WHETHER a non
signatory to arbitration agreement could be subject tO arbitration
The basic law is that the parties and
signatory to an arbitration agreement shall only be subjected to arbitration in
a context of “group of companies” doctrine. However, a Five (5) Judge constitution
bench in a matter captioned as Cox and Kings Ltd. Versus SAP India Pvt. Ltd. & Anr Arbitration Petition (Civil)
No. 38 of 2020 has revisited on the aforesaid prescription after analyzing the
case law on broad parameter of arbitration.
The Supreme Court was called upon to determine the validity of
the ‘Group of Companies’ doctrine in
the jurisprudence of Indian arbitration. This entails that an arbitration
agreement entered into by a company within a group of companies may bind
non-signatory affiliates, if circumstances demonstrates the mutual intention of
the parties to bind both signatories and non-signatories. Doubts are expressed
however on the premise that the aforesaid doctrine interferes with the
established legal principles -such as party autonomy, privity of contract, and
separate legal personality. What was thus to be ascertained by the Supreme
Court was whether there can be a reconciliation between the group of companies
doctrine and well settled legal principles of corporate law and contract law.
A three-Judge Bench of Supreme Court in Chloro Controls India (P) Ltd v. Severn Trent Water
Purification Inc 2 (2013) 1 SCC 641 relied upon the phrase “claiming through or
under” in Section 45 of the Arbitration Act to adopt the group of companies
doctrine. It was observed that the subsequent decisions of the Supreme Court
established the doctrine in Sections 8 and 35 without adequately examining the
interpretation of the phrase “claiming through or under” appearing in those
provisions. These decisions includes:
Cheran Properties Ltd v. Kasturi and Sons Ltd 3 (2018) 16 SCC 413,
Mahanagar
Telephone Nigam Ltd. v. Canara Bank (2020) 12 SCC 767, and Oil and Natural Gas
Corporation Ltd v. Discovery Enterprises Pvt. Ltd. (2022) 8 SCC 42.
It was felt that economic concepts such as tight group structure
and single economic unit alone cannot be utilized to bind a non-signatory to an
arbitration agreement, in the absence of an express consent. Consequently, the
matter was referred to the larger bench to seek clarity on the interpretation
of the phrase “claiming through or under” appearing under Sections 8, 35, and
45 of the Arbitration Act. The following two questions were thus formulated for
reference:
a. Whether
the phrase ‘claiming through or under’ in Sections 8 and 116 could be interpreted
to include the ‘Group of Companies’ doctrine; and
b. Whether the ‘Group
of Companies’ doctrine as expounded by Chloro Controls Case
(supra) and subsequent judgments is valid in law.
It was also observed that the earlier
decisions of Supreme Court before Chloro Controls (supra), rendered in Sukanya Holdings (P) Ltd v. Jayesh H Pandya (2003) 5 SCC 531 and Indowind Energy Ltd v. Wescare (I) Ltd, (2010) 5 SCC 306 adopted a “rigid” and “restrictive” approach by placing
undue emphasis on formal consent. It was felt that the Supreme Court adopted
inconsistent approaches while applying the doctrine in India, which needed to
be clarified by a larger Bench. Accordingly, hon’ble Justice Surya Kant had highlighted
the following questions of law for determination by the larger Bench:
a. Whether the Group of Companies Doctrine should be read
into Section 8 of the Act or whether it can exist in Indian jurisprudence
independent of any statutory provision;
b. Whether the Group of Companies Doctrine should
continue to be invoked on the basis of the principle of ‘single economic
reality’;
c. Whether the Group of Companies Doctrine should be
construed as a means of interpreting implied consent or intent to arbitrate
between the parties; and
d. Whether the principles of alter ego and/or piercing
the corporate veil can alone justify pressing the Group of Companies Doctrine
into operation even in the absence of implied consent.
PETITIONER’s CONTENTIONS
1.
What is required to be ascertained
is as to whether the basis for the application of the group of companies
doctrine is the tacit or implied consent by the non-signatory to be bound by
the arbitration agreement;
2.
The definition of “party” under
Section 2(1)(h) of the Arbitration Act cannot be restricted to the signatories
to an arbitration agreement, but should also include non-signatories depending upon
the facts and circumstances;
3.
In terms of section 7 of the
Arbitration Act the defined legal relationship between the parties may be
non-contractual as well. Moreover, Section 7(4)(b) indicates that a
non-signatory could be bound by an arbitration agreement if the intention to be
bound by the agreement is evident; and
4.
The group of companies doctrine
should ideally be applied by the arbitral tribunal. At the stage of referral,
the court should merely take a prima facie view
and leave it for the arbitral tribunal to determine the necessity of joining
the non-signatories to the arbitration agreement.
RESPONDENT’s CONTENTIONS
a. The applicability of the group of companies doctrine
must be examined from the touchstone of whether a non-signatory could be made a
party to the arbitration agreement. The expression “claiming through or under”
a party cannot be the basis to apply the doctrine;
b. The doctrine is predicated on the existence of a
dispute arising from a defined legal relationship and mutual intention of the
parties to be bound by the arbitration agreement. The intention of the non signatory
has to be ascertained from the cumulative factors laid down in Chloro Controls (supra);
c. In order to bring non signatory group of companies to
the ambit of arbitration agreement, the following requirements must be satisfied
to bind the non-signatory as a “veritable” party to the arbitration agreement:
i. mutual intention of all the parties, both signatories
and non signatories, to be bound by the arbitration agreement;
ii. absolute and unqualified acceptance by the
non-signatory party to the arbitration agreement; and
iii. such acceptance must either be expressed or
implied. In the context of a non-signatory, such acceptance will be implied and
manifested in the negotiation, performance, or termination of the contract;
d. Mutual consent of the parties to refer disputes arising
out of their defined legal relationship to arbitration is the essential
ingredient of an arbitration agreement.
e. The concept of “party” to an arbitration agreement is
distinct from the concept of “person claiming through or under” a party. The
latter expression conveys the notion of a derivative cause of action where the non-signatory
steps into the shoes of the party rather than claiming an independent right
under the agreement; and
f. Concepts such as ‘tight group structure’ and ‘single
economic unit’ cannot be the sole basis to invoke the group of companies
doctrine. This doctrine cannot be applied to bind a non-signatory merely on
account of it being under the ownership, control, or supervision of the
signatory party;
Historical Perspective
In the aftermath of Chloro Controls (supra), the Law Commission of India
published a Report in 2014 recommending amendments to the Arbitration Act. Observing
that the phrase “claiming through or under” as used and understood in Section
45 of Arbitration Act is absent in the corresponding provision of Section 8 of
the said Act It was suggested that the definition of “party” under Section
2(1)(h) be amended to also include the expression “a person claiming through or
under such party.”
Significantly, in 2016, Section 8 was
amended to bring it in line with Section 45 of the Arbitration Act. The unamended
Section 8(1) provided that a party to an arbitration agreement could make an
application seeking a reference to arbitration. The amended Section 8(1)
provided that “a party to an arbitration agreement or any person claiming through
or under him” could seek a reference to arbitration. However, the legislature
did not bring about any change in the language of Section 2(1)(h) or Section 7
of the Arbitration Act. Since, Chloro Controls (supra) and the amendment to Section 8, subsequent
decisions of the Supreme Court have referred to the group of companies doctrine
to join non-signatories persons or entities to arbitration agreements.
However, in Cheran Properties (supra), the issue before the
Supreme Court was whether the arbitral award could be enforced under Section 35
of the Arbitration Act against a non-signatory, who was a nominee of one of the
signatories to the arbitration agreement and a direct beneficiary of the
underlying contract between the signatories. Section 35 of the Arbitration Act
postulates that an arbitral award “shall be final and binding on the parties
and persons claiming under them respectively.” The Supreme Court observed that
the expression “persons claiming under them” refers to every person whose
capacity or position is derived from and is same as a party to the proceedings.
It held that the non signatory, being a nominee of one of the signatory
parties, was bound by the arbitral award as it was claiming under the
signatory.
In Ameet Lalchand Shah v. Rishabh Enterprises, (2018) 15 SCC 678 a two-Judge Bench of the Supreme
Court was dealing with an arbitral dispute arising out of four interconnected
agreements executed towards a single commercial project, All the parties were
not signatories to the main agreement containing the arbitration clause. The
Supreme Court relied on Chloro Controls (supra) to hold that a non-signatory, which is a party
to an interconnected agreement, would be bound by the arbitration clause in the
principal agreement. It was thus observed that in view of the composite nature
of the transaction, the disputes between the parties to various agreements
could be resolved effectively by referring all of them to arbitration.
Subsequently, the Supreme Court in Reckitt Benckiser (India)
Private Limited v. Reynders Label Printing India Private Limited (2019) 7 SCC 62 has identified certain additional
factors for the invocation of the group of companies doctrine, when the court
was dealing with an application under Section 11(6) of the Arbitration Act
seeking the appointment of an arbitrator and it was prima facie observed by the
two bench of Supreme Court that the parties belonged to the same group of
companies. It was held that the non-signatory party, even though a constituent
part of the corporate group, did not have “any causal connection with the
process of negotiations preceding the agreement or the execution thereof,
whatsoever.
Thus, the participation of the
non-signatory party in the negotiation and performance of the underlying
contract was held to be the key determinant of the intention of the parties to
be bound by an arbitration agreement.
In Canara Bank (supra), the Supreme Court
emphasized that the group of companies doctrine could be invoked on the basis
of the principle of “single economic unit”. In the said case, Canbank Financial
Services Ltd (CANFINA) , wholly owned subsidiary of Canara Bank, subscribed to
the bonds floated by MTNL. CANFINA subsequently transferred the bonds to Canara
Bank. Eventually, MTNL cancelled the bonds which gave rise to the dispute
between the parties. Canara Bank filed a writ petition before the Delhi High
Court challenging the cancellation of bonds by MTNL. The High Court referred
the parties to arbitration, but Canara Bank challenged the impleadment of CANFINA.
This Court dismissed Canara Bank’s objection on the ground that CANFINA was a
necessary and proper party to the arbitral proceedings, being the original
purchaser to the bonds. While dealing with the contours of the group of
companies doctrine. It was observed that the doctrine could also be invoked “in
cases where there is a tight group structure with strong organizational and
financial links, so as to constitute a single economic unit, or a single
economic reality.”
In France,
The Dow Chemicals case reflected the application of the group of companies doctrine in
arbitration law. It mainly originated from the decisions rendered by
international arbitral tribunals. The origin of the doctrine is primarily
attributed to a number of arbitration awards rendered mainly in France. The
most prominent among them remains an interim award delivered more than four
decades ago by an ICC tribunal in Dow Chemical v. Isover Saint Gobain,
Interim Award, ICC Case No. 4131, 23 September 1982.
The issue before the ICC tribunal
was to determine its own jurisdiction over the non-signatory parties. The
tribunal had to determine whether there existed a common intention of the
parties to be bound by the arbitration agreement. The tribunal established the
common intention of the parties by analyzing the factual circumstances
underpinning the negotiation, performance, and termination of the contracts.
The tribunal held that Dow Chemical France “was a party” to the two contracts,
and consequently to the arbitration agreements contained in them, because it
played a preponderant role in the negotiation, performance, and termination of
the contract. As for Dow Chemical Company, the tribunal held that the holding
company had ownership of the trademarks under which the products were marketed
in France and had absolute control over its subsidiaries who were involved in the
negotiation, performance, and termination of the two contracts. It was
concluded that the non-signatories were also a party to the arbitration agreement,
the tribunal proceeded to analyze the factual circumstances of the signatory
and non-signatory belonging to the same group of companies. It was observed
that a group of companies constitutes one and the same economic reality.
However, the tribunal emphasized that a non signatory may be bound by the
arbitration agreement entered into by another entity of the same group if the
non-signatory appears to be a veritable party to the contracts on the basis of
their involvement in the negotiation, performance, and termination of the
contracts.
In the Cox and Kings Ltd (Supra) the constitution
bench has succinctly observed in para 90 and 91 as under:
90. In
the context of arbitration law, the intention of the parties has to be derived from
the words used in the arbitration agreement. While construing the arbitration
agreement, it is the duty of the court to not delve deep into the intricacies
of the human mind, but only consider the expressed intentions of the parties.81
The words used in the contract reflect the commercial understanding between the
parties. The intention of the parties has to be ascertained from the words used
in the contract, considered in light of the surrounding circumstances and the
object of such contract.
91. An
arbitration agreement encapsulates the commercial understanding of business
entities as regards to the mode and manner of settlement of disputes that may
arise between them in respect of their legal relationship. In most situations,
the language of the contract is only suggestive of the intention of the
signatories to such contract and not the non-signatories. However, there may
arise situations where a person or entity may not sign an arbitration agreement,
yet give the appearance of being a veritable party to such arbitration
agreement due to their legal relationship with the signatory parties and
involvement in the performance of the underlying contract. Especially in cases involving
complex transactions involving multiple parties and contracts, a non-signatory
may be substantially involved in the negotiation or performance of the
contractual obligations without formally consenting to be bound by the ensuing
burdens, including arbitration”.
“92.
Modern commercial reality suggests that there often arise situations where a company
which has signed the contract containing the arbitration clause is not always
the one to negotiate or perform the underlying contractual obligations. In such
situations, emphasis on formal consent will lead to the exclusion of such
non-signatories from the ambit of the arbitration agreement, leading to
multiplicity of proceedings and fragmentation of disputes. In A Ayyasamy
v. A Paramsivam, (2016) 10 SCC 386 this Court observed that it is the duty of the courts
“to impart to that commercial understanding a sense of business efficacy.” The
courts must interpret contracts in a manner that would give them a sense of
efficacy rather than invalidating the commercial interests of the parties. The
meaning of the contract must be gathered by adopting a common sense approach,
which should “not be allowed to be thwarted by a narrow, pedantic and
legalistic interpretation.” Therefore, there is a need to adopt a modern approach to
consent, which takes into consideration the circumstances, apparent conduct,
and commercial facets of business transactions”.
Similarly, in the following
paragraph the constitution bench has further observed as under:
“101.
The group of companies doctrine was developed by international arbitral tribunals
specifically in the context of arbitration, and is not generally used in other
areas of law. Although the existence of a group of companies is a necessary
condition, it is not the sufficient condition to determine the intention of the
parties. In almost all formulations, the courts and tribunals have cautioned
that the mere membership of a non-signatory in a group of companies is not
enough to bind it to the arbitration agreement. Rather, the courts need to
determine: first, the existence of a group of companies; and second, the conduct
of the signatory and non-signatory parties which indicate their common
intention to make the non-signatory a party to the arbitration agreement. Thus,
the group of companies doctrine is similar to other consent based doctrines
such as agency, assignment, assumption, and guarantee to the extent that it is
ordinarily applied as a means of identifying the common intention of the
parties to bind the non-signatory to the arbitration agreement”.
102. The above position was explicitly adopted by the ICC Tribunal
in Dow Chemicals (supra)
where it held that an arbitration agreement signed by certain companies of a
corporate group will bind the other non-signatory members only where all the
parties intended and understood the non signatories to be the “veritable
parties” to the underlying contract containing the arbitration agreement based
on their participation in the “conclusion, performance, or termination of the
contracts”. Thus, the existence of a group of companies is a factual element
that the court or tribunal has to consider when analysing the consent of the
parties. It inevitably adds an extra layer of criteria to an exercise which at
its core is preponderant on determining the consent of the parties in case of
complex transactions involving multiple parties and agreements”.
The hon’ble Constitution bench of
Supreme Court in Cox and Kings Ltd (Supra) and after analyzing the details
in the context has in paragraph no. 165 concluded as under:
“165. In view of the discussion above, we arrive at the
following conclusions:
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;
b. Conduct of the non-signatory parties could be an
indicator of their consent to be bound by the arbitration agreement;
c. The requirement of a written arbitration agreement
under Section 7 does not exclude the possibility of binding non-signatory parties;
d. 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;
e. 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 non signatory party to the arbitration agreement;
f. The principle of alter
ego or piercing the corporate veil cannot be the basis for the application
of the group of companies doctrine;
g. 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;
h. 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;
i. The persons “claiming through or under” can only
assert a right in a derivative capacity;
j. 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;
k. The group of companies doctrine should be retained in
the Indian arbitration jurisprudence considering its utility in determining the
intention of the parties in the context of complex transactions involving
multiple parties and multiple agreements;
l. 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
m. 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.
The aforesaid conclusion are self
contained.
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Anil
K Khaware
Founder & Senior Associate
Societylawandjustice.com
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