Cox and Kings and the “Group of Companies” Conundrum

Background

Arbitration is a “creature of consent”; parties consensually bind themselves to an arbitration agreement for the resolution of their disputes. It follows that generally, only the signatories to such an arbitration agreement should be bound by, and attached to, the arbitration that follows a dispute. However, the group of companies doctrine provides that, where a corporation has signed an arbitration agreement, it can be used to bind such a corporation's non-signatory affiliates if the “mutual intention” of the parties was to bind both the signatories and such non-signatories.

In Cox and Kings v. SAP India (P) Ltd. (Cox and Kings),¹ after analysing the position of the group of companies doctrine in India, the Supreme Court made a reference to a larger Bench for the examination of this doctrine. The authors, by examining both majority and minority opinions, seek to showcase the insufficient reasoning in the majority opinion and argue in favour of the applicability of the group of companies doctrine in India.

Turning points — The Chloro Controls case, the 246th Law Commission Report and the 2015 Amendment

A pioneering attempt to bring the group of companies doctrine into the sphere of mainstream commercial arbitration was brought about by the ICC award in Dow Chemical v. ISOVER Saint Gobain (Dow Chemical).² While relying on the general principles of international arbitration law, the Court in Dow Chemical case provided that “if the non-signatory company has effectively and individually participated in the conclusion, performance and termination of the respective contract, appeared as the actual party both to the contract and to the arbitration clause”, then it may be allowed to take advantage of the arbitration clause.³

The commercial jurisprudence that flowed from the Arbitral Tribunal was that notwithstanding the parties' distinct juridical identity, they would constitute a “group of companies”.

In India, the group of companies doctrine was first adopted and applied in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. (Chloro Controls).⁴ Chloro Control primarily did two things; first, it concretised the exceptional cases in which non-signatories may be subject to the arbitration agreement. The Supreme Court, in establishing these exceptional cases, provided that the parties must be held to the “touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject-matter and the agreement between the parties being a composite transaction.”⁵ This is the threefold test or the “mutual intentions” test. Second, it provided for the distinction in the language of Sections 45⁶ and 8⁷ of the Arbitration and Conciliation Act, 1996 (A&C Act). The Supreme Court, while distinguishing the language of Sections 45 and 8 of the Act, stated that “in Section 45, the expression ‘any person' clearly refers to the legislative intent of enlarging the scope of the words beyond ‘the parties' who are signatory to the arbitration agreement”.⁸ In doing so, the Court allowed non-signatory parties to be referred to arbitration provided they fulfil the “mutual intentions” test.

In 2014, shortly after the judgment laid down in Chloro Controls case⁹, the Law Commission of India, in its 246th Report sought to delve into the “definition of party” under the Act. The primary concern laid down by the Law Commission of India was that the existing definition was “restrictive” and implicates only signatory to an arbitration agreement.¹⁰ In accordance with the interpretation laid down in Chloro Controls case¹¹ on the scope of Section 45 of the Act, the Law Commission recommended an amendment to Section 8 of the Act. The Law Commission noted that the language mentioned in Section 45 of the A&C Act i.e. “person claiming through or under [a party]”, is absent in Section 8 of the Act and the latter should accordingly be amended to cure this inconsistency between Parts I and II of the A&C Act.¹² Moreover, the Law Commission of India recommended that an amendment be made “to the definition of ‘party' under Section 2(h)¹³ of the Act”.¹⁴ In 2015, the Indian legislature amended Section 8 of the Act in accordance with the Law Commission's recommendation.¹⁵ Post amendment, a reference to arbitration could be made “by a party to an arbitration agreement or any person claiming through or under him”.¹⁶

Subsequent refinements

The aforementioned developments were further revisited and refined by the Supreme Court in its subsequent decisions. In Ameet Lalchand Shah v. Rishabh Enterprises [Ameet Lalchand]¹⁷, the Supreme Court cited Chloro Controls case¹⁸ in conjunction with the 246th Law Commission Report and following the 2015 Amendment to Section 8 of the Act to hold that “various agreements could be resolved only by referring all the four agreements and the parties thereon to arbitration”.¹⁹

It is important to note that the application of the “mutual intentions” test did not remain confined to references to arbitration under Section 8 of the Act. Rather, in Cheran Properties Ltd. v. Kasturi and Sons Ltd. [Cheran Properties], the issue into consideration was whether a non-signatory could be bound by an arbitral award. Section 35 of the Act states that an arbitral award “shall be final and binding on the parties and persons claiming under them respectively”.²⁰ By reaffirming the threefold test laid down in Chloro Controls case²¹, the Supreme Court stated that “[t]he group of companies doctrine is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories.”²² In this regard, the Supreme Court stated that the expression “persons claiming under them” indicates the legislative intention to bind non-signatories to the arbitral awards as well.

The group of companies doctrine was further refined and crystallised in MTNL v. Canara Bank [MTNL]. In this case, Indu Malhotra, J. made an attempt to harmonise the principle of separate legal personality with the group of companies doctrine.²³ On one hand, she stated that “each company is a separate legal entity which has separate legal rights and liabilities” and that “the company entering into the agreement, would alone be bound by it”.²⁴ On the other hand, with respect to the group of companies doctrine, she stated that,

10.3 [a] non-signatory can be bound by an arbitration agreement on the basis of the “group of companies” doctrine, where the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non-signatory parties. Courts and tribunals have invoked this doctrine to join a non-signatory member of the group, if they are satisfied that the non-signatory company was by reference to the common intention of the parties, a necessary party to the contract.

(emphasis supplied)

Indu Malhotra, J. seems to be explaining how the group of companies doctrine is not affecting the applicability of the separate legal identity principle i.e. the former does not entail assuming that separate entities are one and the same. Rather, the non-signatories are bound by the arbitration agreement because of the “mutual intentions” test, without having any impact on the separateness of the entities.

Recently, in ONGC Ltd. v. Discovery Enterprises (P) Ltd.²⁵, D.Y. Chandrachud, J. examined the group of companies doctrine. Inter alia, he took into account Indowind Energy Ltd. v. Wescare (India) Ltd.²⁶, Chloro Controls case²⁷, Ameet Lalchand case²⁸, Cheran Properties case²⁹, and MTNL case³⁰ and ruled that the following factors need to be considered in law for applying this doctrine:³¹

(i) the mutual intent of the parties;

(ii) the relationship of a non-signatory to a party which is a signatory to the agreement;

(iii) the commonality of the subject-matter;

(iv) the composite nature of the transaction; and

(v) the performance of the contract.

This view of the group of companies doctrine is erroneous because of the following reasons. The parties' “mutual intent” is not one of the factors, but the ultimate finding based on which the application of the group of companies doctrine is determined. Making it one of the factors unnecessarily and unreasonably convolutes the established “mutual intentions test”. Moreover, the underlying “mutual intentions” test is threefold. It comprises a direct relationship of the non-signatory with the signatory party, direct commonality of the subject-matter, and composite nature of the relevant transaction.

Furthermore, in Chloro Controls case³², the feasibility to perform the main agreement without the aid, execution, etc. of the ancillary agreements was considered as one of the sub-factors to the third element/factor i.e. the composite nature of the transactions involved. In this regard, making “performance of the contract” a separate factor leads to uncertainty in the application of the doctrine; this is especially because the application of this doctrine is heavily based on the intricate facts of each case.

Cox and Kings

Recently, the Supreme Court examined the application of the group of companies doctrine in India and made a reference to a larger Bench. In Cox and Kings case³³, two views were put forth by the 3-Judge Bench of the Supreme Court.³⁴

The majority view of N.V. Ramana, C.J. and A.S. Bopanna, J. which was authored by the former, was in disagreement of the applicability of the group of companies doctrine in India. On the other hand, Surya Kant, J. put forth a dissenting view. Surya Kant, J. albeit in support of the group of companies doctrine in India, also referred certain questions of law to a larger Bench for the purposes of clarity in the application of the same.

N.V. Ramana, C. J. criticised the group of companies doctrine by stating that a “joinder [of non-signatories] has the effect of obliterating the commercial reality, and the benefits of keeping subsidiary companies distinct” and that “[c]oncepts like single economic entity are economic concepts difficult to be enforced as principles of law.”³⁵ However, the group of companies doctrine does not entail circumventing the principle of separate legal personalities. Nor does it entail applying the concept of a “single economic entity”. The Chief Justice, while arriving at this criticism, specifically focused on the obiter stated by Indu Malhotra, J. in MTNL case.³⁶ Inter alia, she had cited previous International Chamber of Commerce (ICC) Arbitration cases to discuss the concept of “single economic entity;” however, as discussed in the preceding paragraphs, the ratio in this case was based on the concept of “mutual intent.” The Chief Justice's 's undue focus on the obiter, and not the ratio of MTNL case³⁷ raises serious doubts about his conclusion opposing the application of the group of companies doctrine in India.

Moreover, the Chief Justice stated that:

50. [i]t is evident from the discussion above that the group of companies doctrine must be applied with caution and mere fact that a non­-signatory is a member of a group of affiliated companies will not be sufficient to claim extension of the arbitration agreement to the non­-signatory.³⁸

(emphasis supplied)

Even this criticism is misguided as the relationship between the signatory with the non-signatory(ies) is just one of the factors that are taken into consideration while arriving at a finding of “mutual intent”.

The Chief Justice referred the following two questions of law to a larger Bench:

(a) Whether the phrase “claiming through or under” in Sections 8 and 11³⁹ could be interpreted to include “group of companies” doctrine?

(b) Whether the “group of companies” doctrine as expounded by Chloro Controls case⁴⁰ and subsequent judgments are valid in law?

In the opinions of the Chief Justice and A.S. Bopanna, J. the group of companies doctrine is not in lieu with international principles and takes away from the foundational principles of arbitration which were entrenched in consent.

The majority raised a rather critical concern that the doctrine's application was based more on economics and convenience rather than principles of law itself. This brings about an important question of whether convenience or consent and party autonomy is on a higher pedestal in the conception of legal doctrines such as the group of companies.

On the other hand, in his dissenting opinion, Surya Kant, J. took a more pro-doctrine stance. He correctly pointed out that:

92. … joining a third party to arbitration based on the convergence of a group of companies as a “single economic unit” is no longer the norm under the group of companies doctrine. Instead, the standard is premised primarily on implied consent drawn from the acts and conduct of an entity within the group of companies.⁴¹

He postulated that “a non-signatory may act duplicitously to represent itself as the driver of the contract while avoiding any liabilities arising from it by not signing the contract”. It may be understood that Surya Kant. J's understanding of the theory examines the intent of the non-signatory and whether or not that intent positions the non-signatory in the same position as a contracting entity.

In this light, he referred the following questions of law to a 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 the implied consent or intent to arbitrate between the parties?

(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?

Conclusion

The relevance of a doctrine such as the group of companies in Indian arbitration law is one that is undisputed. However, we are standing at international crossroads, where the requirement of consent and party autonomy seems to be directly conflicting and balancing the two within the landscape of arbitration has become more pertinent than ever.

One can only anticipate the direction that the larger Bench will take, however, greater clarity on the application of the doctrine will ensure that the judicial discretion in its application will be curbed.