Contentious (/kənˈtenʃəs/) “likely to cause people to disagree” as defined in Oxford Learner’s Dictionary is the perfect representation for the concept of “Group of Companies” in arbitration, in various jurisdictions around the world.
Its Inception can be attributed to the provisional ruling in the notable case of Dow Chemical v. Isover Saint Gobain[1] (“Dow Chemical”), which was decided by the International Chamber of Commerce (ICC) Tribunal in Paris, wherein it was held that “the arbitration clause expressly accepted by certain of the companies of the group should bind the other companies which, by virtue of their role in the conclusion, performance, or termination of the contracts containing said clauses, and in accordance with the mutual intention of all parties to the proceedings, appear to have been veritable parties to these contracts or to have been principally concerned by them and the disputes to which they may give rise”. In India, the doctrine has gained significance in the context of resolving disputes among related entities within a corporate group. This concept of “Group of Companies” doctrine allows for the piercing of the corporate veil and holds the entire group liable for the actions of one of its entities. This article will delve into the Indian perspective on the “Group of Companies” doctrine in arbitration and examine the practical implications of this doctrine on arbitration proceedings involving corporate groups in India.
In order for us to comprehend what the “Group of Companies” doctrine entails in Indian Arbitration, it is imperative to first understand what the Indian Law says about Arbitration. Section 7 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as the “Act“) stipulates that both the parties to an arbitral tribunal should have consensus ad idem for there to exist a valid arbitration agreement and is the sine qua non for any arbitration proceedings. This consensus ad idem indicates that both the parties agree and have the common intention to resolve the dispute through arbitration. This concept of “consent” is the genesis of the contentious-ness around the doctrine of “Group of Companies” in Indian Arbitration (hereinafter referred to as the “Doctrine“) and has been criticized by jurists and arbitration practitioners in both civil and common law countries for diluting consent and allowing addition of parties thus, fundamentally changing how arbitration is to be conducted. However, surprisingly, the Indian jurisprudence has accepted the Doctrine with open arms and has been regularly evolving to suit their specific needs.
Due to the rapid rise in the complications associated with any commercial transaction and to deal with issues where the agreements and disputes are multi-faceted, this Doctrine has enabled the Arbitral Tribunals and courts in India under special circumstances, to extend the arbitration agreement over members within a company group which have a relationship with the principal contract. Hence, this Doctrine bears a resemblance to the piercing of corporate veil, alter ego, and third-party beneficiary doctrines, yet its defining characteristic lies in its particular genesis and suitability for arbitration.
This Doctrine, even after its welcome affirmation by the courts and the arbitral tribunals, has not yet been codified in the Act or any Indian laws. The Judiciary has however, on multiple occasions, by way of various judgements, relied upon the phrase “party and any person claiming through or under him” prescribed under Sections 8, 35 and 45 of the Act, to develop and justify the existence and application of the Doctrine in Indian Arbitration, ever since the decision of the Hon’ble Supreme Court pronounced in the landmark case of Chloro Controls India (P) Ltd. vs. Severn Trent Water Purification Inc.[2] (“Chloro Controls”). In the instant case, a joint-venture was created under the name of Capital Controls (India) Pvt. Ltd., between two corporations, i.e., Chloro Controls Pvt. Ltd and Capital Controls (Delaware). This joint-venture was solely created in order for Chloro Controls Pvt. Ltd and Capital Controls (Delaware) to work with Capital Controls (Colmar) Co. Inc., which was a sister concern of Capital Controls (Delaware), both of which were subsidiaries of Severn Trent Services (Delaware) Inc. (“Severn Trent”). The joint venture so created entered into various agreements with Capital Controls (Colmar) except the shareholders agreement, which was entered into by Chloro Controls Pvt. Ltd. and Capital Controls (Delaware), containing an arbitration clause. Various disputes arose amongst the parties, resulting in Chloro Controls Pvt. Ltd. initiating litigation, against which Capital Controls (Delaware) and Seven Trent invoked the arbitration clause, as prescribed in the shareholders agreement, on the grounds that all the captioned entities were key cogs in a “composite transaction”, hence obligating all the non-signatories, as mentioned in the shareholders agreement, to the arbitration agreement itself, by virtue of the Doctrine.
The Supreme Court in view of the above, considered the application of Section 45 of the Act, wherein it allowed a party and “any person claiming through or under him” to refer the dispute to an arbitration tribunal. Further, the Supreme Court also observed and considered the shareholders agreement as the “mother agreement” and recognised the existence of a “composite transaction” which bound the non-signatories to the arbitration agreement contained in the shareholders agreement by virtue of the Doctrine[3]. The Supreme Court further laid down a four-pronged test to extend the arbitration agreements to non-signatories “without their prior consent” in “exceptional cases” which was contrary to the emphasis drawn by the Supreme Court towards the “intention of the parties”. This “four-pronged test” aimed to identify the following:
- there is a direct relationship between the non-signatory and the signatory;
- the disputes involve a common subject-matter;
- there is a composite transaction i.e. where performance of the mother agreement may not be feasible without the aid, execution, and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having a bearing on the dispute; and
- the composite reference serves the ends of justice.[4]
After the above-mentioned decision of the Supreme Court in the case of Chloro Controls, this Doctrine found application in various other cases which were distinctly different from that of Chloro Controls, wherein the Courts relied upon the phrase “party and any person claiming through or under him” appearing under Sections 8[5] and 35[6] of the Act. Due to the existence of such a varied pattern of application, in the recent case of ONGC Ltd. vs. Discovery Enterprises (P) Ltd.[7] (“ONGC”), the Supreme Court was of the belief that the circumstances qualifying the application of the Doctrine need to be analysed and came up with certain factors to be considered in order to decide whether the Doctrine would find application or not, being:
- the mutual intent of the parties;
- the relationship of a non-signatory to a party which is a signatory to the agreement;
- the commonality of the subject-matter;
- the composite nature of the transaction; and
- the performance of the contract.[8]
Even though the above-mentioned test embodies all the essential components of the Doctrine as stipulated in the case of Dow Chemical, the elements of the “composite transaction” test, as established in the case of Chloro Controls, continues to constitute an important component of the Doctrine being applied in India.
After the Supreme Court upheld the Doctrine in the case of ONGC, a concurrent bench of the Supreme Court in the case of Cox & Kings Ltd. vs. SAP India (P) Ltd.[9] (“Cox & Kings”) has criticised the development and application of the Doctrine in India. The court in the instant case sought to examine and trace the jurisprudential history of this Doctrine, with a specific emphasis on the case of Chloro Controls, which essentially is the genesis of the Doctrine in India. The Court, after analysing the judgement pronounced in the case of Chloro Controls and the subsequent application of the Doctrine in other cases, came to the conclusion that the decisions of the Courts was indicative of a reliance on economics and convenience, rather than on law. Thus, the court in the case of Cox & Kings found it imperative to refer the matter to a larger bench for deliberation and posed the following questions:
- whether the phrase “claiming through or under” in Sections 8 and 11 of the Arbitration Act could be interpreted to include the Group of Companies Doctrine?;
- whether the doctrine as expounded by Chloro Controls and subsequent judgments is valid in law?;
- whether the doctrine should be read into Section 8 of the Arbitration Act or whether it can exist in Indian jurisprudence independent of any statutory provision?;
- whether the doctrine should continue to be invoked on the basis of the principle of “single economic reality”?;
- whether the doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?; and
- whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the doctrine into operation even in the absence of implied consent?[10]
As the above case is still pending adjudication, in my view, the larger bench in answering the above-mentioned questions should consider the absence of any amendment to the current legislation, and needs to ensure that the Doctrine is confined to the phrase “persons claiming through or under” appearing under Sections 8, 35 and 45 of the Act. If the Doctrine is confined to the afore-mentioned phrase, the application of the Doctrine could be sustainable, provided that it does not compromise the two essential pillars of any arbitration, those being “consent” and “party autonomy”. Free consent, be it express or implied, acts as a fundamental pillar to any arbitration and in general, forms an essential pre-requisite of the Contract Law, and would sufficiently apply on an arbitration agreement which in itself is a contract. Furthermore, as India is a signatory to and has adopted the New York Convention, it has fundamentally embraced and accepted the concept of “consent” and “party autonomy” in the Indian arbitration system, thus, rendering “consent”, sine qua non.
Author: Nandish Munjal
Footnotes:
[1] ICC Case No. 4131, Interim Award dt. 23-9-1982
[2] (2013) 1 SCC 641
[3] The Hon’ble Supreme Court held that: All these agreements are so intrinsically connected to each other that it is neither possible nor probable to imagine the execution and implementation of one without the collective performance of all the other agreements.
[4] https://www.scconline.com/blog/post/2022/10/19/the-group-of-companies-doctrine-defending-an-endangered-species-of-the-indian-arbitration-law/#fnref53 Accessed on 15.05.2023 at 11:30 AM.
[5] Ameet Lalchand Shah vs. Rishabh Enterprises (2018) 15 SCC 678
[6] Cheran Properties Ltd. vs. Kasturi and Sons Limited and ors. (2018) 16 SCC 413
[7] 2022 SCC OnLine SC 570
[8] https://www.scconline.com/blog/post/2022/10/19/the-group-of-companies-doctrine-defending-an-endangered-species-of-the-indian-arbitration-law/#fnref53 Accessed on 15.05.2023 at 12:15 PM.
[9] (2022) 8 SCC 1
[10] https://www.scconline.com/blog/post/2023/03/23/the-group-of-companies-doctrine-in-india-antithetical-to-free-consent/#fn6 Accessed on 15.05.2023 at 1:00 PM.