Select Page

Arbitrable Disputes Vis-À-Vis Group Company Doctrine: An Expanding Scope

Article by Ankita Sinha

The question of law and concept of ‘Group-Company Doctrine’ which was referred to the constitution bench of Hon’ble Supreme Court in the matter of Cox & Kings Ltd. v. SAP India (P) Ltd.[1], has now been crystallized and made enforceable under the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’). The Hon’ble Supreme Court has recognized the Doctrine’s application to bind non-signatories to an ‘Arbitration Agreement’ upon satisfaction of certain parameters. The controversy over binding nature of Arbitration Agreement on non-signatories – in absence of their express consent inter-alia the concepts of ‘Autonomy’ and ‘Privity of Contracts’ has been laid to rest to the extent that Court’s seized of the question have to determine if there exists a defined legal relationship between the non-signatory and the parties to the arbitration agreement. Depending on the facts and circumstances of each case, the courts where the question of applicability of doctrine arises will have to see whether the non-signatory has consented to be bound by the arbitration agreement, either expressly or impliedly.

Analysis of “Group of Company Doctrines”

In recognizing the Group Company Doctrine as an applicable concept under the Indian Arbitration regime – and making the joinder of parties who are non-signatory to the Arbitration Agreement – a question of contractual interpretation, the Hon’ble Courts have given way to a more diverse and expansive view of what constitutes an ‘Arbitrable Dispute’. By way of the present Article, the author is trying to analyze the broader impact of the Constitution Bench judgment on the Indian Arbitration regime, with a focus on the meaning of ‘Arbitrable Disputes’ in the subsequent judgments of Indian Court.

However, before delving into what the Hon’ble Courts have held subsequent to the judgment of the Constitution Bench, the present Article is briefly dealing with the findings on the ‘Group Company Doctrine’ as the same forms the backbone of the subsequent rulings on ‘Arbitrable Dispute’. Vide the judgment upholding the ‘Group Company Doctrine’ the Hon’ble Supreme Court has cautioned that a pragmatic approach ought to be adopted to ascertain consent of the non-signatory from the facts of each case. The Hon’ble Court examined the questions of ‘Single Economic Reality’ ‘Implied Consent to arbitrate’ ‘Piercing of Corporate Veil’ etc. to find that the conduct of the non-signatory is the most important factor to be considered by the courts and tribunals as the same is an indicator of the intention of the non-signatory to be bound by the Arbitration Agreement. In its conclusions, it was held that 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 and that principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies’ doctrine. Indeed, it has been clarified that 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. It has also been cautioned that the 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.

Following the Judgment of Cox & Kings, recently the Hon’ble Delhi HC in the matter of Opuskart Enterprises v. Kaushal Kishore Tyagi[2] dated 10.01.2014 in an application under S.11(6) of the Arbitration Act examined the Arbitration Agreement arising out of a partnership deed between certain individuals. In the said case, the partnership deed clearly narrated that the referred parties intended to carry on the business of trading, import and export of books and any other businesses which the partners intended to deal with under the name of M/s Opuskart Enterprises. Under Clause 12 of the Deed, the parties were required be just and faithful and render true accounts and full information relating to the firm to the other partners and also pay their separate private debts on their own.

It was the case of the Petitioners is that the Respondent – Mr. Tyagi had indulged in misappropriation of funds of the firm. Accordingly, notice was issued initially raising a claim of certain amounts. In the reply to said notice, Respondent stated that apart from being a partner in the partnership firm, the said partners are also Directors in M/s Opuskart India Pvt. Ltd and made allegations that the that the Petitioners intended to hijack, usurp and run away with the business of both the firm as also the company. Whereafter, the Petitioners invoked the Arbitration Clause and since there was no response from the Respondent, the S.11 petition was filed before the Hon’ble High Court of Delhi. The Hon’ble High Court was therefore seized of the question as to whether the disputes raised by the Petitioner, since the business was common between the firm and the company, whether the claim is an arbitrable dispute.

Without going into the factual analysis of the above case, attention is drawn to the Hon’ble High Court’s interpretation of the Cox & Kings judgment (Supra). Rejecting the Respondent’s arguments that the accounts relating to the firm, or the Company would not be ‘Arbitrable Disputes, the Hon’ble Judge took the view that since the business by the Partners is being conducted both through the firm and by the company, the disputes raised would in fact be arbitrable disputes. Therefore, in the Opuskart Judgment (supra) the Hon’ble Judge reiterated the view taken in Cox & Kings and stated that a non-signatory affiliate or sister or parent company can be a party to an arbitration agreement if there is mutual intention of the signatories and non-signatories to this effect.

However, in the subsequent judgment of the Hon’ble Delhi High Court in the matter of Vingro Developers (P) Ltd. v. Nitya Shree Developers (P) Ltd[3] dated 24.01.20214, where once again the main challenge raised by the respondent was that Respondent No. 2 and 3 were not parties to the Arbitration Agreements and thus, the matter could not be referred to arbitration against them, as the  Respondent No.2 and 3 had only acted in their capacity as directors of the Respondent No.1. It was argued that they cannot be held personally liable, and the referred disputes were not ‘Arbitrable Disputes’.

The Hon’ble Delhi High Court, interpreted the judgment in Cox & Kings and found that to bind a non-signatory to an arbitration agreement, there must exist a common intention between the parties to do so, and held that there was a principal agent relationship between the Respondent No.1 and Respondents Nos. 2 and 3, and merely because they were signatories to the Builder Buyer Agreement in question, Arbitration could not be invoked against them.

Conclusion

By way of the illustration of the above referred two judgments of the Hon’ble Delhi High Court, in the aftermath of the Constitution Bench Judgment in Cox & Kings, the author is trying to convey that the diverse views being taken by the Hon’ble Court’s is a curiouser subject and begs the present analysis insofar as the contrary views & interpretations only make it fascinating to see how the definition of ‘Arbitrable Disputes’ especially in cases of Partnership Firms and Companies will unfold going forward. The present Article is a mere commentary on the diverse understanding of the evolving Group Company Doctrine, and as stated above, it will be fascinating to follow and analyze. However, it goes without saying, that the Constitution Bench Judgment and recognition of the ‘Group Companies doctrine” has left the Indian Arbitration Jurisprudence much richer.

[1] 2023 SCC OnLine SC 1634
[2] 2024 SCC OnLine Del 266
[3] 2024 SCC OnLine Del 486

Doctrine of Group of Companies: An Analysis across Jurisdictions

Article by Jagatjeet Singh and Jagrati Maru

Introduction

In a landmark ruling[1], the Hon’ble Apex Court has ruled on the finality of the long-standing debate of Group of Companies Doctrine (hereinafter referred to as ‘GOC Doctrine’) being a challenge to the foundational principles of arbitration law being party autonomy, privity of contract, consensus ad idem and separate legal personality. The doctrine postulates that an arbitration agreement which is entered into by a company within a group of companies may bind non-signatory affiliates if the “circumstances are such as to demonstrate the mutual intention of the parties to bind both signatories and non-signatories”. This article attempts to dissect the GOC Doctrine from the perspective of foreign jurisdictions and discuss the implications of the judgment upon Indian Arbitration Jurisprudence.

 

Observations of the Hon’ble Supreme Court in Cox and Kings Ltd. v. SAP India Pvt. Ltd.

The Supreme Court while upholding the GOC Doctrine has concluded, the following:

  1. Definition of “parties” in Section 2(1)(h) of the read with the Section 7 Arbitration & Conciliation Act, 1996 (hereinafter referred to as ‘A&C Act’) includes both signatories and non-signatories.
  2. Consent to be bound by an arbitration shall be inferred from the conduct of the non-signatory.
  3. Section 7 of A&C Act requirement of written arbitration agreement does not exclude the possibility of a non-signatory party.
  4. Under the A&C Act, “party” and “persons claiming through or under” a party are distinct and different terms.
  5. Basis of the application of the GOC Doctrine is for maintaining the corporate separateness of group of companies while determining common intention of parties to bind a non-signatory party.
  6. Piercing of Corporate veil or the Doctrine of Alter Ego cannot be the foundation for the application of the GOC Doctrine.
  7. GOC Doctrine is a principle of law which stems from the conjoint reading of Section 2(1)(h) and Section 7 of the A&C Act.
  8. Single Economic Unit cannot be sole basis for invoking the GOC Doctrine.
  9. Persons “claiming through or under” can only assert their right in a derivative capacity.
  10. GOC Doctrine shall be retained ‘considering its utility in determining the intention of the parties in context of complex transactions involving multiple parties.
  11. At referral stage (under Section 11 or Section 8 of the A&C Act), the referral Court shall leave it to the Arbitral Tribunal whether non-signatory is bound by the arbitration agreement.

 Overview of the Doctrine in other Jurisdictions

France

The Doctrine finds its origin from France wherein an ICC tribunal as early as in 1982 passed an interim award in an arbitration titled Dow Chemical v. Isover Saint Gobain[2], holding the Dow Chemical (France) and Dow Chemical Company, non-signatories to the contracts, to be a party to the arbitration. The Tribunal observed that Dow Chemical (France) played vital role in the negotiation, performance and termination of the contract and Dow Chemical Company was the holding company who owned the trademarks under which the products were sold in France and also had absolute control over its subsidiary, the signatory to the contracts. In French law an arbitration agreement can be extended on the non-signatory parties, if it can be stablished that all the parties had a common intention to be bound by the agreement. Such common intention is subjective and is inferred on the objective conduct of the said party during the ‘negotiation, performance and termination of the contract containing the arbitration agreement.[3]

 Switzerland

The Swiss law considers the consent of the parties, either implied or express by their conduct to determine whether a non-signatory is bound by an arbitration agreement. In Swiss law, the mere fact that a non-signatory is a part of the same group of companies is not enough justification for binding the said non-signatory to the arbitration agreement[4]. The Swiss law, similar to the French, mandates a subjective willingness of a non-signatory derived through certain behaviour or conduct which is expressed through an objective element such as involvement in negotiation and performance of the contract for a non-signatory to be bound to the arbitration agreement.[5]

England

Under the English law, even non-signatory parties may be bound by an arbitration agreement but only if they are claiming under or through the original party to the agreement. Therefore, the doctrine of privity is adhered to strictly and an arbitration agreement is extended to non-signatory parties on the basis of traditional contractual principles and doctrines such as agency, novation, assignment, operation of law, and merger and succession. English Courts have discarded the applicability of the Doctrine of Group of Companies. For instance, in Peterson Farms INC case[6] the Respondent claimed damages suffered by its group entities against the Petitioner and some of these group entities were non-signatories to the arbitration agreement. While the tribunal opined that by virtue of the GOC Doctrine the Respondent was entitled to claim damages suffered by its group entities against the Petitioner, on appeal the Commercial Court held that English Law excludes the application of GOC Doctrine and arbitration agreement, therefore, cannot be extended to non-signatory parties.

 USA

The US Federal Arbitration Act does not provide for joinder of non-signatory parties to arbitration agreements. The US Courts have used non-consensual doctrines to extend arbitration agreements to non-signatory parties. For example, where parent company completely exercised control over subsidiary, the Courts have pierced corporate veil and held the alter ego liable in exceptional circumstances.  The US Supreme Court in GE Energy case[7]  held that the New York Convention is silent on the aspect of whether non-signatories can enforce an arbitration agreement and therefore the Convention does not conflict with the application of domestic law equitable estoppel doctrines to third parties.

 Brazil

The Brazilian Arbitration Act, 1996 does not envisage any express provision governing joinder of third parties however, the rule finds its recognition in several institutional arbitration rules.

A look at the jurisprudence on the GOC doctrine, it can be observed that the Courts in Brazil have relied on the GOC Doctrine in limited circumstances. The Doctrine finds its recognition in Court of Appeals decisions wherein the Doctrine has been used to find the very consent to arbitrate when non-signatories from the same group of companies of one of the parties were involved in the negotiation or performance of underlying contract.  The Superior Court of Justice in one case pierced corporate veil under Article 50 of the Brazilian Civil Code invoking an exceptional circumstance to find implicit consent when the signatory and non-signatory parties belonging to the same Group of Companies had abused their rights by committing fraud and acting malafide[8].

Japan

The Japanese Arbitration Act does not contain provisions to enable an Arbitral Tribunal to assume or assert its jurisdiction over individuals or companies who are not a party to the arbitration. The Japanese Law, in stark contrast to the French, Indian and the Swiss, dictates that no parent company or subsidiary company of a signatory shall be bound by the arbitration agreement under the doctrine of group of companies even though the same may have played a vital role in the negotiation, performance and termination of the contract. However, a District Court in Nagoya, Japan in 1995 had held that ‘an arbitration clause in a contract entered into by a company would extend to the individuals closely associated with the said company.’[9]

Singapore

The Singapore High Court has taken a concurrent view with the English Courts in rejecting the Group of Companies Doctrine on reasoning that the doctrine is “anathema to the logic of consensual basis of an agreement to arbitrate; and second, ordering of companies within a broader group did not mean one could dispense with separate legal entity[10].” Following the English decision in Peterson Farms (supra), it was observed that enforceable obligations cannot be imposed on “strangers” to an arbitration agreement.

Conclusion

The Hon’ble Supreme Court while listing its reasoning for upholding the GOC Doctrine has referred to and explored numerous jurisdictions and foreign case laws with respect to the GOC Doctrine. The Court has recognised implied consent for binding non-signatories to an arbitration agreement.

To conclude, this decision has crystalized the applicability of GOC Doctrine in the Indian Arbitration Law landscape and paved way for a comprehensive standard in determining the intention of parties, particularly in a multi-party commercial setup.

[1] Cox and Kings Ltd. v. SAP India Pvt. Ltd. and Anr. 2023 SCC OnLine SC 1634.
[2] Dow Chemical v. Isover Saint Goblain, Interim Award, ICC Case No. 4131, 23 September 2023.
[3] ICC award in Case No. 11405 of 2001.
[4] Saudi Butec Ltd et Al Fouzan Trading v. Saudi Arabian Saipem Ltd, unpublished ICC Interim Award of 25 October 1994, confirmed by DFT on 29 January 1996, ASA Bulletin (1996) Vol 3 p 496.
[5]Cox and Kings Ltd. (Supra).
[6] Peterson Farms INC v. C & M Farming Limited [2004] EWHC 121 (Comm).
[7] 140 S.Ct. 1637 (2020).
[8] Commerical Arbitration : Brazil, Global Arbitration Review <https://globalarbitrationreview.com/insight/know-how/commercial-arbitration/report/brazil > last accessed 22.12.2023.
[9] International Arbitration Laws and Regulations Japan 2023, (Iwata Good 2023) < International Arbitration Laws and Regulations Report 2023 Japan (iclg.com)> last accessed on 26.12.2023.
[10] Manuchar Steel Hong Kong Limited v. Star Pacific Line Pte Ltd. [2014] SGHC 181.
077761