The Fallacies of Consent in Arbitration: Dissecting the Group of Companies Doctrine Across Jurisdictions

Introduction

The concept of “consent” goes to the core of arbitration, but various jurisdictions interpret it slightly differently. Initially, “consent” was only interpreted formally, that is, that it could be verbal or written. The only theory that highlighted the internal will to bind them with right and duty was “the will theory”. On another note, “declaratory theory”, strong in its conviction of commerce being certain, condemned the arbitrary notion of “internal will”. However, these two intermix to form “pragmatic approach to consent” i.e. internal will and commerce. This article examines how the concept of consent to arbitration has been shaped by the legal evolving needs and the notion of implied in group of companies (herein “GoC”).

Written form and the roots of implied consent

In almost every jurisdiction, the first approach to finding the route to the minds of parties is a formal approach i.e. writing between parties. It can be either of two purposes: evidentiary purpose and validity purpose. In Dutch, the word used is: “The arbitration agreement is proven by writing … provided that this instrument is expressly or impliedly accepted by or on behalf of the other party,”¹ similarly, in Spain it mentions, “The arbitration agreement shall be verifiable in writing”² further in Article 9 it mentions agreement must “express the will of the parties”; this shows the evidentiary nature of legislation. Whereas, in Swiss, it mentions, “The arbitration agreement shall be valid if made in writing or in any other manner that can be evidenced by text,”³ and in the Brazil, it mentions, “An arbitration clause will be in writing.”⁴ Another example is UAE, which mentions that: “The arbitration agreement shall be in writing; otherwise, it shall be null and void.”⁵ This shows the validity purpose of the legislation. Also, there are countries like France and Sweden, which, in fact, do not require written form.

These approaches, however, show the subjective and objective understanding of “consent”. For example, in countries with evidentiary value, the legislation provides for multiple methods of establishing consent, such as express or implied consent like Dutch and Spain, whereas in statutes with validity purposes, there are stricter requirements for establishing consent, such as the Swiss requiring only the “text” or UAE strongly focusing of text and provide restriction based on privity and writing requirement.⁶

Now, the substantive question is what is the extent of implied consent under the Arbitration Act? For example, in Singapore, it is provided that an agreement is in writing when “recorded in any form, whether the agreement is concluded orally, by conduct, or by any other means”.⁷ In contrast, the UK Act⁸ clearly laid out the evidence in writing, which includes writing recorded by one party or a third party (with authorisation of the parties). There is no concept of “implied consent”. Even in the Indian Arbitration Act⁹, apart from statement of claim arguments, there is no other way to prove implied consent. This raises the issue of “implied consent” in the GoC. How will it be fitted into statutory provisions? There are two schools for interpretation: one consensual and another, non-consensual school. Consensus school includes contractual interpretation of implied consent, doctrines of assignment and GoC doctrine. This school lies on the presumption of “less evidence requirement in arbitration agreement”.¹⁰

Another school is non-consensual, which is based on principle of justice and equality such “single economic unit” and “same economic reality” concepts. Another principle used is the “principle of good faith”. In the Swiss Federal Tribunal, the arbitral award was set aside on the ground that non-signatories acted in a manner where it is presumed, they had consented or led others to believe they were the true party in the contract.¹¹ Lastly, “the doctrine of equitable estoppel” and is equated as part of GoC.¹² In Shapoorji Pallonji & Co. (P) Ltd. v. Rattan India Power Ltd., while connecting two, emphasise that the agent of the principle can be included in arbitration by the concept of implied consent.¹³ Hence, although, the two school mentions overlaps certainly in “estoppel doctrine”. This article will focus on first school especially implied consent and GoC doctrine.

Across borders: The uneven evolution of the GoC doctrine in arbitration

Evolution of consent in arbitration agreements, even after amendment to the United Nations Commission on International Trade Law (UNCITRAL) Model, is unevenly distributed across jurisdictions. The jurisdictional difference is seen in Aloe Vera of America Inc. v. Asianic Food (S) Pte. Ltd.¹⁴ where the Singapore rejected the challenge to the arbitral award based on GoC. The Court stated the State of Arizona was the proper law of arbitration, later upheld by the Court in Arizona. Another is FR 8 Singapore Pte. Ltd. v. Albacore Maritime Inc.¹⁵, where the New York District Court applied piercing the corporate veil, stating US law is more favourable as compared to England to corporate veil. However, later, it was held that US common law is not applicable to contracts because English law is the choice of law.¹⁶ This shows how the choice of law shapes the outcome of a challenge to a group of companies’ doctrine. The jurisdiction is divided into three categories: one is legislation with no writing standard, the second is those with writing as a “validatory purpose”, and the last is statutes with writing as a clear differentiation between “validity and evidentiary purpose” i.e. formalistic approach. This categorisation is important because the question is how to substantiate or evidence implied consent for the application of GoC. As in the first and second categories, implied consent can be imported, whereas in the third category, the consent is too formalistic with an evidentiary section attached.

(A) The jurisdiction in the first category includes France and Sweden: Sweden does not recognise GoC. However, implied consent can be inferred from passivity¹⁷ and behaviour of parties.¹⁸ France is the first country where the concept evolved. However, there is no concept of writing in arbitration agreements under the French Civil Code¹⁹. It is also important to note an arbitration agreement is considered a contract within the main contract with independent rights and obligations. Therefore, GoC doctrine makes an exception to privity of contract for practical reasons. The Court has even gone so far as to annul the award on the ground of GoC.²⁰ The uniqueness of France’s jurisdiction is that they relied on GoC, not only on the commerce argument but also on consent. One such case is KIS France SA v. Société Générale²¹, where the Court of Appeal in Paris held that it is not merely the GoC, but parties intended by agreement based on a “contractual unity”, and hence, it is an act of implied consent.

(B) The second category includes the United States and Germany: In the US, there is mere mention of “written provision of arbitration”; hence, the group of doctrines only is made applicable for efficiency and commercial benefit based on the principle of alter ego²², corporate veil²³, or agency²⁴. In fact, Germany does not follow GoC doctrine.²⁵ This category has allowed GoC doctrine but for limited purposes and based on alter ego or corporate veil. However, the interesting part is it does not import implied consent.

(C) The third category includes Singapore, Switzerland, England and India: In Singapore, considered a pro-arbitration regime, even after adopting the UNCITRAL Model Law (as amended in 2006), consider the doctrine against the consensual nature of arbitration.²⁶ In the recent case of CJD v. CJE²⁷, propounding the concept of consent in third-party intervention, it stated:

Underpinning the principle of party autonomy is the fundamental principle of consent or agreement of the parties. Thus, in an area of dispute resolution where consent plays such a central role, the notion of a “forced joinder” of a party would appear somewhat out of place and, some might say, anathema to the very definition of consent.

On the other hand, there are jurisdictions with a formalistic approach in statutes and an adopted uniform approach in GoC doctrine, except for India. Similarly, Switzerland, under Section 176²⁸, provided that “allowing it to be evidenced by text”, however, domestic arbitration has implied consent and third-party intervention mentioned in the statute. The Court usually does not extend to third parties except in assignment, debt, or interference by a party in execution.²⁹ Similarly, in England, there is a strict standard of writing, and they categorically rejected the GoC.³⁰

Curious case of “implied consent” in India’s group of companies doctrine

From the abovementioned, interpretation cannot hold in a vacuum; rather, it needs to be seen with the statute. It is important to note that writing is considered as essential element for consent, as mentioned by the Supreme Court.³¹ However, India imports both the concept of writing i.e. validity [Section 7(3)]³², and the evidentiary [Section 7(4)] purpose of writing. Hence, writing is a statutory requirement for a valid arbitration agreement against an oral agreement.³³ Further, writing need not be signed but must be documented. Out of three methods of documentation, only in Section 7(4)(c) is the import of limited “implied consent”.

The Court began by asserting it as a consent-based doctrine, and to include commercial factors, it propounded the term “pragmatic approach to consent”. However, the Court rejected the corporate veil while explaining the pragmatic approach to commercial understanding based on legal relationships. Further, while defining the GoC, it mentioned the reasoning of complicated structures, multi-party transactions and forming groups by informal alliances, joint ventures, etc. This all shows the intention of the Court to favour substance over form and looking beyond the contract which will ultimately pave way for corporate veil or single economic entity. This is also the reason why Singapore has rejected the doctrine because of subjective observations on “single economic unity”. Another example is that of Turkey whose definition is almost identical with India

Secondly, the Court relied on Section 7(4)(c). This section allows us to look into the conduct of the parties. The Court relied on S.N. Prasad v. Monnet Finance Ltd.³⁴, the Court intermixed the validity question with the evidentiary question. Even in the mentioned case, the existence or validity of contract was challenged. The validity question is answered in Section 7(3), whereas Section 7(4) is a procedural extension of the section. As mentioned above, only the first category of countries is able to adopt consent-based GoC doctrine freely because of its legislative intent of non-writing requirement and partially by second category because of limited writing requirement. India can use validity/formal provision to act like rejoinder provision without there any implied consent mentioned in the section. Further, cherry-picking implementation of GoC only on “contractual claims” limit the power of arbitrator to decide claim.

Conclusion

Writing standard is often considered as dead wood in arbitration, however, GoC doctrine has raised serious concern. It needs to be noted judiciary must stick to legislature intent. The liberty to interpret comes with statute, as seen in France. The interpretation of Section 7(4)(c) is first of its kind for extracting consent. Major jurisdictions have either rejected the doctrine or adopted the non-consensual approaches like corporate veil. India, in its attempt, to link consent with GoC doctrine has interpreted section beyond its scope without any legislative support. Indian jurisprudence risks trumping the basic premise of party autonomy by confusing evidential qualifications and nullity standards going by the provisions of Section 7.