|Reference Date | Version
|December 07, 2023 | 1.0
|Group of Companies’ Doctrine, arbitration agreement, non-signatories, party autonomy, consent
|The Arbitration and Conciliation Act, 1996 and The Constitution of India.
An Arbitration Agreement is important because, among other things, it sets out the manner in which the parties wish to settle disputes among themselves in relation to specified matters. The parties are at liberty to define the ‘scope’ of matters that would be arbitrable. Matters falling outside the ‘scope’ would need to be settled following the court process. It may so happen that parties agree to resolve even apparently related matters in separate fora.
A decision to enter into an Arbitration Agreement or execute the contract of which the arbitration clause forms a part is a conscious decision on the part of a party. Following the recent decision of the Hon’ble Supreme Court in Cox and Kings Ltd v. SAP India Pvt. Ltd. & Anr. (2023 INSC 1051) (‘Cox and Kings‘), under certain circumstances, even non-signatories may be treated as having consented to Arbitration.
This article illustrates the implication of the decision of the Hon’ble Supreme Court in Cox and Kings and the need to evaluate the introduction of the ‘clarification of intent’ provision to the arbitration agreement(s) to avoid a situation where a non-signatory unwittingly is required to submit to Arbitration under the Indian Arbitration and Conciliation Act,1996.
Decision in Cox and Kings:
The five-judge bench of the Hon’ble Supreme Court in Cox and Kings has determined that the Group of Companies’ Doctrine should be retained in the Indian Arbitration jurisprudence considering its utility in determining the intention of the parties, and held:
“a. The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties;
- Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement;
- The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties;’
- Under the Arbitration Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement;
- The underlying basis for the application 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 nonsignatory party to the arbitration agreement;
- The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine;
- The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act;
- To apply the group of companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Discovery Enterprises (supra). Resultantly, the principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine;
- The persons “claiming through or under” can only assert a right in a derivative capacity;
- The approach of this Court in Chloro Controls (supra) to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law;
- At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and
- In the course of this judgment, any authoritative determination given by this Court pertaining to the group of companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.”[i]
The factors earlier laid down in Oil and Natural Gas Corporation Ltd. V. Discovery Enterprises Pvt. Ltd. Were reiterated by the Court, and it was held that these factors [ii]must be examined while adjudicating on the issue of binding a non-signatory to an arbitration agreement. The factors are reproduced as follows:
- 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 transactions
- The performance of the contract
What is the Group of Companies’ Doctrine?
The Group of Companies’ Doctrine originated from an interim award rendered by the ICC Tribunal in the case of Dow Chemical v. Isover Saint Gobain[iii] (‘Dow Chemical’) in 1982, wherein a non-signatory was held to be bound by the arbitration agreement based on its participation in negotiation, performance, and termination of the agreement.
In the Dow Chemical case, Dow Chemical Company (USA), along with its subsidiaries Dow Chemical (France), Dow Chemical A.G. (Zurich) and Dow Chemical (Europe), initiated arbitration proceedings against Isover Saint Gobain (‘Isover’) on the grounds of breach of distribution agreements. Isover raised the issue of jurisdiction of the ICC Arbitral Tribunal on the claims of Dow Chemical Company (USA) and Dow Chemical (France) as these companies were not signatories to the arbitration agreements.
The decision of the ICC Arbitral Tribunal to assume jurisdiction concerning the claims submitted by the non-signatories was primarily based on the premise that even though each company was a distinct juridical identity, as a group, they constituted the same economic reality. The ICC Arbitral Tribunal emphasized the significant involvement of the non-signatories in the negotiation, drafting, performance and termination of the agreements. It justified the inclusion of Dow Chemical (France) in the arbitration proceedings.
In the Dow Chemical case, the arbitration agreement stated that since Dow Chemical (USA) owns all the Intellectual Property Rights in relation to the performance of the distribution agreements, it may be made a party to the arbitration proceedings for necessary enforcement of the award. However, the arbitration agreement did not refer to the involvement of Dow Chemical (France).
Further, in the Dow Chemical case, the non-signatories, i.e., Dow Chemical (USA) and Dow Chemical (France) themselves, initiated arbitration proceedings. Hence, the issue of consent of the non-signatories was not in question.
In India, the application of the Group of Companies’ Doctrine was first accepted in the case of Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc[iv] wherein the Hon’ble Supreme Court observed that a non-signatory may be bound by an arbitration agreement in cases comprising composite transactions involving multiple parties and agreements due to its legal relationship with the signatories and involvement in discharging contractual obligations.
In Cox and Kings, the Hon’ble Supreme Court stated that the group of companies doctrine is a means of identifying the common intention of the parties to bind a non-signatory to an arbitration agreement by emphasizing and analysing the corporate affiliation of the distinct legal entities.[v].
The application of the Doctrine of Group Companies in the Indian Arbitration jurisprudence may arguably reflect a very simplistic approach.
It is debatable if common intention can be attributed simply on account of being part of the same group. There is a certain purpose to corporate structuring. For example, typically, it is a conscious decision to vest intellectual property rights (IPR) in the holding company and enforcement thereof is typically subject to the place of jurisdiction of the IPR holder. Confidentiality and non-use issues may arise involving IPR issues and other contractual issues among two parties (not involving the IPR-owning company). Unless the IPR holding company elects to join the Arbitration, it would not be appropriate to impute consent based on factors such as the relationship of the parties, the commonality of the subject matter, and the composite nature of transactions.
In light of the decision in Cox and Kings, the following are some inescapable issues which are relevant to consider:
- If a non-signatory is unwillingly made a party to an arbitration proceeding, it will likely raise a preliminary objection regarding jurisdiction, thereby delaying the arbitral proceedings.
- The substantive right of a non-signatory to seek recourse to the Courts is adversely affected.
- The common intention of the parties may also be extended to the claims in question.
- Reading ‘implied consent’ with respect to the execution of ‘arbitration agreement’ could potentially weaken the essence of ‘consent’, which in turn may impact one of the pillars of Arbitration, i.e., party autonomy.
- The broad application of the Group of Companies’ Doctrine may blur the line between law and accepted commercial practices based on commercial prudence. The doctrines are intended to assist in interpreting the law and legislative intent; however, if such application of doctrine veers towards a circuitous route to control and/or undermine commercial and economic activities, then it becomes a cause of concern.
The decision in Cox and Kings may prompt parties to incorporate a carefully crafted provision in the arbitration agreement to expressly exclude non-signatories from being made a party to the arbitration proceedings. Since the basis for binding a non-signatory to an arbitration agreement is the surrounding circumstance, what would happen if, despite the express exclusion of non-signatories to the arbitration agreement, the factors considered to apply the Doctrine of Group of Companies’ lean in favour of applying the said Doctrine. It seems like a perfect recipe for intricate and complex legal arguments on both sides.