acts and conducts of that party within the group of companies. This position upholds the principle of separate legal entity of that party and it joins the arbitration based on the implied consent inferred from its acts and conducts. Further, it has also been emphasized by the court that GOCD is an exception to the general rule of arbitration and it has to be applied with caution.

Further, the three-judge bench of this case directed a larger bench to consider the case for further elaboration on questions related to GOCD. In pursuance thereof, on 6 December 2023, the five-judge bench of the Hon'ble SC in the case of Cox and Kings Ltd. v. SAP India Private Ltd.(Cox & Kings II) pronounced its judgment on the validity of the "Group of Companies" doctrine.

The Hon'ble Supreme Court, while affirming the validity of the GOCD, arrived at the following conclusions:

1. Both signatory and non-signatory parties are included in the definition of "parties" under Section 2(1)(h) read with Section 7 of the Act. Therefore, the non-signatory parties' actions may be a sign that they agree to be bound by the arbitration agreement.
2. The possibility to bind non-signatory parties is not eliminated by Section 7's need of a written arbitration agreement.
3. The foundation for applying the GOCD lies in preserving the distinct corporate identities of the group companies while assessing the shared intent of the parties to bind the non-signatory entity to the arbitration agreement.
4. When a court or arbitral tribunal is charged with deciding whether an arbitration agreement and its parties exist, it is imperative that the GOCD be included in the legal process in accordance with Section 7(4)(b) of the Act.
5. The principle of alter ego, piercing the corporate veil and single economic unit cannot be the basis for the application of the GOCD.
6. The Court's approach in Chloro Controls (supra), wherein it linked the GOCD to the phrase "claiming through or under," is flawed and inconsistent with the the well-established corporate and contract law principles. The expression "party" in Section 2(1)(h) and Section 7 is different from "persons claiming through or under them".
7. To apply the GOCD, the courts or tribunals, as applicable, must take into account each of the cumulative elements listed below:

(i) Mutual intent of parties;

(ii) Relationship of a non-signatory to a signatory;

(iii) Commonality of the subject matter;

(iv) Composite nature of the transaction;

(v) The performance of the contract.

Conclusion

The five-judge bench decision in Cox & Kings II marks a pivotal moment in Indian arbitration jurisprudence. It conclusively affirms the inclusion of the Group of Companies Doctrine as a part of Indian arbitration law, highlighting its critical role in discerning the intentions of parties in complex, multi-party, and multi-agreement transactions. Despite this recognition, questions about the doctrine's practical application persist, such as whether a party's failure to implead another party before the arbitral tribunal could justify filing an application under Section 34 of the Arbitration and Conciliation Act.

While upholding the doctrine's validity, the judgment underscores that tribunals must exercise caution in applying it as the inclusion of non-signatory parties depends on the tribunal's assessment of implied consent, which is inferred from the actions and conduct of such parties. Furthermore, non-signatory entities must carefully scrutinize the terms of agreements and their conduct during contract performance to avoid inadvertently assuming obligations under the arbitration agreement.

Footnotes

1 Chloro Controls (I) P. Ltd. vs. Severn Trent Water Purification Inc. and Ors., (2013) 1 SCC 641.

2 Cox and Kings Limited vs. SAP India Private Limited and Ors., (2022) 8 SCC 1..

3 Cox and Kings Ltd. vs. SAP India Pvt. Ltd. and Ors.Arbitration Petition (Civil ) No. 38 of 2020, Judgment dated 06.12.2023,

4 Dow Chemical v. Isover Saint Gobain, ICC Case No. 4131, Interim Award dt. 23-9-1982.

5 Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya and Anr, (2003) 5 SCC 531.

6 Indowind Energy Ltd. v. Wescare (I) Ltd. and Anr., MANU/SC/0300/2010.

7 Chloro Controls (I) P. Ltd. vs. Severn Trent Water Purification Inc. and Ors., MANU/SC/0803/2012.

8 Cheran Properties Limited v. Kasturi & Sons. Limited, (2018) 16 SCC 413.

9 Oil and Natural Gas Corporation Limited v. M/s. Discovery Enterprises Private Limited & Anr., Civil Appeal No. 2042 of 2022, Judgment dated 27.04.2022.

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