Doctrine of Group of Companies in Indian Jurisprudence

Satyarth Kuhad || Student of Campus Law Centre ( kuhadsatyarth@gmail.com )

Shelly Chhillar || Student of Campus Law Centre ( shellychhillar@gmail.com )

|| March 29 2023 ||

The doctrine of group of companies in matters of arbitration agreement refers to a legal principle that allows an arbitration agreement between one company in a group of companies to be extended to other companies within the same group, even if those other companies are not signatories to the arbitration agreement.

This concept originated in 1984 in the case of Dow Chemical v. ISOVER Saint Gobain^[1], where the ICC Arbitral Tribunal observed that, when a non-signatory company has effectively and individually participated in the conclusion, performance and termination of a contract, and appeared as an actual party both to the contract and to the arbitration clause, then it may be bound by the arbitration agreement.

Evolution in India

In the year 2012, in Chloro Controls India Pvt Ltd v Severn Trent Water Purifications Inc & Ors^[2], the Supreme Court of India, for the first time, allowed non-signatory parties to be a part of arbitration proceedings in exceptional cases and laid down a threefold “mutual intention” test which requires:

1. the non-signatory party to be proven in direct relationship to the party signatory to the arbitration agreement,
2. a direct commonality of the subject-matter, and
3. the agreement between the parties should be of a composite transaction.

The Court also clarified on the interpretation of Section 45 of the Arbitration and Conciliation Act, 1996 observing that “in Section 45, the expression ‘any person’ clearly refers to the legislative intent of enlarging the scope of the words beyond ‘the parties’ who are signatory to the arbitration agreement” (Supra).

The Law Commission of India in its 246^th Report^[3] in the year 2014, expressed the necessity of clarifying the definition of “party” in the act, to enable it to be read in accordance with the judgement of the Supreme Court, where the Court recognised non-signatories to be party of the arbitration proceedings in some cases. The commission was of the view that the scope and nature of judicial intervention in context of Section 8 and 45 should be the same as that under Section 11 of the act. The Commission proposed an amendment to the definition of “party” under section 2(h) of the Act^[4]. The LCI report also recommended amendment to Section 8 to make it at par with Section 45 of the act. Regarding Section 8, the report mentioned that, “…where the context would demand, a party includes also a “person claiming through or under such party”^[5].

Present Status

In 2020, in the case of Cox and kings Pvt Ltd v SAP India Pvt Ltd & Anr.^[6], the Appellant company invoked arbitration against Respondent No. 2 which was a parent company of Respondent No. 1 and was not a signatory to the arbitration agreement. The respondents did not respond to the notices; hence the appellant filed the present application seeking appointment of the Arbitrator in an International Commercial Arbitration.

The most dominant issue was whether Respondent No.2, the parent company which was not part of the original contract, could be made a party to the arbitration proceedings arising out of the dispute related to Respondent No.1, the subsidiary company. The three-judge bench examined the doctrine and passed two separate but concurring judgements, and referred the question of correctness and applicability of the doctrine to a larger bench. 

In this case, Justices NV Ramana and AS Bopanna making the majority opinion observed that arbitration is a creature of contract so binding the non-signatories does not justify the purpose of arbitration agreement. The Bench doubts the correctness of the law laid down in Chloro Control (Supra) and cases following it as it appears to be based more on economics and convenience rather than law. The Hon’ble Judges referred the following questions to a larger bench:

1. Could the term “claiming through or under” as used in Sections 8 and 11 be construed to encompass the “Group of Companies” doctrine?
2. Is the “Group of Companies” doctrine as established in the Chloro Control Case (Supra), and its subsequent rulings, legally correct?

In a minority opinion, Justice Suryakant in his concurring judgement made certain observations regarding the mechanism of corporations while making contracts and pressed on identifying the actual intention behind such acts. The Hon’ble Judge referred the following questions to a larger bench in addition to the questions referred by Justices NV Ramana and AS Bopanna:

1. Is it appropriate to interpret Section 8 of the Act to include the Group of Companies Doctrine, or can it exist as a standalone principle in Indian jurisprudence?
2. Should the Group of Companies Doctrine continue to be applied based on the principle of “single economic reality”?
3. Is it valid to construe the Group of Companies Doctrine as a method for inferring implied consent or intent to arbitrate between the parties?
4. Can the principles of alter ego and/or piercing the corporate veil, in the absence of implied consent, justify the application of the Group of Companies Doctrine?

The present status as to the applicability of the Doctrine of Group of Companies to join the non- signatory parties to the arbitration proceeding is ambiguous and has been referred to a larger bench of the Supreme Court of India in May 2022 by a three- judge bench in the case of Cox and kings Pvt Ltd v SAP India Pvt Ltd & Anr (Supra). The doctrine has been applied in India in exceptional cases, but its validity in law and interpretation in the context of the Arbitration and Conciliation Act is still a matter of debate and requires further clarification from the Supreme Court.

---

^[1] ICC Case No. 4131 of 1982

^[2] Civil Appeal No. 7134 of 2012

^[3] Law Commission of India, “246th Report on Amendments to the Arbitration and Conciliation Act, 1996” (August, 2014)

^[4] Law Commission of India, “246th Report on Amendments to the Arbitration and Conciliation Act, 1996” Page 38 (August,   2014)

^[5] Law Commission of India, “246th Report on Amendments to the Arbitration and Conciliation Act, 1996” Page 33 (August,   2014)

^[6] Arbitration Petition (Civil) No. 38 of 2020

---