By: Abhimanyu Pathania and Devansh Dixit
Introduction
Party consent is one of the most important facets of arbitration under several international conventions. Section 7 of the Arbitration and Conciliation Act, 1996 [hereinafter, “the Act”] makes consensus ad idem essential for a valid arbitration agreement. Though infrequently, diverse legal theories have been applied to bind non-signatories to an arbitration agreement to demonstrate such consent. One such approach is the “group of companies” doctrine which binds non-signatories to an arbitration agreement as a party to the arbitration proceedings based on their legal relationship with one of the signatories to the arbitration agreement.
The doctrine has come under fire across jurisdictions for allowing different corporations to be treated as one individual group and subsequently forced into arbitration proceedings to which they never consented in the first place. However, Indian courts have shown a higher predisposition towards the doctrine, breaking with their common law equivalents, until now.
A three-judge bench of the Apex Court, in Cox and Kings v SAP India, while referring the matter to a larger bench, has called upon re-examination of the validity of the doctrine. The bench reviewed the application of the doctrine in Indian jurisprudence and concluded that it suffered from various inconsistencies and is not sustainable in its present form. This post attempts to analyse the development of the doctrine and some fundamental issues that the larger bench must address to ascertain its validity in the Indian legal system.
Genesis and Reception
The “group of companies” doctrine originated in the International Chamber of Commerce case of Dow Chemicals v Isover Saint Gobain; The tribunal laid down three tests for the successful application of the doctrine:
- Existence of a group of companies that must display a tight group structure.
- Effective and individual involvement of the non-signatory in the agreement’s conclusion, performance, and termination.
- Mutual intention of the parties.
Various tribunals across jurisdictions have since used it as a precedent. However, many common and civil law countries do not appreciate the doctrine mainly because of two reasons:
First, by permitting different entities in a group to be recognised as a single economic unit, it disregards the distinct legal entity doctrine, which can only be done in exceptional circumstances. Second, forcing courts to interpret the intention that the parties have not expressed in the original arbitration agreement undermines the privity of contract and party consent, which is essential to arbitration proceedings.
For these reasons, the doctrine has been rejected in several U.S. and Singapore courts. Furthermore, in Peterson Farms Inc v C&M Farming Ltd, the English High Court rejected the doctrine holding that the principle “does not form any part in English Law”.
Application in Indian Jurisprudence
It was in the context of Section 8 of the Act that the applicability of the doctrine was tested in Sukanya Holdings Pvt Ltd v Jayesh H Pandya for the first time. The Apex court rejected the doctrine, holding that only the signatory in the arbitration agreement can be bound as a party to arbitration under this section.
However, the doctrine was later adopted in Chloro Controls (l) Pvt Ltd v Severn Trent Water Purification Inc. The facts fell within Section 45 (Part II) of the Act, that empowers the judicial authority to refer parties to the arbitration. While highlighting the difference in the language of Section 45 and Section 8 of the Act, the court concluded that the phrase “claiming through or under” in Section 45 gave scope for a much broader and liberal interpretation. Hence, the non-signatories “claiming through or under” the signatories to the arbitration agreement could be bound as a party to the arbitration. The court formulated the four exceptional situations when the doctrine could be applied:
- Direct relationship between the non-signatory and the signatory
- Presence of direct commonality in the subject matter
- Composite nature of the transaction
- When ends of justice are served
Subsequently, the scope and applicability of the doctrine has been expanded substantially. In Cheran Properties Ltd v Kasturi & Sons Ltd, the court had to consider whether an arbitral award under Section 35 of the Arbitration Act was binding on a third party. The court applied the doctrine and held that the phrase “claiming through or under them” in Section 35 indicated that the arbitral award would be binding on every person whose capacity or position is the same as a party to the proceedings even though they never participated in the arbitration proceedings.
In Ameet Lalchand Shah v Rishabh Enterprises, the court applied the ratio of the Chloro Controls even though the factual matrix fell under Section 8 of the Arbitration Act, which only applies to domestic arbitration. In this case, there were four agreements, of which 3 contained an arbitration clause. All the agreements related to a single commercial project were connected to the main agreement serving as the seed for arbitration. The matter could be referred to arbitration, and the non-signatories could also be made parties to the arbitration.
Later, MTNL v Canara Bank expanded its application to a “tight group structure with strong organisational and financial links”, constituting a single economic reality.
Fundamental issues to be considered
Evidently, the scope of the “group of companies” doctrine has been enlarged beyond its original purpose. There are several issues with the justifications given to enlarge the scope of the doctrine that the larger bench must look into. The division bench has highlighted several anomalies in its applicability while referring the questions to the larger bench. Apart from the core principle of distinct legal personality, party consent and privity of contract, the doctrine violates Section 7(3) of the Arbitration Act, which requires such arbitration agreements to be reduced to writings.
Some of the fundamental issues that the larger bench must consider while reviewing the doctrine are:
Application in Domestic Arbitration– One of the critical questions that the Supreme Court has referred to the larger bench is whether the doctrine should be read into sections 8 and 11 of the Act. The doctrine shall not apply to domestic arbitration because, unlike Section 45, the judicial authority’s power to refer parties to arbitration is limited U/S 8 of the Act.
In Chloro Controls, the court relied on international jurisprudential theories to read the doctrine into Section 45 of the Act and justified it based on the concept of legal relationship in Article II (1) of the New York Convention. The Convention does not apply to Section 8 because it is in Part I of the Act.
Furthermore, it is evident from a quick perusal of the section that, while an application for reference to arbitration can be made by such non-signatories “claiming through or under” a party, the arbitration can only be among the “parties” to the arbitration. Now, even though the Arbitration and Conciliation (Amendment) Act 2015 amended the language of section 8, making it consistent with Section 45, Section 8 is still limited by Section 2(1)(h) of the Act defining such “party”.
Lastly, if the legislature intended to extend the application of the doctrine in domestic arbitration, it would have followed the recommendation made by the 246th Law Commission report to amend the definition of “party” U/S 2(1)(h) of the Act. Further, the intention can also be interpreted from the fact that the legislature has not amended Sections 7, 9, 11 and 34 of the Act to add “claiming through or under” in these provisions. It would be absurd to interpret that the legislature intended a non-signatory might be allowed to be referred to arbitration under Section 8 but not to seek relief under section 9.
Claiming through or under– The previous judgments have heavily relied on “claiming through or under him” used in Sections 8 and 45 of the Arbitration Act to read the doctrine into the provisions of the Act. However, the phrase often exclusively refers to the successors in interest who derive their rights through and stand in for the signatories to the agreement in situations like assignment, subrogation, and novation. The High Court of Australia took a similar view in Tanning Research Laboratories v O’Brien. Similarly, even though Section 82(2) of the English Arbitration Act, 1996 contains the same phrase, the Court of Appeal rejected to apply the doctrine by expanding the scope of the phrase in The Mayor and Commonalty & Citizens of the City of London v Ashok Sancheti. Therefore, such a broad interpretation to the phrase “claiming through or under” to expand its meaning and reading the doctrine into these provisions was unnecessary.
Chaotic Application in India– The considerations like the “composite nature of the transaction” and “application of the doctrine would serve the ends of justice” are too broad to apply a doctrine that may compromise the party’s intent. Such an approach reduces the threshold for ascertaining “mutual intent”. It opens the door for a broader interpretation similar to that in Cheran Properties, extending the doctrine’s applicability beyond its original intent to bind non-signatories.
There is no defined limit or criteria on when and how the doctrine can be applied. In several instances, the it has been justified by applying it in conjunction with various corporate law doctrines, like piercing the corporate veil, alter ego etc. Party intention is often inferred by relying on flimsy connections such as standard letterhead, addresses, or email ids, undermining the practical realities of business transactions and intricate corporate structures employed to carry them out. This has resulted in confusion and hence, a somewhat chaotic application of the doctrine in Indian jurisprudence.
Conclusion
The doctrine was initially approached in India with a pragmatic, essential goal: to ensure that connected conflicts are settled in a single venue. However, its justification and definitions appear to have been enlarged beyond their original scope which runs the risk of compromising the fundamental precondition of consent in International Arbitration.
The larger bench should seize this opportunity to rule that the doctrine cannot continue to be ingrained in Indian arbitration law. It is paramount for the success of arbitration in India that the court upholds the principle of consent as a fundamental of arbitration and does away with the doctrine.
RMLNLU Arbitration Law Blog 