Key Insights on Group of Companies Doctrine

Arbitration is a form of alternative dispute resolution to redress disputes outside the judiciary courts. It is a process in which two parties in a disagreement use an independent, impartial third party to settle the dispute, often by making a decision they both agree to. An arbitration agreement can be either in the form of an arbitration clause in a contract itself, or a separate arrangement can be made for it. An arbitration agreement must be in writing. There must be an intention of the parties to refer a dispute to arbitration. One of the essentials of arbitration is the mutual consent of the disputing parties to resort to arbitration. Requirements for a valid arbitration agreement have been expressly provided under Section 7 of the Arbitration and Conciliation Act, 1996. For a good arbitration agreement to exist, there must be consensus ad idem, which means that the contracting parties must have the common intention to take the dispute to an arbitral tribunal to claim relief. However, in establishing this doctrine of mutual consent in arbitration law, various other legal principles may play a role in the fair adjudication of the dispute. The “group of companies” principle is one such doctrine, acting as an exception to the concept of mutual consent in an arbitration agreement. It has raised controversies throughout jurisdictions regarding its validity and correctness.

The “group of companies” doctrine allows a non-signatory to an arbitration agreement to be included as a party to the arbitration, as this non-signatory may form part of the same group of companies as one of the signatories to the arbitration agreement. This doctrine aims to encompass, under certain conditions, the arbitration agreement signed only by one or some of the companies of a group to the non-signatory companies of the same group. Any party bound and benefitted by the contract can be connected to the agreement. This doctrine is inherently linked to but not similar to piercing or lifting the corporate veil doctrine. The ‘group of companies’ philosophy does seem to stand contrary to the basic principles of separate legal personality, which are rooted in the legal jurisdictions.

The ‘group of companies’ doctrine has been first elaborately discussed in the International Chamber of Commerce (ICC) in the case of Dow Chemicals Company & Ors. v. Isover Saint Gobain¹ (Dow Chemicals). According to the award rendered in the Dow Chemicals’ case, it was well-established that a non-signatory can be bound by an arbitration agreement and can be obliged under such arbitral proceedings. Furthermore, it has been stated that the position of this doctrine has further strengthened if the non-signatory has participated effectively in the performance, conclusion and termination of the underlying contract. This award has been after that upheld by the Cour d’Appel de Paris and has since acted as a precedent for several arbitral tribunals across jurisdictions on the issue of non-signatories bound by arbitration agreements.

This doctrine is relatively a novel concept in Indian jurisprudence. In India, the jurisprudential basis for extension of non-signatories to be obliged under an arbitration agreement was primarily established by the judgment in Chloro Controls v. Severn Trent Water Purification Inc. & Ors.². Indian courts have often been perplexed regarding the validity of the extension of the arbitration agreement to non-signatories. While this judgment introduced the doctrine in Indian jurisprudence, the principle is yet to be set in the system of Indian courts. In this case, the Court noted that a “definite reference to the language of the contract and intention of the parties” must be ascertained with great caution. The Court also stressed that the

“intention of the parties is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties”.

(2013) 1 SCC 641

In deciding the ambit of the doctrine, the Court set out four factors that need to be taken into consideration, namely:

• the direct relationship of the non-signatory to the signatory to the arbitration agreement;
• the direct commonality of the subject matter and agreement’ between the parties;
• the transaction should be of a composite nature where the performance of the [principal] agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements and
• whether referring to disputes under all agreements would serve the ends of justice.

In Cheran Properties Limited v. Kasturi and Sons Limited³, the Supreme Court held that an arbitral award could be enforced against a non-signatory, depending upon the specific facts and circumstances of the case. The Supreme Court noted that the “group of companies” doctrine facilitates the fulfilment of the parties’ common intention, which was to bind both signatories and non-signatories to the arbitration agreement. The Supreme Court, whilst passing this judgment, also noted the exceptional nature of this doctrine and held that its application largely depends on the construction of the arbitration agreement and the factual context of the dispute. The Court also relied on Section 35 of the Act, which provides that an arbitral award “shall be final and binding on the parties and the persons claiming under them respectively”.

In Mahanagar Telephone Nigam Ltd. v. Canara Bank⁴ pursuant to it, the Supreme Court further enlarged the doctrine’s scope and held that the doctrine could be utilized to bind the third party to arbitration if a tight corporate group structure constituting a single economic reality existed. Even though the group of companies doctrine was used by Indian courts in the past, it is through the decision of the Supreme Court in Mahanagar Telephone Nigam Ltd. v. Canara Bank it has been made clear the different circumstances under which the group of companies philosophy would be invoked and even more importantly the focus of courts to look at the conduct of the parties especially when there was no written arbitration agreement in place.

In the case of Oil and Natural Gas Corporation Ltd. v. M/s Discovery Enterprises Pvt. Ltd. & Anr⁵, the Supreme Court held that the following factors might be considered while deciding whether a non-signatory company within a group of companies would be bound by the arbitration agreement:

• 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.

In Shapoorji Pallonji and Co. Pvt. Ltd v. Rattan India Power Ltd & Anr⁶, the main question was whether a non-signatory could be compelled to be a party in the arbitration. The Delhi High Court dove into the “group of companies” doctrine, stating that the principal legal basis for holding a non-signatory bound by an arbitration agreement is to include both purely consensual theories such as agency, assignment and non-consensual theories such as estoppel or alter ego. The Court held that Elena (Respondent No.2), a wholly owned subsidiary was an alter-ego of Indiabulls (Respondent No.1) and that even though Indiabulls had not signed the contract, it was compelled to be a party to the arbitration.

Many believe this doctrine to be flawed and criticise the same as it hampers the concept of “Privity of Contract” and the fundamental principle that ‘an international law imposes arbitration only on the parties have expressly provided their consent for the same. This doctrine has more acceptance in countries like the US, France, England, Belgium, etc., than in India because of its novelty.

In light of those described above, for great clarity, it is prudent to add formal language in the arbitration clause to avoid any anomaly in the future. One must be cautious while drafting a contract to prevent this doctrine. Wordings of an arbitration agreement must be clear, concise and carefully framed. It is vital to have proper documentation. Lawyers and Counsels should examine mutual intention in case it binds a signatory and a non-signatory. Due diligence must be practised so that one does not attract this doctrine. Supreme Court 3-judges bench in Cox and Kings Limited v. SAP India Private Limited,^7, while referring to the earlier decisions, doubted the Chloro Controls v. Severn Trent Water Purification Inc. & Ors. and other subsequent decisions that followed Chloro Controls v. Severn Trent Water Purification Inc. & Ors., observed:

“there is a need for having a relook at the doctrinal ingredients concerning the group of companies doctrine.”

2022 SCC Online SC 570

Vaibhavi Inamdar is a 5th-year BLS LLB student of Anand Vishwa Gurukul College of Law,m University of Mumbai.

Disclaimer:  The views, thoughts, and opinions expressed in the text belong solely to the author and not to the Jurisedge Academy.

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Endnotes

1. (ICC Case No. 4131).
2. (2013) 1 SCC 641.
3. (2018) 16 SCC 413.
4. (2020) 12 SCC 767.
5. 2022 SCC Online SC 522.
6. 2021 SCC OnLine Del 2875
7. 2022 SCC Online SC 570.