The Indian case of Doctrine of “Group of Companies”

“Group of Companies” doctrine - a modern theory which challenges the conventional notions of arbitration law. It is celebrated by some, reviled by many others. Yet, its legacy continues.

The doctrine provides that an arbitration agreement which is entered into by a company within a group of companies may bind non-signatory affiliates, if the circumstances are such as to demonstrate the mutual intention of the parties to bind both signatories and non-signatories.

Genesis of the doctrine | Dow Chemicals

The origin of the doctrine is primarily attributed to a number of arbitration awards rendered mainly in France. The most prominent among them remains an interim award delivered more than four decades ago by an ICC Tribunal in Case No. 4131,?Dow Chemical?v.?Isover Saint Gobain, Interim Award?[ICC Case No. 4131, 23-9-1982], more popularly known as the Dow Chemicals case.

The Tribunal emphasized that a non-signatory may be bound by the arbitration agreement entered into by another entity of the same group if the non-signatory appears to be a veritable party to the contracts on the basis of their involvement in the negotiation, performance, and termination of the contracts. (facts are being avoided for brevity)

Indian Landscape | Case of Chloro Controls

Over the past two decades the law on joinder of non-signatory parties has evolved substantially in India. The Doctrine was first applied in the case of Chloro Controls (I) (P) Ltd.?v.?Severn Trent Water Purification Inc?[2013] 1 SCC 641, by three-judge Bench of Supreme Court. The evolution could roughly be classified into two stages: before?Chloro Controls and after?Chloro Controls.

Pre Chloro Controls era

In the pre Chloro Controls era the Supreme Court rejected such contentions observing that there is no provision under the Arbitration Act stipulating what is required to be done where some parties to the suit are not parties to the arbitration agreement.

Post Chloro-Controls era

Judgements in Chloro Controls and subsequent to that, established the doctrine in Sections 8 and 35 of the Arbitration and Conciliation Act without adequately examining the interpretation of the phrase "claiming through or under" appearing in those provisions. These decisions include:?Cheran Properties Ltd.?v.?Kasturi and Sons Ltd.?[2018] 92 taxmann.com 384/147 SCL 352/16 SCC 413,?Mahanagar Telephone Nigam Ltd.?v.?Canara Bank?[2019] 110 taxmann.com 270/156 SCL 419/[2020] 12 SCC 767, and?Oil and Natural Gas Corporation Ltd.?v.?Discovery Enterprises (P.) Ltd.?[2022] 8 SCC 42.

In?Chloro Controls, the Supreme Court acknowledged that cases of composite transactions involving multi-party agreement give rise to peculiar challenges where non-signatories may be implicated in the dispute because of their legal relationship and involvement in the performance of contractual obligations.

To remedy such situations, it was held that the Group of Companies doctrine could be applied to systematically evaluate the facts and circumstances to determine "a clear intention of the parties to bind both, the signatory as well as the non-signatory parties" to the arbitration agreement.

According to the Court a non-signatory could be subjected to arbitration "without their prior consent" in "exceptional cases" on the basis of four determinative factors:

1. A direct relationship to the party which is a signatory to the arbitration agreement;
2. A direct commonality of the subject-matter and the agreement between the parties being a composite transaction;
3. The transaction being of a composite nature where performance of the mother agreement may not be feasible without the aid, execution, and performance of supplementary or ancillary agreements for achieving the common object and collectively have a bearing on the dispute; and
4. A composite reference of such parties will serve the ends of justice.

Case of Discovery Enterprises

In Discovery Enterprises [Oil and Natural Gas Corporation Ltd.?v.?Discovery Enterprises (P.) Ltd.?[2022] 8 SCC 42], the Supreme Court clarified the cumulative factors that the courts and tribunals should consider in deciding whether a company within a group of companies is bound by the arbitration agreement:

1. The mutual intent of the parties;
2. The relationship of a non-signatory to a party which is a signatory to the agreement;
3. The commonality of the subject-matter;
4. The composite nature of the transactions; and
5. The performance of the contract."

Doctrine is akin to ‘lifting of corporate veil’ | Caution

In?Balwant Rai Saluja v. Air India, (2014) 9 SCC 407, it was cautioned by the Supreme Court that the principle of piercing the corporate veil should be applied in a restrictive manner and only in scenarios where it is evident that the subsidiary company was a mere camouflage deliberately created by the holding company for the purpose of avoiding liability. It was further observed that the intent of piercing the corporate veil must be such that would seek to remedy a wrong done by the holding company.

?That the entities within a corporate group have separate legal personality, cannot be ignored save in exceptional circumstances such as fraud. The distinction between a parent company and its subsidiary is fundamental, and cannot be easily abridged by taking recourse to economic convenience.?Bank of Tokyo?v. Karoon [1986] 3 All ER 468. Legally, the rights and liabilities of a parent company cannot be transferred to the subsidiary company, and vice versa, unless, there is a strong legal basis for doing so.

Partially eclipsing the Doctrine | Cox and Kings vs. SAP

The doctrine of “Group of Companies” was recently called into question in the case of Cox and Kings Ltd vs. SAP India (P.) Ltd [2023] 157 taxmann.com 142(SC) [06-12-2023] {access here}, purportedly on the ground that it interferes with the established legal principles such as party autonomy, privity of contract, and separate legal personality.

In Cox and Kings, it was opined that the ‘Group of Companies’ 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. It further observed that the doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.

Conclusion remains non-conclusive

While the Supreme Court agrees that “Group of Companies” doctrine should be retained in arbitration jurisprudence but at the same time it opines that other doctrines and principles for binding non-signatories should not be ignored.