BACKGROUND/INTRODUCTION

 The “group of companies” doctrine has been a subject of rigorous academic debate among practitioners of arbitration law and academics with domain expertise. The first view questions the necessity of adopting the doctrine by suggesting that the determination of consent in complex multi-party arbitration can be done on the basis of traditional contractual and commercial law theories. [1] while, the second view suggests that the group of companies’ doctrine is an integral aspect of arbitration law. According to this view, the existence of specific patterns of corporate structure could be a useful factual indicator to determine the common intention of the parties to make the non-signatory, a party to the arbitration agreement.

For instance, the active involvement of a non-signatory group company in the facilitation and performance of a commercial project helmed by other signatory companies of the group can be considered as an indication that the non-signatory party also consented to arbitrate

While some jurisdictions embrace the doctrine, others tread cautiously. Understanding its compatibility with core arbitration principles, exploring alternatives, and considering public policy implications are crucial before diving headfirst into this murky water

The group of companies’ doctrine is used in the context of companies which are related to each other by virtue of their being a part of the same corporate group. Since every company in a group has a separate legal personality, a contract formally entered by one member of a group will not be binding on the other members by virtue of the limited liability principle. The group of companies doctrine is used to bind a non-signatory company within a group to an arbitration agreement which has been signed by other member of the group.

The underlying basis of the group of companies 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. In other words, the group of companies’ doctrines is a means of identifying the common intention of the parties to bind a non-signatory to arbitration agreement by emphasizing and analysing the corporate affiliation of the distinct legal entities.

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. 4131,20 more popularly known as the Dow Chemicals case[2]. In that case, Dow Chemical Group, an American company, entered into several contracts with a corporation called Isover Saint Gobains, for the installation of thermal insulation devices. These contracts were entered into via the subsidiaries of Dow Chemical. At the time of dispute and the invocation of the arbitration proceedings, Dow Chemical argued that, them being a parent company are not signatories of the contract but the concerned company is its own subsidy and therefore implored to be impleaded in the arbitration proceedings.  The ICC tribunal held that Dow Chemical France “was a party” to the contracts, and consequently to the arbitration agreements contained in them, because it played a preponderant role in the negotiation, performance, and termination of the contract. As for Dow Chemical Company

The ICC tribunal was of the opinion while applying the doctrine of group of company held that since these companies were related, formed a single economic entity and hence should be impleaded in the arbitration. For this, the tribunal laid down a three-pronged test to see whether a party would fall under the Group of Companies Doctrine. This would include:

• Presence of a Tight Group Structure
• Participation of the Non-Signatory in the execution of the contract
• Mutual intent of the parties to bind the Non-Signatory.

This award and the jurisprudence that followed, naturally went against a long-established principle of company law of most jurisdictions: the doctrine of separate legal personality[3]. Doctrine of separate legal personality stated that a company has a separate legal identity, separate from that of its shareholders. It puts a veil which protects the shareholders from being liable for the actions of the company, and subsequently, the parent companies are separate from their subsidiaries.[4]

• THE APPLICATION OF THE GROUP OF COMPANIES DOCTRINE IN INTERNATIONAL

The Group of Companies Doctrine was formulated and initially applied by international arbitral tribunals to determine whether a person who has not formally signed an arbitration agreement can be made party to it. The application of the group of companies doctrine in arbitration law mainly originated from the decisions rendered by international arbitral tribunals. Before proceeding to analyze the contours of the doctrine, it is necessary to understand its origin and development in the international context.

• FRANCE

In a series of subsequent rulings, the Court of Appeal of Paris acknowledged the extension of an arbitration agreement to non-signatories provided there was common intention of all the parties. According to the Court of Appeal, the common intention may be ascertained from the active role played by the non-signatories in the performance of the contract containing the arbitration agreement, which gives rise to the presumption that the non-signatory had knowledge of the arbitration agreement.[5]

France is one of those examples which have fully accepted and adopted the doctrine.  It Is however argued by scholars that such an approach is a result of their method of their contract law in general, as in France, consent can be inferred from the conduct of the party. Therefore, such an approach easily fit into their law and assimilated into their jurisprudence.

• SWITZERLAND

Section 178(1) of the Swiss Private International Law Act, 1987 states that an “arbitration agreement must be made in writing or any other means of communication allowing it to be evidenced by text.” In 2003, the Swiss Federal Supreme Court held that once there is a valid arbitration clause according to Section 178(1) of the Swiss Act, the issue whether it also extends to non-signatories may be decided by the courts or the arbitral tribunals. As a matter of general rule, the Swiss courts have extended an arbitration agreement to non-signatories typically in cases of assignment of a claim, assumption of debt or delegation of a contract.

Hence, In Swiss law, the consent of the parties to be bound by an arbitration agreement may be express or implied by conduct. In a 2008 decision, the Swiss Federal Court held that certain behavior or conduct may substitute compliance with a formal requirement of an arbitration agreement. To determine the implied consent, it was held that the courts or tribunals may take into consideration the fact whether the non-signatory party was involved in the negotiation and performance of the contract, and thereby expressed its willingness to be bound by the arbitration agreement. [6]

• ENGLAND

The English courts have generally taken a conservative approach to binding non-signatory parties to arbitration agreements. Section 82(2) of the English Arbitration Act, 1996 defines a “party to arbitration agreement” to include “any person claiming under or through a party to the agreement.” The English law envisages that even non-signatory parties may be bound by an arbitration agreement but only if they are claiming under or through the original party to the agreement.[7]

• UNITED STATES OF AMERICA

The Federal Arbitration Act is silent on the aspect of the joinder of non-signatory parties to the arbitration agreement. Nevertheless, the US courts have often used the general principles of contract law such as incorporation by reference, assumption, agency, veil piercing or alter ego, and estoppel for binding non-signatories to arbitration agreements. Although the United States follow a pro-arbitration policy, an important issue that often comes up for deliberation is whether the domestic doctrines could be applied for binding non-signatories in cases of international arbitration.[8]

• UNITED KINGDOM

In the UK, the Group of Companies doctrine finds no acknowledgement.  The UK holds a very conservative view to contracts, and by extension, arbitration agreements. It is unheard of in the United Kingdom to assume consent by inference. Adopting such a doctrine would negatively affect the privity of the contract at both jurisdictional and enforcement stage. English law requires clear and apparent intent to contract, as aspects such as party’s conduct and performance cannot indicate intent to contract.

One can see, therefore, that if a tribunal of an international commercial arbitration invokes the Group of Companies doctrine, the enforcing court might face difficulties in jurisdictions which does not recognise the doctrine. There is an apparent inconsistency in its application.

• THE APPLICATION OF THE GROUP OF COMPANIES DOCTRINE IN THE  JURISPEUDENCE OF INDIAN ARBITRATION JURISDICTION.

The Indian Supreme Court adopted this doctrine in the case of Chloro Control India v. Severn Trent Purification,[9]  wherein under, there were multiple contracts between the parties with different provisions for arbitration clauses. All these contracts formed part of an overall transaction, and each of these contracts were interlinked with each other. This fact drove the Court to find a mutual intent for the determination of jurisdiction. In the opinion of the Court, the non-signatories implicitly consented to the arbitration and combined the principles of non-signatory and consent. Further, it was added that the group of companies doctrine is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories.

The Supreme Court was, however, aware of the implications such a decision might have, and therefore stated that it should apply in a case-to-case basis. However, the Indian Supreme Court have recently re-considered the application of doctrine of group of companies in the case of Cox and Kings Limited v. SAP India Private Limited, Arbitration Petition (Civ.) No. 38 of 2020 [10]. In the instant case, Cox and Kings Ltd. (C&K) company entered into a software licensing agreement with SAP India Pvt. Ltd. Subsequently, in October 2015, when C&K began developing its e-commerce platform, SAP India offered its hybris solution software. This led to three new agreements, including one with an arbitration clause. However, after facing challenges and project failure, C&K terminated the said contract, and arbitration proceedings ensued. C&K then sought to include SAP SE (the parent company of SAP India) in the arbitration, claiming implied consent under the 'Group of Companies Doctrine'. Former CJI N.V. Ramana referred this case to a five-Judge constitution bench to determine the validity of the ‘Group of Companies’ doctrine in the jurisprudence of Indian arbitration. This 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. This doctrine was called into question purportedly on the ground that it interferes with the established legal principles such as party autonomy, privity of contract, and separate legal personality. The challenge before the Court was to figure out whether there can be a reconciliation between the “group of companies” doctrine and well settled legal principles of corporate law and contract law.

The said matter was referred to seek clarity on the interpretation of the phrase “claiming through or under” appearing under Sections 8, 35, and 45 of the Arbitration Act,1996 by formulating the following two questions:

1. A. Whether the phrase ‘claiming through or under’ be interpreted to include the ‘Group of Companies’ doctrine.
2. Whether the ‘Group of Companies’ doctrine as expounded by chloro controls case (supra) and subsequent judgments is valid in law.

Out of five judges, four judges provided a comprehensive affirmation of the position laid out in the chloro controls case and held that “ The definition of "parties" under the Arbitration Act in India is broad, covering both  signatories and non-signatories. The non-signatories parties can be bound by arbitration agreements based on their conduct, despite the requirement for a written agreement. The concept of "parties" is distinct from those "claiming through or under" a party to the agreement. The group of companies doctrine helps to understand the intentions of multiple parties in complex transactions as recognized under the Act. This doctrine isn't based on piercing the corporate veil but aims to maintain corporate separateness while discerning common intentions. The courts should let arbitral tribunals decide if non-signatories are bound by arbitration agreements hence, it's important to keep this doctrine in Indian arbitration law for its usefulness in complex transactions, while also being open to other principles for binding non-signatories to arbitration agreements.

However, justice P. S. Narasimh provided a concurring view to the judgement and inter-alia laid down that 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) of Arbitration Act,1996 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. While interpreting and constructing the contract, courts or tribunals may adopt well-established principles, which aid and assist proper adjudication and determination.

The Group of Companies doctrine  can be subsumed 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. The doctrine is subsumed within the statutory regime of Section 7(4)(b) for the purpose of certainty and systematic development of law.   The expression “claiming through or under” in Sections 8 and 45 of said act is intended to provide a derivative right; and it does not enable a non-signatory to become a party to the arbitration agreement. Hence,

In conclusion, the apex court has reaffirmed the position as held in the chloro controls case and inter-alia stated that “ The Group of Companies doctrine is premised on ascertaining the intention of the non-signatory to be party to an arbitration agreement. 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. Further added “ 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. While interpreting and constructing the contract, courts or tribunals may adopt well-established principles, which aid and assist proper adjudication and determination”

Conclusion

Now that the Group of Companies doctrine has been thoroughly explained, it is obvious that there are enough justifications of this doctrine. However, the very concept of implied consent in the doctrine has to be carefully applied so as to not be unreasonable. The tribunals and courts are very prone to misapply the three-pronged test of Dow Chemicals, and have in the past impleaded parties even when there is no consent to the same.

Therefore, the dispute based approach seems like the most prudent alternative, where the definitional first principles of equity and fairness should guide the tribunals in impleading non-signatories. The tribunal’s jurisdiction should be a carefully constructed aspect and not based on half baked laws. Since at the time of enforcement, the award may be made redundant.

Footnotes

[1] Stavros Brekoulakis, ‘Parties in International Arbitration : Consent v. Commercial Reality’ in Stavros Brekoulakis, Julian DM Lew, et al (eds) ‘The Evolution and Future of International Arbitration’ (2016) 119, 137.

[2] Dow Chemical v. Isover Saint Gobain, Interim Award, ICC Case No. 4131, 23 September 1982

[3] Mohammad Razil Salim, Corporate Insolvency: Separate Legal Personality and Director’s Duties to Creditors, Vol.2, UiTM Law Review, 90 (2004).

[4] Yaraslau Kryvoi, Piercing the Corporate Veil in International Arbitration, Vol.1, Global Bus. L. Rev., 176 (2010-2011).

[5] Paris Court of Appeal, 7 December 1994, V 2000 (formerly Jaguar France) v. Project XS, Rev. Arb. (1996) 67.

[6] X v. Y Engineering S.p.A. and Y S.p.A., 4A_450/2013, ASA Bull., 160 (2015)

[7] Audley William Sheppard, ‘Third Party Non-Signatories in English Arbitration Law’ in Stavros Brekoulakis, Julian Lew, et al (eds) The Evolution and Future of International Arbitration (Kluwer Law International, 2016) 183-198.

[8] Andrijana Misovic, ‘Binding non-signatories to arbitrate : the United States approach’ (2021) 37(3) Arbitration International 749-768.

[9] Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & Or, (2013) 1 SCC 641.

[10] Cox and Kings Limited v. SAP India Private Limited, Arbitration Petition (Civ.) No. 38 of 2020,