This article was written by Ronak Pattanaik and Shriya Salini Routray, pursuing the Paralegal Associate Diploma from LawSikho, and edited by Koushik Chittella. It primarily delves into the relevance of the group of companies doctrine in Indian arbitration jurisprudence and whether the same is negating certain well-known principles of corporate law, such as the principle of separate legal personality & the piercing of the corporate veil.
Table of Contents
Introduction
As a product of a contract, an arbitration agreement is subject to certain fundamental principles derived from contract law, including but not limited to the doctrine of privity. This doctrine asserts that a contract shall only bestow rights or impose liabilities on the parties to the contract. In other words, a contracting party shall not confer any right/liability arising out of the contract upon a third party. Furthermore, only the contracting parties are entitled to or bound by the contract. A person who is not a party to the contract cannot enforce the terms of the contract. The principle is reflected in the international arbitration conventions and even in the Arbitration Act.
Arbitration agreement: meaning
The UNCITRAL Model Law & Section 7 of the Arbitration & Conciliation Act, 1996 define an arbitration agreement as a mutual agreement between parties. It allows them to resolve any potential disputes through arbitration related to a specific legal relationship, whether contractual or otherwise. It is a well-established legal proposition that consent is one of the essential requisites of a valid arbitration agreement, as is the case with other contracts, and that a party can’t be compelled to submit to arbitration for disputes that they haven’t agreed to previously. This legal proposition led to the notion that non-signatories to an arbitration agreement can’t be made parties to the agreement or arbitration, as the same would contradict the principles of party autonomy and the doctrine of privity. The general rule in identifying the parties to an arbitration agreement has always been looking for the one’s named in the recital clause of the agreement and who has signed the agreement. The notion that the non-signatories to the agreement are not bound by the arbitration agreement may not always be found to be appropriate.
Express and Implied contracts
A contract may take one of two forms, i.e., express or implied. In some cases, individuals or entities who haven’t explicitly and formally signed the arbitration agreement or the underlying contract (which contains the arbitration clause) may still intend to be bound by its terms. The intention can be inferred from their conduct. In essence, the determination of whether an entity is considered a “party” to an arbitration agreement primarily hinges on the issue of consent.
The group of companies doctrine and its evolution
The group of companies doctrine stipulates that an arbitration agreement entered into by one or more companies within a group may extend to the non-signatory affiliates. This extension happens when the circumstances demonstrate mutual intention among both the signatory and non-signatory affiliates to be bound by the agreement and submit to arbitration in case of a dispute.
A group of companies signifies a conglomeration of individual companies, each with a distinct legal identity, having a formal or informal structure, and all under the control of a common authority, usually a parent company. Companies are tied to trust-based relationships here. When applying the group of companies doctrine, the court shall look into both the presence of such a group and the actions of both signatory and non-signatory parties. This examination serves to discern an evident intention to include non-signatory entities in arbitration and compel adherence to the stipulations of the arbitration agreement. The evolution of the joinder of non-signatories as parties to arbitration proceedings can be bifurcated into two stages, i.e., before and after the Chloro Controls case. In the pre-Chloro Controls era, the ambit of the term “parties,” as defined under Section 2(1)(h) of the Arbitration & Conciliation Act 1996, was restricted only to the signatories to the agreement.
The Chloro Controls Case
In the Chloro Controls (I) P. Ltd. vs. Severn Trent Water Purification Inc. & Others case, a three-judge bench permitted the inclusion of non-signatories in arbitration proceedings through the application of the group of companies doctrine. However, the court specified that non-signatories must base their claims on or under the parties who are signatories to the agreement. This means that arbitration can occur between a party that signed the agreement and a non-signatory making a claim under or through a signatory. Furthermore, the court emphasised that several factors should be collectively considered to determine the intentions of the parties.
These factors include:
- Relationships within the intricate corporate group structure,
- Complicity of non-signatories in meeting contractual obligations,
- Commonality of subject matter,
- In Interrelated transactions where the performance of primary agreements relies on the pursuit of ancillary agreements,
- Overall performance of the contract.
The party seeking to include a non-signatory in arbitration bears the burden of proof, presenting evidence that satisfies these factors warranting the approbation of the court or tribunal.
Observations of the Court in Cox & Kings Case
A five-judge bench in the matter of Cox & Kings Ltd. vs. SAP India Pvt Ltd. (Cox & Kings) decided the validity of the doctrine in Indian arbitration jurisprudence. The Court considered whether a balance can be maintained between the doctrine and other principles governing corporate and contract law. Additionally, it examined whether the principle of piercing the corporate veil alone justifies invoking the group of companies doctrine. Also, the Court noted that there were no circumstances demonstrating implied consent from the non-signatory to submit to arbitration.
Parties under Section 2(1)(h) of the Act
The Hon’ble Court held that the term “parties,” as defined under Section 2(1)(h) of the Arbitration & Conciliation Act 1996, encompasses both the signatory and non-signatory parties to the agreement. It also recognised that the actions of a non-signatory can occasionally indicate their intention to be bound by the terms of the agreement. Further, the court observed that “the articulation of a contract primarily contemplates the intention of the signatories rather than non-signatories. However, circumstances may arise where a person or entity, despite not formally signing an arbitration agreement, may appear to be an indisputable participant in the agreement due to their legal ties with the signatories and involvement in the contract’s execution and its performance. Particularly in intricate transactions with multiple parties and contracts, a non-signatory may play a significant role in negotiations or performance without formally agreeing to be obligated by the ensuing responsibilities, including arbitration.”
As per the court, modern commercial scenarios often involve instances where a company signing a contract containing an arbitration clause may not necessarily be the entity negotiating or fulfilling the contractual obligations. Emphasising formal consent in such cases could exclude non-signatories from the arbitration agreement, and hence courts and tribunals should avoid a rigid approach that excludes individuals or entities intending to be bound by the underlying contract, considering their conduct and relationships with signatories. In such cases, the group of companies doctrine is employed to understand the parties’ intentions by analysing the factual circumstances surrounding the contractual arrangements.
The existence of a group of companies or the presence of robust organisational and financial interconnections between the signatory and non-signatory entities is a crucial element for the court to consider, but it can’t be the sole criteria when assessing the consent of the parties. The test shall always be as to whether the non-signatory was directly and substantially involved in the negotiation, performance, and termination of the contract. The five-judge bench accordingly recommended a balanced approach, ensuring consistency with internationally accepted practices and principles in arbitration law, contract law, and company law. The court further held that the doctrine has an independent existence of its own and shall not be linked to the phrase “claiming through or under” under Section 8 of the Arbitration & Conciliation Act, 1996, as has been held in the Chloro Controls case. This means that the non-signatories do not claim through or under a signatory party to the agreement, and the persons claiming via or under a party who has signed it possess a right only in derivative capacity and stand as a successor to the signatory party’s interests and hence are not parties to the agreement.
Ensuring harmony with the principles of corporate law
While addressing the questions “Whether the doctrine would undermine the principles of corporate and contract law?” and “Whether the principle of piercing the corporate veil alone justifies invoking the group of companies doctrine?, the Court ruled that applying this doctrine depends on preserving the separate legal identities of group companies. Additionally, it involves discerning parties’ intention to enforce the arbitration agreement against a non-signatory. The principle of alter ego or piercing the corporate veil ought not to underpin the application of the group of companies doctrine.
The case of Salomon v. Salomon
The foundation of corporate law lies in the principle of separate legal personality, as established in Salomon v. Salomon, emphasising that a company is legally distinct from its promoters, directors, shareholders, and employees. This principle also applies to corporate conglomerates, wherein the parent company is not automatically held liable for the actions of its subsidiary. Despite common ownership or a shared board of directors, they are recognised as separate legal entities. The distinct legal personality of entities within a corporate group remains crucial, with exceptions only in cases like fraud.
The group of companies doctrine is employed to enforce arbitration agreements across group members without undermining their separate legal status. Unlike the alter ego principle, which disregards legal separateness, the group of companies doctrine preserves corporate identity while discerning parties’ common intentions to surrender themselves to arbitration. Corporate (and contract) law serves to establish actual legal responsibilities, such as potentially disregarding the corporate structure to hold individuals liable. Conversely, arbitration law focuses on assessing if an arbitral tribunal holds authority over a dispute among parties bound by an arbitration agreement. It is in this context that the group of companies doctrine is pertinent.
Conclusion
The group of companies doctrine is valuable for discerning parties’ mutual intentions in complex transactions, especially in the Indian arbitration context. While not universally accepted, particularly in English law, it is considered essential in Indian jurisprudence. The suggestion is to uphold the doctrine within the framework of mutual consent and intent, ensuring dynamism in Indian arbitration law to address contemporary challenges. The intention of the agreement should be the resolution of disputes. By grounding the doctrine in established principles governing mutual intent, it maintains a jurisprudential bedrock in party autonomy and volitional consent to arbitrate.
References
- https://main.sci.gov.in/supremecourt/2020/21647/21647_2020_1_1501_48956_Judgement_06-Dec-2023.pdf
- https://main.sci.gov.in/jonew/judis/39605.pdf
- https://lddashboard.legislative.gov.in/sites/default/files/A1996-26.pdf
- https://main.sci.gov.in/jonew/judis/39605.pdf
