Veritable bonhomie amongst Group of Companies- a good case for arbitration?

In 2022, the validity of the Group of Companies doctrine to bind non-signatory affiliates within a Group of Companies to arbitration was called into question by a three Judge bench of the Hon’ble Supreme Court of India.

It was opined that the application of the doctrine interferes with the established legal principles such as party autonomy, privity of contract and separate legal personality. The perception created through past precedents was that the doctrine is premised on economic efficiency rather than law. 

A reference was thus made by the three Judge Bench to a Constitution Bench comprising five Judges of the Supreme Court. In a detailed judgment pronounced in Cox and Kings Ltd v. SAP India Pvt Ltd.[1] the Supreme Court has upheld the applicability of the Group of Companies doctrine with the objective to make the Indian arbitration law more responsive to contemporary requirements.

The judgment, however, did not simply uphold the Group of Companies doctrine but carved a new chapter to the theory. The Court has delineated the threshold standard required for the invocation of the theory, the cumulative factors which should be considered while permitting extension of the arbitration agreement to a non-signatory and the concept of consent as the basis of arbitration.

The observations in the judgment underscore the inclination of the Judiciary to stymie satellite litigation by non-signatory members of a corporate group while maintaining the sanctity of separate legal personality which is the cornerstone of corporate law. 

Group of Companies doctrine- insight

Group of Companies is an agglomeration of privately held and publicly traded firms operating along different lines of business, each of which is a separate legal entity but which are collectively under the entrepreneurial, financial, and strategic control of a common authority. 

Therefore, while there may be an intrinsic relation between different entities in the same group, there is a statutory recognition to the concept of separate legal personalities, where one entity is not generally responsible or liable for the actions of its affiliate in the same group. 

There are well recognized exceptions to the theory of separateness of corporate personality but in this event, the authors are restricting their analysis to the validity and scope of invoking the Group of Companies doctrine on the premise of corporates having separate legal personalities. 

The Group of Companies doctrine is a consent based doctrine to bind a non-signatory to an arbitration agreement. The applicability of the doctrine was, till the present judgment, shrouded in uncertainty due to its intention-based approach to bind a non-signatory. This is opposed to non-consensual theories such as piercing the corporate veil or alter ego and estoppel, which have also been applied to bind a non-signatory party to an arbitration agreement.

The Group of Companies doctrine is used to bind a non-signatory company within a group to an arbitration agreement which has been signed by other member of the group. The underlying basis of the Group of Companies doctrine rests on maintaining corporate separateness of group companies but determining common intention of the parties to bind the non-signatories to the arbitration agreement.

Therefore, in the face of the limited liability principle of corporates, the applicability of the Group of Companies doctrine has been reconciled with certain fact specific safeguards to be adopted. Broadly, invocation of the doctrine should be tested on the touchstone of existence of a Group of Companies and conduct of the signatory and non-signatory parties which indicate their common intention to bind the non-signatory such that the non-signatory was a veritable party to the contract and arbitration agreement contained thereunder.  

Determination of Consent

As noticed above, the fundamental basis for invocation of the Group of Companies doctrine is discerning the consent of parties. In fact, consent lies at the heart of arbitration, where the parties consensually decide to submit a dispute to an arbitral tribunal to the exclusion of domestic courts.

Being a creature of a contract, arbitration agreements are bound by the general principles of contract law including the doctrine of privity, which prohibits a third party from enforcing the terms of a contract. As a corollary, a non-signatory cannot be forcibly made a party to an arbitration agreement being violative of the sacrosanct principles of party autonomy and privity of contract

However, the Supreme Court derived a statutory basis for the applicability of the Group of Companies doctrine to bind a non-signatory to an arbitration, which was found in section 2(h) of the Arbitration and Conciliation Act, 1996 (‘Act’) and section 7 of the Act. The said provisions deal with the definition of a party to an arbitration agreement and the definition of an arbitration agreement. 

It was found that so long as the validity of an arbitration agreement is determined, the question of examining the actual parties bound by such arbitration agreement is open to be decided by a Court or Tribunal on the basis of factual inquiries on consent, both express and implied. The Supreme Court has advocated for a pragmatic approach to consent.

Ideally, a formalistic construction of an arbitration agreement presumably leads to the conclusion that the decision of a party to not sign an arbitration agreement means that the mutual intention of the parties was to exclude that party from the ambit of the arbitration agreement. 

Veritable Party

It is here that the Supreme Court has stepped in and theorized the principle of veritable party. That is, if a corporate entity deliberately made an effort not to be bound by the underlying contract containing the arbitration agreement, but was actively involved in the negotiation, performance and termination of the contract, then the Group of Companies doctrine can be applied to discern the intentions of the parties.

In the course of its verdict, the Supreme Court has lucidly identified a distinction between the Group of Companies doctrine which is premised on consent and principle of piercing the veil or alter ego, which is not premised on consent. The latter disregards corporate separateness and intention of the parties while the former facilities the identification of the intention of parties to determine the true parties to the arbitration agreement without disturbing the legal personality of the entity in question.

When is the doctrine applicable?

While the overall tenor of the verdict advocates for retention and applicability of the doctrine to avoid multiplicity of proceedings and fragmentation of disputes, there is restraint expressed on blanket invocation of the doctrine.

The Court reiterated certain principles to be followed while examining whether a non-signatory group company is bound by the arbitration agreement. These include, the mutual intent of the parties, the relationship of a non-signatory to a party which is a signatory to the agreement, commonality of the subject-matter, composite nature of the transactions, performance of the contract, relationship between and among the legal entities within the corporate group structure and the involvement of the parties in the performance of the underlying contractual obligations. 

The Group of Companies doctrine cannot be applied to abrogate party consent and autonomy and therefore, even the principle of single economic entity cannot be used as the sole basis for invoking the Group of Companies doctrine.

In the words of the Supreme Court, the doctrine when properly conceptualized and applied, gives effect to mutual intent and autonomy. The extent of participation of the non-signatory in the performance of the underlying contract is the most important factor which may be considered by Courts and Tribunals while determining the applicability of the doctrine. 

Comment

Through the authoritative pronouncement, the Supreme Court has permitted Courts and Tribunals to discover the de facto party to an arbitration agreement in group companies where the parent company or the substantive decision maker would be masquerading as an unrelated entity to the transaction.

The Court has emphasized on the principles of competence-competence under arbitration law which allows due deference to an arbitral tribunal for adjudicating such issues of whether a non-signatory is bound by the arbitration agreement.  

While the Court has cautioned against routine applicability of the Group of Companies doctrine to join non-signatories to arbitration, if the factors above are cumulatively appreciated, then a dogmatic emphasis on express consent has been directed to be eschewed in favour of a modern approach to consent. 

By retaining the Group of Companies doctrine in the Indian arbitration jurisprudence in addition to other theories for binding non-signatories, the Supreme Court has indeed laid the foundation for checking fragmentation of disputes and imparting commercial understanding a sense of business efficacy. The legacy of the doctrine will thus continue with greater clarity.

Authors

	Sumeet Lall  Partner, CSL Chambers  Sumeet.Lall@cslchambers.com
	Sidhant Kapoor Legal Director, CSL Chambers Sidhant.Kapoor@cslchambers.com