Navigating the Terrains of the Group of Companies Doctrine- Binding Non-Signatories to Arbitration

(This is authored by Rohan Tyagi (V BALLB) of ILS Law College, Pune

Introduction

In the recent years, Indian courts have notoriously used the ‘group of companies doctrine’ to bind non-signatories to the arbitration proceedings. The doctrine has witnessed an evolution right from the days when compelling a non-signatory party was forbidden, to days where higher courts have indulged in this practice rather liberally. Lately, the doctrine has proven to be a double-edged sword and needs to be applied with utmost caution as Courts have espoused the possibility to not only have a third party bind itself with the arbitration agreement but also enforce arbitral award against non-signatories. Naturally so, Courts in a few common law countries such as the UK and Switzerland, have expressed sheer disapproval of the application of this doctrine as it goes against the fundamentals of common law, i.e., principle of privity of contract and the touchstone of arbitration- the autonomy of the parties. The doctrine found its most recent application in the Delhi High Court judgment in the case of Sharpoorji Pallonji and Co. v Rattan India Pvt Ltd (“Sharpoorji Pallonji”). This blog attempts to decipher the rules of application inherent to the doctrine, which aims to bring about third-parties within the scope of an arbitral tribunal’s jurisdiction.

The Origins

The seed was sown in the international case of Dow Chemicals Co. & Ors v Isover Saint Gobain. The ICC award, which was further upheld by The Court of Appeal of Paris, touted that even though in a group, where each company enjoys a separate legal identity of its own, if due consideration is paid to their roles in ‘conclusion, performance or terminating’ of the agreements which contain the arbitration clause and carve out the mutual intention of the signatories to not just bind themselves but non-signatories too, it could be concluded that such non-signatories are bound to come under the radar of the arbitration proceedings.

Soon after, tribunals around the world started obliging non-signatories to the arbitration agreement into the arbitral proceedings. The much-anticipated question was deliberated in India for the first time before the Supreme Court bench in Sukanya Holdings Pvt. Ltd. v Jayesh H. Pandya &Anr.(“Sukanya Holdings”). In this case the court was confronted with the issue of referring non-contracting parties to the arbitral proceedings on an application made under section 8 of the erstwhile Arbitration Act. The court interpreted section 8 of The Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and expounded that courts are empowered to refer to arbitration only those issues which form a part of the arbitration agreement, thereby emphasizing that a non-signatory can never be a part of the arbitration proceedings as adopting such an interpretation would not be within the purview of the Arbitration Act. It is pertinent to note that, before the Amendment to Arbitration Act in 2015 (hereinafter “2015 Amendment”), the language used in sections 45 and 54 , falling under Part 2 of the Arbitration Act supported the inclusion of non-signatories as it empowers the court to refer a party "... or any person claiming through or under him..." however, section 8 of the erstwhile Arbitration Act did not suggest any such inclusion.

A major shift came in the case of Chloro Controls (I) Pvt. Ltd. v. Severn Trent Water Purification Inc. and Ors, (hereinafter “Chloro Controls” ) wherein the Apex Court unequivocally distinguished the facts of the case with that of Sukanya Holdings, stating that this was an arbitration that needed to be adjudicated with the rules under Part II of the Arbitration Act, and relied on the wider interpretation available under section 45 of the Arbitration Act, thereby impleading a non-signatory to the arbitration proceedings . The Court laid down that an arbitration agreement entered into by a company within a group of companies can bind its non-signatory affiliates, if the circumstances demonstrate that the mutual intention of the parties was to bind both the signatory as well as the non-signatory parties.

Primitive Developments In Domestically Seated Arbitrations

After the 2015 Amendment, section 8 of the Arbitration Act was given a language that was akin to that of section 45 so as to include any party claiming through or under a signatory. However, Sukanya Holdings continued to hold the realms on this subject, at least domestically. It was only in the Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Ors (hereinafter “Ameet Lalchand”) judgement whereby the court fundamentally changed the jurisprudence related to the group of companies doctrine in India. By relying on the 246th Law Commission Report, the Court opined that post the 2015 amendment to section 8 of the Arbitration Act, the Court is capable to refer to arbitration not just a party to the arbitration agreement but also any person claiming under or through the party. This view taken by the Court, provided an impetus to consider the ratio in Chloro Controls for domestic arbitrations as well. The approach of the Bench in Ameet Lalchand case was to unravel the epicenter or the primary agreement in a web of agreements to determine the relationship between the non- signatory beneficiaries of the parties. The court held that in a case where multiple parties (both signatories and non-signatories) are involved in a single commercial project which is executed through several ancillary agreements (which do not contain the arbitration clause), all such parties can be covered by the arbitration clause in the main agreement provided that all such ancillary agreements are integrally connected with each other and form a single business transaction. Consequently, even though not implicitly overruled, this decision of the Supreme Court had weakened the law in Sukanya Holdings, which has now been reduced to a litmus test for determining necessary parties and establishing the veracity of the arbitration agreement itself.

The Supreme Court in Cheran Properties Limited v. Kasturi and Sons Limited, exponentially expanded the scope of the group of companies doctrine. In this case where the enforcement of an award was sought against the appellant on the basis that the appellant, even though being a non- signatory, claims under the signatory, Justice D.Y Chandrachud went onto interpret section 35 of the Arbitration Act and expressed that the phrase “persons claiming under them” in the language of section 35 of the Arbitration Act is a legislative recognition of the doctrine that besides the parties, an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the arbitral proceedings. Simply put, under section 35, the award by the tribunal may be enforced against a non-signatory. This is virtually supported by the literal interpretation of the same section. The ratio in Cheran Properties presents itself as the ‘sharper’ edge of the double edged sword. In other words, if not applied with caution, it can lead to gross injustice by binding parties that never had any intention of binding themselves to the arbitration agreement or the arbitral award. The same caveat was expounded by the Hon’ble Supreme Court in Reckitt Benckiser (India) Private Limited vs. Reynders Label Printing India Private Limited and Ors. wherein the court faced the issue of impleading a non-signatory, which was based in Belgium, to an arbitral proceeding between the parties. In this case, the Court took cognizance of the correspondence between the parties to discern any intention of binding the non-signatory to the arbitration agreement. The Court came to the conclusion that even though the non-signatory forms a part of the same group of companies to which respondent belongs to, the correspondence between the parties failed to make any intention to bind the non-signatory manifest itself.

Following Recent Trends

After a long haul and much confusion, it finally came before the Supreme Court to lay down a thumb rule (or two) for the application of the group of companies doctrine in MTNL v. Canara Bank. The Court, by relying on various seminal precedents, held that the doctrine can only be invoked either-

• if the courts are satisfied that the non-signatory company was by reference to the common intention of the parties, a necessary party to the contract or;

• if the facts and circumstances of the case demonstrate that it was the mutual intention of all parties to bind both the signatories and the non-signatory affiliates in the group or;

• if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject matter; the composite nature of the transaction between the parties.

However, in doing so, the court also held that the doctrine has been applied in cases where there existed a tight group structure with strong financial and organizational links in order to come together as a ‘single economic reality’. By holding so, the court has supposedly diluted the bar to determine a proximate relationship between the signatory and the non-signatory. The conglomerates in India stand at risk, as a callous application of this doctrine by the courts can result into non-signatories of the same group being helplessly dragged into the arbitration proceedings.

Recently, various other high courts, including The Bombay High Court in Kotak Mahindra Bank Ltd v. Williamson Magor& Co Ltd & Anr and The Delhi High Court in Magic Eye Developers Pvt. Ltd. vs Green Edge Infra Pvt. Ltd. & Ors., have carefully examined the facts and the circumstances of each case before applying the doctrine and held that the application cardinally rests on whether a clear case is made out to establish that the signatory exercised adequate control over the non-signatory so as to constitute a ‘single economic reality’. The Sharpoorji Pallonji , witnessed the most recent use of the same doctrine. In this case, the Delhi High Court emphasized on the importance of verifying whether the non-signatory is closely connected to the party to the arbitration agreement and whether a non-signatory can be said to be a direct beneficiary of the signatory by providing aid and necessary assistance to the signatory in the same commercial endeavor or project. The court also noted that in this pursuit, it has the power to apply other modes of impleading a non-signatory to the arbitration proceedings, such as lifting of the corporate veil to find the ‘real’ party behind a commercial transaction.

At this juncture, it is imperative to bring about the hotly debated issues in the Amazon- Future Group saga, one of which remains pending before the Hon’ble Supreme Court for final consideration. The Future group moved the Delhi High Court against the order passed by the emergency arbitrator that impleaded ‘Future Retail’ (a non- signatory) as party to the arbitration agreement. Denied relief at first instance, the Future Group appealed before the division bench of the Delhi High Court and got a favorable order stating no prima facie case has been carved out in order to implead ‘Future Retail’ as a necessary party in the arbitration proceedings. However, a month later, a single judge bench of the Delhi High Court ruled in contrast to the divisional bench judgement and upheld the order passed by the emergency arbitrator, thereby binding ‘future retail’ to the arbitration agreement. This instance brings out the ambiguity faced by various courts when it comes to the application of the group of companies doctrine. The final disposal of the arbitration saga between Amazon and the Future group is due soon and one can expect more clarity from the Hon’ble Supreme Court after it takes into account the status of ‘future retail’, a non-signatory, in the arbitration proceedings.

Conclusion

In the era of multi-faceted and composite business transactions that incidentally results in execution of several agreements, it is important to carefully navigate through the tough waters of rules of invoking the group of companies doctrine to bind a non-signatory to the arbitration agreement. A careless application of the doctrine can leave a non-signatory hanging by a thin thread. A lot of common law courts from around the world have readily departed from this uncertain position and even went on to hold that the doctrine of group of companies finds no place in common law jurisprudence. In India, various courts have made an earnest effort to bring clarity in the rules of application of the doctrine, evident through the years with cases, nevertheless, it may be said in finality that a comprehensive take on the doctrine by the Apex Court would be more than welcomed amidst the prevailing confusion.