Aishwarya Kaushiq and Pranav Wahi
Standard Position - De facto parties in arbitration
Arbitration is a consensual submission to a dispute resolution mechanism where parties agree to be bound by a third party’s (arbitrator) ruling.
Until 2015, the Arbitration and Conciliation Act, 1996 (“Act”) prescribed only for signatories to apply to the court for referral of a dispute to arbitration. However, in furtherance of Chloro Controls (I) P. Ltd v Severn Trent Water Purification (“Chloro Controls”) [2013 1 SCC 641] and Arbitration and Conciliation (Amendment) Act, 2015 the words “or any person claiming through or under them to arbitration” were inserted into Section 8 of the Act, allowing non-signatories to apply to courts for referring a dispute to an arbitral tribunal.
Caveat to standard position – Inclusion of non-signatories
The basis for binding a non-signatory to an arbitration agreement is akin to that of binding a non-signatory to any other contract i.e., agency, alter ego, estoppel, third party beneficiary, or assignment. However, in Chloro Controls, the Hon’ble Supreme Court introduced the ‘Group of Companies’ doctrine that binds a non-signatory to an arbitration agreement. This doctrine specifically applies to arbitration agreements and states:
“Where a company is a part of a corporate group, is subject to the control of (or controls) a corporation affiliate that has executed a contract and is involved in the negotiation or performance of that contract, then that company may in some circumstances invoke or be subject to an arbitration Clause contained in that contract, notwithstanding the fact that it has not executed the contract itself.”[1]
Factors for application of doctrine of Group of Companies
Chloro Controls laid out essential prerequisites for the application of Group of Companies doctrine:
Direct Relationship with the signatory;
Intention to bind itself to the arbitration.
The courts have since developed upon these two prerequisites and formulated the following dictum on application of doctrine of ‘Group of Companies’:
Non-signatory/third party has direct relationship with the signatory to arbitration agreement.
The transaction amongst parties (signatory and non-signatory) is a composite transaction.
There exists commonality of the subject matter under the agreements governing relationship between a parties.
All agreements in the transaction are connected or ancillary to the agreement which contains arbitration clause/agreement.
Bona fide use of doctrine?
Ever since its pronouncement under Chloro Controls, courts in India have relied on this doctrine to bind non-signatories to arbitration agreements and awards. Recently, in Cox and Kings Limited vs. SAP India Private Limited (“Cox and Kings”) [2022 (3) ALT 99], the Supreme Court of India referred the issue to a larger bench to expound upon the intricacies of the Group of Companies doctrine and answer the following primary questions:
Whether phrase ‘claiming through or under’ under Sections 8 and 11 of the Act, could be interpreted to include the ‘Group of Companies’ doctrine?
Whether the ‘Group of Companies’ doctrine as expounded by Chloro Control and subsequent judgments, is valid in law?
The three-judge bench in Cox and Kings observed that “The law laid down in Chloro Control and the cases following it, appear to have been based, more on economics and convenience rather than law. This may not be the correct approach. The Bench doubts the correctness of the law laid down in Chloro Control and cases following it.”
The doctrine has been actively applied by Indian courts to expand the jurisdiction of arbitral tribunals while impeding the age-old doctrine of ‘Separate Legal Entity’.
The doctrine of ‘Separate Legal Entity’ ensures that a company enjoys separate existence from its directors, members, and shareholders. This separate identity allows companies to enter into agreements and exercise their rights, which ultimately eventuates as a veil between shareholders and the rest of the world. The corporate veil is only lifted in exceptional circumstances.
As is the case with the doctrine of Group of Companies which ought to be an exception to the rule that arbitration is constituted between parties to the arbitration agreement. The advent use of this doctrine has extended beyond parties that exist in joint ventures, partnerships, and parent-subsidy structures. In another recent case before Telangana High Court, Tecpro Systems Limited vs. Telangana State Power Generation Company Limited [2020 (1) ALD 77] the doctrine was widened to even include partners in a consortium agreement.
Key Takeaways
The exercise of piercing the corporate veil to apply the ‘Group of Companies’ doctrine is undertaken to allow companies in a tight corporate structure, which have a direct relation to the nexus of the dispute, to be predisposed along with signatories. A liberal construct of this doctrine may hamper the defined principles of law, contract, and equity under Indian jurisprudence.
Courts have settled the legal position in re. the applicability of the said doctrine and have clarified that only the courts have the jurisdiction to implead a non-signatory party into an arbitration proceeding. This power cannot be exercised by an Arbitral Tribunal on its own accord.
However, in our view, the courts must administer the exercise of this doctrine to implead non-signatories to an arbitration, stringently and sparingly. Unwarranted impleading of parties loosely affiliated with signatories would cause superfluous roadblocks to the dispute resolution process and act as an antithesis to its expeditious disposal.
[1] Gary B. Born’s, International Commercial Arbitration, 3rd Edition, Volume I, Page 1558 & 1559
Comments