The Doctrine of Group of Companies: A Modern Approach to Consent in Arbitration Proceedings?

INTRODUCTION

Party autonomy is a foundational pillar in arbitration proceedings. An arbitration agreement reflects the parties’ willingness to be legally bound within the contours of that agreement. That is to say that parties to an arbitration agreement mutually consent to bestow jurisdiction upon a court and/or tribunal to decide certain disputes by their choice of law. However, in recent demanding times, in order to meet the ends of justice, courts and tribunals, under certain exceptional circumstances, have allowed extension of arbitration agreements to bind non-signatories.

This article seeks to briefly review such exceptional circumstances under which courts and tribunals have approved joinder of non-signatories as party to the arbitration agreement by invoking the Group of Companies doctrine and the implications drawn by such joinder in absence of consent to be bound by the arbitration agreement.

APPLICATION OF THE DOCTRINE IN ARBITRATION PROCEEDINGS

In broad terms, the doctrine is often utilised to bind a third party to an arbitration agreement when such a third party either forms part of the same group of companies or when the third party was actively involved in the negotiation, enforcement or performance of the contract or derives direct benefit from the performance of the contract. In the past, the doctrine has also been utilised to bind a consenting third party to an arbitration agreement as well as a non-consenting third party, in absence of formal consent to be bound by such an agreement.

While ascertaining corporate ties within the group of companies appears to be imperative, it must be understood that it cannot be the sole criteria for a third party to be bound by the arbitration. Factual circumstances and the ambit of the arbitration agreement also require consideration since they are likely to differ from case to case.

The qualifying test for a non-signatory to be bound by the arbitration agreement under the Group of Companies doctrine was first propounded in the case of Dow Chemicals Company & Ors v. Isover Saint Gobain (1). Under this ICC pronouncement, corporate ties complimented with active participation in the performance, conclusion and termination of contracts coupled with mutual intention of all parties to the proceedings was considered sufficient to bind third parties to the arbitration.

In the Indian context, the group of companies doctrine has also been invoked and applied by the Hon’ble Supreme Court in Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc.(2), wherein the Apex Court relied on a four factor test to establish applicability of the doctrine. The determining factors were held to be (i) direct relationship of the non-signatory to the signatory to the arbitration agreement; (ii) direct commonality of the subject matter and agreement between the parties; (iii) composite nature of the transaction where performance of the principal agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements; and (iv) when such joinder of non-signatories would serve the ends of justice.

An understanding of the reasons rendered in the said decision suggests that while a non-signatory could be subjected to arbitration without formal consent, it must be borne in mind that the application of the doctrine is an exception to the general rule of consent bound arbitration therefore, the same is practicable only under exceptional circumstances. Such exceptional circumstances in presence of multiple agreements would lie in cases where ancillary agreements are relatable to the principal agreement and where the performance of one agreement in so intrinsically interlinked with the other agreements that they are incapable of being beneficially performed without the performance of the others or severed from the rest.

APPLICATION OF THE DOCTRINE AFTER COX AND KINGS LIMITED

While the decision rendered in Chloro Controls reflects a shift towards a pro-arbitration reasoning, the Apex Court in its most recent pronouncement in Cox and Kings Limited v. SAP India Private Limited & Anr. (3) has criticized its earlier decision in Chrolo Controls for enlarging the scope of the group of companies doctrine in absence of a consenting non-signatory. The reasoning has been criticised for disregarding the principle of separate legal personality and for permitting distinct corporate entities within a group to be treated as a single economic unit. Critics argue that such a wide interpretation of the doctrine inadvertently puts all parent and subsidiary companies at a risk. Another serious implication is pointed out in terms of enforcing awards against non-parties to the dispute as it incidentally amounts to violation of due process and also hinders the concept of fair and equal opportunity to present and contest the claim/s. All in one, application and implication of the use of the group of companies doctrine has been referred to a larger bench to clarify the contours of applicability of the said doctrine.

CONCLUSION: A MODERATED MODERN APPROACH

It is undisputed that consent is the cornerstone of arbitration. However, in the present dynamic, consent cannot be interpreted in isolation of economic realities, commercial practices and trade usages. While the Chloro Controls judgement was considered as a landmark judgement in context of the group of companies doctrine, it has now been overshadowed by the decision upheld in Cox and Kings Limited.

Therefore, it can be said that while Courts have been adopting various tests for joinder of non-signatories under the arch of the group of companies doctrine, caution must be exercised while differentiating factual circumstances of each case. While the pro-arbitration regime is at par with the evolving commercial complexities, it must be borne in mind that arbitration is a consensual dispute resolution mechanism. Therefore, the test for compelling non-signatories to be bound by arbitral proceedings ought to be thoroughly scrutinised and should be invoked only under exceptional circumstances.

1. Dow Chemicals; 1984 Rev Arb 137: (1983) 110 JDI 899.
2. Chloro Controls; (2013) 1 SCC: (2013) 1 SCC (Civil) 689.
3. Cox and Kings Limited; Arb. Petition (Civil) No. 38 of 2020.