Birds of a feather flock together?”: The Supreme Court clarifies the contours of the “Group of Companies” Doctrine

Background

Consent is the cornerstone of arbitration; it can be express or implied. Although Section 7 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) requires an arbitration agreement to be in writing, over the years, Indian courts have held that merely because a party has not signed the arbitration agreement does not mean that it is not bound by or that it cannot rely upon an arbitration agreement. One such basis for binding a non-signatory to an arbitration agreement is the ‘Group of Companies’ doctrine which like the beloved sapota is in fact an immigrant that has found local roots.

Recently, the full bench of the Supreme Court in Cox and Kings Ltd. v. SAP India Pvt. Ltd. & Anr[1] (“Cox and Kings”) dealt with the validity, basis and applicability of this doctrine which has been enmeshing itself into Indian jurisprudence since the decision in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. and Others[2] (“Chloro Controls”)

The Group of Companies doctrine

Simply put, the doctrine requires consideration of whether non-signatory corporate entities have intended to bind themselves or to rely upon an arbitration agreement that has been entered into by an affiliate. Unlike the sapota which is native to Central America, the doctrine is quite often traced to France and a number of arbitral awards issued there including by an ICC tribunal in Case No. 4131, or the Dow Chemical case.

In India, the Supreme Court in Chloro Controls introduced the doctrine using Section 45 of the Arbitration Act, specifically the words “the parties or any person claiming through or under him” to justify, in part, the applicability of the doctrine. The Supreme Court while emphasizing the importance of an intent to bind the non-signatory to the arbitration agreement, placed focus on:

• the legal relationship between the parties and the non-signatory affiliate;
• a direct commonality of subject matter; and
• composite nature of the transaction, where a composite reference will serve the ends of justice.

In light of Chloro Controls, the Law Commission of India Report of 2014 discussed that the definition of the word “party” in Section 2(1)(h) refers to “a party to an arbitration agreement” and that it cannot be read restrictively to imply mere signatory to an arbitration agreement. While it recommended that Section 2(1)(h) ought to be amended to include the words “or any person claiming through or under such party” after the words “party to an arbitration agreement”, Section 2(1)(h) remains unamended.

In Cheran Properties Ltd v. Kasturi and Sons Ltd[3] (“Cheran”), the Supreme Court applied the doctrine to determine whether an arbitral award could be enforced as against a non-signatory.

Again, in Oil and Natural Gas Corporation Ltd v. Discovery Enterprises Pvt. Ltd[4] (“Discovery”), the Supreme Court was called upon to discuss the doctrine where arbitral tribunal had rejected an application to proceed against a non-signatory. In Discovery, the Supreme Court considered Chloro Controls and laid down the following parameters for application of the doctrine:

• 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; and
• The performance of the contract.

It appeared that the doctrine had firmly been accepted under Indian law until a three-judge bench of the Supreme Court doubted the view adopted in Chloro Controls and referred the question to the full bench.

The Cox and Kings decision

The full bench of the Supreme Court agreed that the ‘Group of Companies’ doctrine could be applied in the Indian context to bind non-signatories to an arbitration agreement. The Supreme Court however disagreed with the basis of its application as was recorded in Chloro Controls to a certain degree.

Some of the key observations of the Supreme Court in Cox and Kings are:

• Although an arbitration agreement needs to be formally recorded, a party need not necessarily have to append its signature to the same.
• Consent-based theories that bind non-signatories to arbitration agreements include agency, novation, assignment, operation of law, merger and succession. In rare cases, non-consensual theories such as piercing of corporate veil or estoppel can bind a non-signatory.
• The ‘Group of Companies’ doctrine is a consent-based theory and therefore cannot be equated with the piercing of corporate veil which disregards intention of parties and is based on overriding considerations of good faith, equity and public policy.
• The basis of the doctrine cannot be found in the legislative phraseology “the parties or any person claiming through or under him” as found in Section 45 of the Arbitration Act or similar language in Section 8. That language can only describe situations akin to assignment, subrogation, novation or a claimant in a derivative capacity, i.e., as a successor in interest. Hence, the doctrine stands independent of the basis stated in Chloro Controls.
• Instead, the doctrine rests on mutual intention/consent and party autonomy. The Supreme Court premised the doctrine on the basis of the definition of parties under Section 2(1)(h) and Section 7. This is despite the fact that 2(1)(h) was not amended to include the words suggested by the Law Commission.
• Factually, there must be corporate affiliation that must be established. However, the mere existence of corporate affiliation will be insufficient as there must be palpable consent to be bound by the arbitration agreement.
• This consent cannot simply be derived from the basis of the single economic entity principle. Instead, it has to be holistically arrived at through various factual circumstances which include the following:

– There must be presence of a legal relationship between the parties and the non-signatory. However, a simpliciter commercial relationship would not be determinative of an intention to be bound by the arbitration agreement. In fact, causing an affiliate to be bound simply because of a commercial relationship with a signatory to an arbitration agreement would render otiose the separate juristic personality of a company. In a lighter vein this would result in the statement, ‘the first rule of company law is that there is no company…’

– There should be a commonality of subject matter.

– There may be a composite nature of the various transactions in play. In complex transactions involving several agreements amongst various parties, it would be important to establish that some of the agreements are inextricably linked to the agreement containing the arbitration agreement or are consequential to such agreement.

– The participation of the non-signatory in the negotiation, conclusion, performance or termination of the underlying contract containing the arbitration agreement would also be a strong indicator for the application of the doctrine. This would ensure accountability if it were evinced that there is a mutual intent to be bound. However, participation could often be incidental which would not demonstrate the intent to be bound by the arbitration agreement.

– The conduct of the non-signatory should demonstrate that it was in fact the true party to the arbitration agreement and that there is legitimate reason to believe that it chose to be so bound.

• Although the doctrine can be applied to avoid multiplicity of proceedings in the interests of justice, that cannot be the sole consideration.
• The factors laid down in Discovery stand approved, but the courts and tribunals should apply the same in the facts and circumstances of each case.
• The determination of whether a non-signatory is bound by an arbitration agreement can be decided by the court while referring parties to arbitration under Section 8, or while appointing an arbitrator under Section 11. However, this has to be performed on a prima facie The issue should preferably be left to be decided by the arbitral tribunal.
• The doctrine can be applied positively as well, i.e., a non-signatory can seek to rely upon an arbitration agreement and invoke arbitration or seek interim relief.

Conclusion

The Supreme Court in Cox and Kings has laid down clear markers on the application of the doctrine in India and clarified that the basis of the doctrine is founded in consent and intent, and not simply the capacity in which the non-signatory exists as part of a large group. The emphasis laid by the Supreme Court on intention to be bound by a non-signatory is significant. In modern economies, both scenarios are equally rampant, i.e., first where the separate juristic personality of a company is utilized by large conglomerates to create economically driven strategic corporate structures which ought not to be dragged into a dispute resolution process that was never intended to be executed on behalf of the entire group. Second, where the conduct of non-signatory affiliates reveals the true parties to a transaction which are otherwise non-signatories.

Additionally, it is now clarified that non-signatories can apply this doctrine to positively rely upon an arbitration agreement and invoke the same.

What remains to be seen is how courts and tribunals apply the doctrine in fact specific circumstances. Older Indian readers would recall the popular song ‘Ek Chidiya, Anek Chidiya’[5] released almost 50 years ago as part of an award-winning animated film. For foreign readers, this translates into ‘One Bird, Many Birds’. The song spoke about unity and common interest. It is fitting that the Supreme Court holds now that only where the united economic interest along with other factors morphs into an intent to be bound by an arbitration agreement, can the doctrine be applied.

Pithily stated, whether the ‘Group of Companies’ doctrine applies should be tested on the basis of the ending of ‘Murder on the Orient Express’[6]. Only when birds of a feather “truly” flock together with a common intention, the doctrine may be applied.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Naresh Thacker, Partner – Email – NareshThacker@elp-in.com
Alok Jain, Partner – Email – AlokJain@elp-in.com
Vinuta Rayadurg, Principal Associate – Email – VinutaRayadurg@elp-in.com
Sharmin Kapadia, Associate – Email – SharminKapadia@elp-in.com

References:

[1] Cox and Kings Ltd. v. SAP India Pvt. Ltd. & Anr., Arb. Pet (Civil) No. 38 of 2020
[2] Chloro Controls India (Pvt) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641
[3] Cheran Properties Ltd v. Kasturi and Sons Ltd, (2018) 16 SCC 413
[4] Oil and Natural Gas Corporation Ltd v. Discovery Enterprises Pvt. Ltd., (2022) 8 SCC 42
[5] Song from ‘Ek, Anek aur Ekta’, an award-winning short film produced by Films Division of India on Doordarshan in 1974.
[6] Murder on the Orient Express, Agatha Christie

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.