Tangling the Non-Signatories without “Consent”: Rethinking the “Group of Companies” Doctrine

Introduction

Arbitration is emerging as the most rational, efficient, and effective equilibrium point between mediation and litigation aligning procedural, controllable, and resolution-oriented influences from both ends with a bird’s-eye view of streamlining dispute resolution. Progressing to deal with dynamic disagreements from the entangled corporate structure, arbitration reasonably balances the variables of “party consent” and “separate legal personality” as the parties that are signatories to the agreement are regarded to have provided consent to the arbitration procedure. As acknowledged by international treaties and consistent with accepted practice, “consent” is regarded as the cornerstone of arbitration.

Designing the dilemma: The “group of companies”

In stark contrast, the “group of companies” doctrine (the doctrine) obligates parties to arbitration agreements to arbitrate on behalf of all group companies, including those who have not consented to do so. Resultantly, such group companies, specifically parent corporations, are forced to comply with arbitral rulings in a way that was not anticipated by businesses at the time the underlying agreements were signed. Unquestionably, the doctrine stands congruent to the principles of “alter ego”¹ and “agency”² to hold the intertwined companies responsible but simultaneously violates the principle of “privity of contract”.³ To arbitrate or not to arbitrate becomes an unresolved fundamental dilemma owing to the topsy-turvy judicial stance in the Indian realm. On that substructure, this discourse attempts to raise an analytical conflict on the application of the doctrine in the Indian sphere by incorporating the learnings from the legislative fabric, parliamentary intent, fundamental principles, judicial behaviour, and international jurisprudence to outline the applicability and relevance of the doctrine.

Unearthing the evolution of the doctrine

As highlighted, “consent” is the essence of arbitration, but on the foundation of the “single economic reality” perspective of the corporate conglomerates, it was first softened by the International Chamber of Commerce (ICC) in Dow Chemical Co. v. Isover Saint Gobain⁴ with the evolution of the contentious “group of companies” doctrine. Successively, the seed of the doctrine was shadowed in the Indian horizon in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya⁵ (Sukanya), where the Supreme Court rejected the enforcement against non-signatories, even in a composite reference.

Balancing oscillations in the Indian jurisprudence

The muddled saga continued and Sukanya case⁶ took an unobtrusive stance after Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc.⁷ (Chloro Controls), which constructed the foundation for the doctrine in India. Under Section 45 of the Arbitration and Conciliation Act, 1996⁸ (the Act), the case only lowered the threshold of “consent” as the obligation was squarely on the non-signatory party to demonstrate that they were asserting claims “through or under” a signatory, but it marked the inception of the puzzle. Moving further parallelly, the Supreme Court in Cheran Properties Ltd. v. Kasturi & Sons Ltd.⁹ established that despite the absence of the non-signatories from the proceedings, an arbitral judgment might be enforced against them. Shading the analytical colour of Chloro Controls¹⁰ on Section 8¹¹ of the Act, the Court ruled in Ameet Lalchand Shah v. Rishabh Enterprises¹² that non-signatories will also be parties to the arbitration in a composite transaction leading to an extreme augmentation of the doctrine.

Hitting the last nail to the spirit of arbitration — “Party autonomy”, the Supreme Court in MTNL v. Canara Bank¹³, expanded the horizon of the doctrine to close-knit group structures with strong organisational and financial ties, forming a “single economic unit” or a “single economic reality”. Furthermore, the Supreme Court earmarked capital transfer across group companies as a suitable standard for the application of the doctrine. Consequently, there are very specific circumstances when piercing the corporate veil is empowered and the group of companies’ doctrine may be used to dodge the same. On the foundation of such chaotic jurisprudence by the Supreme Court, the High Courts are in a baffled situation with oscillating positions but have ended up applying the doctrine in majority cases. [See Shapoorji Pallonji and Co. (P) Ltd. v. Rattan India Power Ltd.¹⁴; SEI Adhavan Power (P) Ltd. v. Jinneng Clean Energy Technology Ltd.¹⁵; and Magic Eye Developers (P) Ltd. v. Green Edge Infra (P) Ltd.¹⁶]

Applicability of the doctrine

Unfolding the question of applicability, the dilemma arose with two recent judgments of the Full Bench of the Supreme Court revolving around the doctrine. Firstly, in ONGC v. Discovery Enterprises (P) Ltd.¹⁷, the Court overturned an arbitral ruling that did not take the group of companies’ doctrine into account by affirming its application under the Indian domain. Taking note of the tumultuous positions, the Court laid down factors and circumstances for the applicability of the doctrine, highlighted hereinbelow:

40. … (i) the mutual intent of the parties;

(ii) the relationship of a non-signatory to a party which is a signatory to the agreement;

(iii) the commonality of the subject-matter;

(iv) the composite nature of the transaction; and

(v) the performance of the contract.

Secondly, shortly afterward, the Court in Cox & Kings Ltd. v. SAP India (P) Ltd.¹⁸ (Cox & Kings) forecasted the catastrophe and tightened the reins on the unbridled applicability of the doctrine by questioning whether the doctrine was consistent with fundamental ideas like party autonomy and separate corporate identity. Summing up, since the earlier principle was also established by a Full Bench, the Supreme Court’s larger Bench has been referred to rule on establishing the doctrine’s foundation, scope, and applicability.

Claiming “through or under”

Within the statutory frame, the primary root of the issue can be traced in Section 8¹⁹ of the Act which outlines that “a party to the arbitration agreement or any person claiming through or under him” can oblige a court that has jurisdiction over a dispute covered by arbitration to refer the parties to arbitration rather than ruling on the issue itself. Understanding the parliamentary purpose, the amendment inserting the expression “claiming through or under” (amendment made on account of Chloro Controls²⁰) permitted a non-signatory to get standing before the Arbitral Tribunal as the signatory’s successor-in-interest.

On similar lines, the 246th Report of the Law Commission of India ²¹ proposed a modification to Section 2(1)(h)²² (definition of “party”) to enable successors-in-interest to exercise all rights that a signatory of an arbitration agreement was entitled to since they had essentially taken the signatory’s place. Exercising wisdom, Parliament did not amend to that effect and such omission casts a shadow on examining the parliamentary intent as well as the validity of the doctrine.

In a panoramic view of the interpretation of the phrase “claiming through or under” across the globe, diversified positions can be observed for utilisation in the Indian horizon. Paramountly, the Court of Appeal in City of London v. Sancheti²³ narrowed down the interpretation of the phrase and refused to include the doctrine, whereas the Australian High Court in Rinehart v. Hancock Prospecting Pty Ltd.²⁴ lucidly substantiated the derivate cause of action from “claiming through or under” and enlarged the ambit of the phrase holding that non-signatories are also bound by the arbitration agreement. Therefore, the Supreme Court must now take into account the varied rulings of courts around the world, appraise both the consensual and non-consensual theory of contracts, and establish the meaning of the expression “claiming through or under” for the Indian context.

Balancing multi-dimensional disagreements: Pros and cons

Progressing to the other dimension, the doctrine helps optimistic claimants who believe that the signatory to the arbitration agreement may not be able to fulfil an award and who thus want to involve financially stronger group entities in the proceedings. But such a trade-off will be at the cost of sidelining the fundamental principles that made arbitration a popular means of conflict settlement.

From a multi-dimensional perspective, catastrophic consequences of the application of the doctrine can be forecasted. Firstly, the doctrine undermines the cardinal principle of arbitration that relies on “consent”; secondly, the doctrine outrightly contradicts Section 7(3)²⁵ of the Act, which mandates that the arbitration agreement must be in writing; thirdly, it violates the principle of “privity of contract”; and finally, the adoption of doctrine flagrantly contravenes the tenet of “separate legal personality” established in Salomon v. Salomon & Co. Ltd.²⁶ The conundrum is a double-edged sword with one facet promising enforcement and guarantee while the other preserving the aspect of party consent and autonomy.

Concluding perspectives and suggestions

Dissolving the legal, logical, and commercial balances highlighted with the alignment of the group of companies’ doctrine, it is commendable that the Supreme Court decided to refer a larger Bench to comprehensively consider the doctrine owing to the dynamic and multi-layered ramifications. Recently, the Supreme Court in Gemini Bay Transcription (P) Ltd. v. Integrated Sales Service Ltd.²⁷ corroborated the binding nature of foreign awards on non-signatories, however, the question of doctrinal applicability remains unresolved. With the exponential transformation in commercial structures where capital flows freely amongst group companies, the “single economic reality” test will have severe consequences. Analysing the paradigm in the contemporary structure, it is foremost to get lucidity concerning the applicability of the doctrine which can be done in the following alternative ways:

1. In exercise of the parliamentary wisdom in line with the 246th Law Commission Report, third parties and non-signatories should be included in the definition of a party under Section 2(1)(h)²⁸ of the Act, provided that there is a clear requirement that the third party receives a direct benefit from the contract as opposed to an incidental advantage from its fulfilment.

2. In the interests of justice and good conscience, the Supreme Court can establish a principle dealing with the applicability of the doctrine and if no straightforward answer can be attached to the issue, then a model framework furnishing a preconditioning test along with the outlines of the scope/ambit can be settled.

3. Till the dilemma exists, parties to contracts subject to Indian law can specifically state in their contracts (including arbitration agreements) that interests descended from the contractual obligations will be confined to only the parties to the contract; and only the signatories and specified individuals/entities shall be recognised as “parties”.

From our perspective, the Supreme Court should seize this opportunity to uphold the aspect of “consent” and rule that the doctrine cannot continue to be ingrained in Indian arbitration law. Considering the doctrine is adopted with the vision of guarantee and fast-track resolution, the Court must provide a skeletal formula that lucidly enlists the conditions, circumstances, and scope of the doctrine.