{"id":308789,"date":"2023-12-09T10:00:28","date_gmt":"2023-12-09T04:30:28","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=308789"},"modified":"2024-01-04T12:15:51","modified_gmt":"2024-01-04T06:45:51","slug":"supreme-court-5-judges-bench-upheld-group-of-companies-doctrine-legal-news","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2023\/12\/09\/supreme-court-5-judges-bench-upheld-group-of-companies-doctrine-legal-news\/","title":{"rendered":"Supreme Court 5-Judge Bench Ruling on Group of Companies Doctrine: What You Need to Know"},"content":{"rendered":"
\n

Supreme Court:<\/span> The 5 Judges Bench comprising of Dr. Dhananjaya Y. Chandrachud C.J.*<\/span>, Hrishikesh Roy, Pamidighantam Sri Narasimha*<\/span>, J B Pardiwala, Manoj Misra, JJ. were called upon in a reference by the 3-Judges Bench to determine the validity of the \u2018Group of Companies\u2019 doctrine (\u2018Doctrine\u2019) in the Indian arbitration jurisprudence. The Court unanimously upheld the application of the Doctrine in the Indian Arbitration regime.<\/p>\n

3-Judge Bench Decision<\/p>\n

While considering an application under Section 11(6) of the Arbitration and Conciliation 1996, (\u2018the Act\u2019), the validity of the doctrine in the Indian context on the ground that it is premised more on economic efficiency rather than law, was sought to be ascertained. The Bench of three judges doubted the correctness of the application of the doctrine by the Indian Courts. The Majority opinion criticised the Chloro Controls India Private Limited v. Severn Trent Water Purification<\/span>, (2013) 1 SCC 641<\/a><\/span>, for relying upon the phrase \u2018claiming through or under\u2019 in Section 45 of the Act to adopt the doctrine. It was also noted that subsequent decisions after the Chloro Controls (supra)<\/span> had established the doctrine in Sections 8 and 35 of the Act without adequately examining the interpretation of the phrase \u2018claiming through or under\u2019 and there was application of the doctrine in varied manner. It was observed in the majority opinion that economic concepts such as \u2018tight group structure\u2019 and \u2018single economic unit\u2019 alone cannot be utilized to bind a non-signatory to an arbitration agreement in the absence of an express consent. Therefore, the matter was referred to the larger Bench to interpret the phrase claiming through or under\u2019 in Sections 8, 35, and 45 of the Act. In concurring opinion, it was observed that the doctrine had gained a firm footing in the Indian jurisprudence, however, there were inconsistent approaches for application of the doctrine in India. Hence, clarification was sought from the larger Bench by reference.<\/p>\n

5-Judge Bench Decision<\/p>\n

1. Whether the Group of Companies Doctrine should be construed as a means of interpreting implied consent or intent to arbitrate between the parties?<\/p>\n

The Court stated that \u201cconsent forms the cornerstone of arbitration.\u201d<\/span> The Court said that an arbitration agreement records the consent of the parties to submit their disputes to arbitration. The Court reiterated that an arbitration agreement must satisfy the principles of contract law laid down under the Contract Act, 1872<\/a> in addition to satisfying other requirements stipulated under Section 7 of the Act, to qualify as a valid agreement, as laid down in Vidya Drolia v. Durga Trading Corporation<\/span>, (2021) 2 SCC 1<\/a>. Further, the Court explained that being a creature of a contract, an arbitration agreement is also bound by the general principles of contract law, including the doctrine of privity and that the principle that only the parties to an arbitration agreement are either bound or benefited by an agreement is fundamental to arbitration, as reflected in the Act. The Court also cited United Steelworkers of America v. Warrior and Gulf Navigation<\/span>1<\/sup><\/a>, wherein it was observed that \u201carbitration is a matter of contract, and a party cannot be required to submit to arbitration any dispute which they have not agreed so to submit<\/span>.\u201d<\/p>\n

Therefore, the Court said that a non-signatory affiliate\/ party cannot be forcibly made a \u2018party\u2019 to an arbitration agreement, as doing so would violate the sacrosanct principles of privity of contract and party autonomy. However, the Court said that in the case of multi-party contracts, the Courts and the Tribunals are often called upon to determine the parties to an arbitration agreement.<\/p>\n

2. Whether the Doctrine should be read into Section 8 of the Act or whether it can exist in Indian jurisprudence independent of any statutory provision?<\/p>\n

Party and Persons \u2018claiming through or under\u2019 are different<\/p>\n

The Court said that the phrase \u2018claiming through or under\u2019 has been used in Sections 8, 35, and 45 in their specific contexts. The Court explained that Section 8 contains a mandate that when an action is brought before a judicial authority which is the subject of an arbitration agreement, the dispute shall be referred to arbitration on an application made by a party or any person claiming through or under him. The Court said that the phrase was inserted in Section 8 to bring it in line with Section 45 and that Sections 8 and 45 are peremptory in nature mandating the court to refer the parties to arbitration if there is a valid arbitration agreement. The Court noted that Section 35 of the Act provides that an arbitral award shall be final and binding on the parties and persons claiming under them respectively. The Court noted that the Sections 8, 35, and 45 use the phrase \u2018parties or any person claiming through or under\u2019 and explained that the word \u2018or\u2019 is used in Section 8 and 45 as a disjunctive particle to express an alternative or give a choice between \u2018parties\u2019 or \u2018any person claiming through or under\u2019. Therefore, the Court said that either the party to an arbitration agreement or any person claiming through or under the party can make an application to the judicial authority to refer the dispute to arbitration.<\/p>\n

However, the Court noted that Sections 35 and 73 of the Act use the phrase \u2018parties and persons claiming under them\u2019 and said that the use of the word \u2018and\u2019 in Sections 35 and 73 conveys the idea that \u2018parties\u2019 is to be added or taken together with the subsequent phrase \u2018any person claiming through or under.\u2019 Thus, the Court conclusively said that given provisions provides that not only the parties but also all such persons who derive their capacity from the party to the arbitration agreement are bound by the arbitration award and that the foundational basis for these provisions is commercial efficacy, ensuring that an arbitral award leads to finality, such that both the parties and all persons claiming through or under them do not reagitate the claims. The Court also concluded that the use of the word \u2018and\u2019 in Sections 35 and 73 brings about the concept of a \u2018party\u2019 in the Act, is distinct from the concept of \u2018persons claiming through or under\u2019 a party to the arbitration agreement<\/span>.<\/p>\n

Approach in Chloro Controls (supra)<\/span> – Incorrect<\/p>\n

The Court noted that it was firstly observed in Chloro Controls that the use of the expression \u201cany person\u201d reflects the legislative intent of enlarging the scope of the words beyond the \u201cparties\u201d who are signatory to the arbitration agreement<\/span> and said that the expression \u201cany person\u201d cannot be singled out and construed devoid of its context, which in terms of Section 8 and 45, is provided by the subsequent phrase \u2014 \u201cclaiming through or under\u201d. Therefore, the Court said that such \u201cany persons\u201d are acting only in a derivative capacity because an arbitration agreement excludes the jurisdiction of national Courts, it is essential that the parties give their consent, either expressly or impliedly, to submit their dispute to the arbitral tribunal.<\/p>\n

Further, the Court noted that it was observed in Chloro Controls secondly, that a signatory party to an arbitration agreement may have a legal relationship with the party claiming through or under the party on the basis of the group of companies doctrine<\/span> and thirdly, that in case of a multi-party contract, a subsidiary company which \u201cderives\u201d its basic interest from the parent contract would be covered under the expression \u201cclaiming though or under.\u201d<\/span> In context of the second and third observation, the Court said that these propositions are contrary to the common law stand taken in Mayoralty and Commonalty & Citizens of the City of London v. Ashok Sancheti2<\/sup><\/a> and Tanning Research Laboratories Inc v. O\u2019Brien, wherein, it was said that a mere legal or commercial connection is not sufficient to allow a non-signatory to claim through or under a party to the arbitration agreement. Further, the Court relied on A. Ayyasamy<\/span> v. A. Paramasivam<\/span>, (2016) 10 SCC 386<\/a>, wherein, it was observed that the Act should be interpreted in a manner to bring in line the principles underlying its interpretation in consistency with prevailing approaches in the common law.\u201d Thus, the Court held that even though a subsidiary derives interests or benefits from a contract entered into by the company within a group, they would not be covered under the expression \u201cclaiming through or under\u201d merely on the basis that it shares a legal or commercial relationship with the parties.<\/p>\n

3. Whether the phrase \u2018claiming through or under\u2019 in Sections 8 of the Act could be interpreted to include the \u2018Group of Companies\u2019 doctrine?<\/p>\n

The Court said that the Doctrine is founded on the mutual intention of the parties to determine if the non-signatory entity within a group could be made a party to the arbitration agreement in its own right and such non-signatory entity is not \u201cclaiming through or under\u201d a signatory party. The Court explained that the Doctrine is contrary to the context in which the phrase \u201cclaiming through or under\u201d is used i.e., in the context of successors in interest that act in a derivative capacity and substitute the signatory party to the arbitration agreement, whereas, the Doctrine is used to bind the non-signatory to the arbitration agreement so that it can agitate the benefits and be subject to the burdens derived or conferred in the contract. Therefore, the Court said that the Doctrine can be used to bind a non-signatory party to the arbitration agreement regardless of the phrase \u201cclaiming through or under\u201d as appearing in Sections 8 and 45 of the Act.<\/p>\n

However, the Court held that the approach taken in Chloro Controls (supra<\/span>) as to tracing the Doctrine to the phrase \u201cclaiming through or under\u2019 was erroneous and against the well-established principles of contract and commercial law.<\/p>\n

4. Whether the Doctrine as expounded by Chloro Controls (supra)<\/span> and subsequent judgments is valid in law?<\/p>\n

The Court clarified that the foundation for the Doctrines lies in the mutual intention of the parties and that it has great utility in determining this mutual intention of the parties in the context of complex transactions involving multiple parties and multiple agreements. The Court opined that it is appropriate to retain the Doctrine, which has held the field in Indian Arbitration jurisprudence though by firmly establishing it within the realm of the mutual consent or the mutual intent of the parties to a commercial bargain. However, the Court clarified that the structuring of the application of the Doctrine must be in terms of the settled principles governing the elucidation of mutual intent is necessary, as to ensure that the Doctrine has a jurisprudential foundation in party autonomy and consent to arbitrate.<\/p>\n

Regarding the subsequent judgments wherein the Doctrine was applied, the Court noted that the series started from Cheran Properties Ltd.<\/span> v. Kasturi & Sons Ltd.<\/span>, (2018) 16 SCC 413<\/a>, wherein it was held that that the non-signatory was a nominee of the signatory party under the underlying commercial contract, and therefore was acting in a derivative capacity. Further, the Court noted that in MTNL<\/span> v. Canara Bank<\/span>, (2020) 12 SCC 767<\/a>, and ONGC Ltd.<\/span> v. Discovery Enterprises (P) Ltd.<\/span>, (2022) 8 SCC 42<\/a>, the non-signatory parties were bound to the arbitration agreement. However, the Court said that the Doctrine was applied pertaining to the facts and circumstances of each case.<\/p>\n

The Stage of applicability of the Doctrine under the Act<\/p>\n

Referring to Pravin Electricals Pvt Ltd<\/span> v. Galaxy Infra and Engineering Pvt Ltd.<\/span>, (2021) 5 SCC 671<\/a>, the Court said that at the referral stage, the Court only has to determine the prima facie existence of an arbitration agreement and if the referral court cannot decide the issue, it should leave it to be decided by the arbitration Tribunal. The Court stated that the referral Court should not unnecessarily interfere with arbitration proceedings, and rather allow the arbitral Tribunal to exercise its primary jurisdiction. Further, on basis of the current position of law after Cholro Controls (supra<\/span>), the Court clarified that, when a non-signatory person or entity is arrayed as a party at Section 8 or Section 11 stage, the referral Court should prima facie determine the validity or existence of the arbitration agreement, as the case may be, and leave it for the arbitral Tribunal to decide whether the non-signatory is bound by the arbitration agreement.<\/p>\n

5. Whether the Doctrine should continue to be invoked based on the principle of \u2018single economic unit\u2019?<\/p>\n

The Court noted that in Canara Bank (supra)<\/span>, it was observed that the Doctrine can also be invoked in cases where a \u201ctight group structure with strong organisational and financial links, so as to constitute a single economic unit, or a single economic reality.\u201d However, the Court said that the presence of commercial relationships between a party and a non-signatory cannot be the sole criteria to bind non-signatory parties to the arbitration agreement as the adoption of this approach would bind all the non-signatories within a corporate group, even though they are not related to the contractual obligations under consideration, to the arbitration agreement and will also override the principle of distinct corporate personality. Therefore, the Court opined that the principle of \u2018single economic entity\u2019 cannot be used as a sole basis to invoke the Doctrine.<\/span><\/p>\n

6. Whether the principles of alter ego and\/or piercing the corporate veil can alone justify pressing the Doctrine?<\/p>\n

The Court explained that the underlying basis of the Doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non-signatory party to the arbitration agreement. The Court opined that the Doctrine is similar to other consent based doctrines such as agency, assignment, assumption, and guarantee to the extent that it is ordinarily applied as a means of identifying the common intention of the parties to bind the non-signatory to the arbitration agreement. Further, the Court viewed that in Chloro Control (supra)<\/span>, it was rightly observed that a non-signatory could be subjected to arbitration provided the underlying transactions were with a group and the parties had clear intent to bind both the signatory as well as non-signatory parties to the arbitration agreement. The Court referred to Cheran Properties (supra)<\/span>, wherein, it was clarified that the Doctrine and the \u2018principle of veil piercing\u2019 or \u2018alter ego\u2019 have important distinction. Therefore, the Court said that the \u2018principle of alter ego\u2019 disregards the corporate separateness and the intentions of the parties in view of the overriding considerations of equity and good faith, whereas the Doctrine facilitates the identification of the intention of the parties to determine the true parties to the arbitration agreement without disturbing the legal personality of the entity in question. Thus, the Court observed that the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the Doctrine.<\/p>\n

Conclusion<\/p>\n

    \n
  1. The definition of \u2018parties\u2019 under Section 2(1)(h) read with Section 7 of the Act includes both the signatory as well as non-signatory parties;<\/li>\n
  2. Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement;<\/li>\n
  3. Under the Arbitration Act, the concept of a \u2018party\u2019 is distinct and different from the concept of \u2018persons claiming through or under\u2019 a party to the arbitration agreement;<\/li>\n
  4. The underlying basis for the application of the Doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non-signatory party to the arbitration agreement;<\/li>\n
  5. The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the Doctrine;<\/li>\n
  6. The Doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act;<\/li>\n
  7. The principle of \u2018single economic unit\u2019 cannot be the sole basis for invoking the Doctrine;<\/li>\n
  8. The persons \u2018claiming through or under\u2019 can only assert a right in a derivative capacity;<\/li>\n
  9. The approach of this Court in Chloro Controls (supra)<\/span> to the extent that it traced the Doctrine to the phrase \u2018claiming through or under\u2019 is erroneous and against the well-established principles of contract law and corporate law;<\/li>\n
  10. \n

    The Doctrine should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements;<\/p>\n<\/li>\n<\/ol>\n

    Justice Narasimha\u2019s concurring opinion with supplemental reasoning<\/p>\n

    Justice Narasimha said that the focus on mutual intention reflects a fundamental difference between the Doctrine and the principle of \u2018piercing the veil\u2019 or alter ego. He explained that in veil-piercing, the separate legal identities of the parent and subsidiary companies are disregarded or nullified on equity and fairness considerations in order to prevent frauds. Therefore, he opined that the application of the Doctrine does not result in lifting the corporate veil and is rather based on identifying the mutual intention of the parties. On referring and comparison of various jurisdictions for application and rejection of the Doctrine, Justice Narasimha concluded that various jurisdictions use both consensual and non-consensual legal principles to determine whether a non-signatory is a party to an arbitration agreement and that the Doctrine is applied irrespective of the distinct juridical identities of each member of the group when they share a common economic reality by virtue of their role in the formation, performance, and termination of the contract.<\/p>\n

    On the question that whether the Doctrine is anchored in Sections 8 and 45 of the Act, Justice Narasimha referred to the trajectory of authorities on the subject and analysed the precedents and held that he was in complete agreement with Chief Justice\u2019s opinion that the Doctrine cannot be anchored in Sections 8 and 45 of the Act and hence, Chloro Controls (supra)<\/span> was wrongly decided.<\/p>\n

    Regarding the alignment of the Doctrine with the statutory regime of the Act, Justice Narasimha opined that it is necessary to entrench the Doctrine within the Act, in order to enable a Court or arbitral Tribunal to apply it as a principle to decipher the intention of the parties and that it is necessary to subsume the Doctrine within the judicial process under Section 7(4)(b) of the Act, where a Court or arbitral Tribunal is called upon to determine the existence of an arbitration agreement and parties to it. He said that the express words in the arbitration agreement and by the parties enable the Court to ascertain the intention of the parties and their agreement to resolve disputes through arbitration, therefore, they may look into the surrounding circumstances such as nature and object of the contract and the conduct of the parties, performance, and discharge of the contract, adopt well-established principles, which aid and assist proper adjudication and determination. He further suggested that the Doctrine may be adopted by the Courts or arbitral Tribunals while interpreting the record of agreement to determine whether the non-signatory company is a party to it.<\/p>\n

    Conclusion<\/p>\n

      \n
    1. An agreement to refer disputes to arbitration must be in a written form, as against an oral agreement, but need not be signed by the parties. Under Section 7(4)(b), a Court or arbitral Tribunal will determine whether a non-signatory is a party to an arbitration agreement by interpreting the express language employed by the parties in the record of agreement, coupled with surrounding circumstances of the formation, performance, and discharge of the contract and may adopt well-established principles.<\/li>\n
    2. The Doctrine requires the intention to be gathered from additional factors such as direct relationship with the signatory parties, commonality of subject-matter, composite nature of the transaction, and performance of the contract.<\/li>\n
    3. Subsummation of the Doctrine within Section 7(4)(b) to enable a Court or arbitral Tribunal to determine the true intention and consent of the non-signatory parties to refer the matter to arbitration, for the purpose of certainty and systematic development of law.<\/li>\n
    4. \n

      The expression \u2018claiming through or under\u2019 in Sections 8 and 45 is intended to provide a derivative right; and it does not enable a non-signatory to become a party to the arbitration agreement. The decision in Chloro Controls (supra)<\/span> tracing the Doctrine through the phrase \u2018claiming through or under\u2019 in Sections 8 and 45 is erroneous. The expression \u2018party\u2019 in Section 2(1)(h) and Section 7 is distinct from \u2018persons claiming through or under them\u2019.<\/p>\n<\/li>\n<\/ol>\n

      [Cox & Kings Ltd. v. SAP India (P) Ltd., 2023 SCC OnLine SC 1634<\/a>, Decided on: 06-12-2023<\/span>]<\/p>\n

      *Judgment Authored by: Chief Justice DY Chandrachud<\/span><\/strong><\/p>\n

      Not here to do miracles but to work on bringing institutional changes: Justice DY Chandrachud shares his to-do list as the 50th CJI<\/a><\/p><\/blockquote>\n