– Written by Harshita Seksaria *
Introduction
One important aspect of arbitration is that mutual consent should exist between the disputing parties stating that they wish to resort to arbitration in situation when any dispute arises. In fact, it is very important that for a valid arbitration agreement to exist, there needs to be consensus ad idem. However, even though this doctrine of mutual consent is established in arbitration, there are a variety of other legal doctrines that come into play as well in order to adjudicate the dispute in the fairest manner. One such doctrine which has raised many eyebrows across all jurisdictions is the “group of companies” doctrine, it is highly contentious for its application, validity and correctness.
In simple terms, ‘group of companies’ doctrine allows a non-signatory to become a part and be included to an arbitration agreement, this is due to the fact that such a non-signatory might belong to the same group of companies as one of those who is a signatory to an arbitration agreement leading to the fulfillment of the following conditions, i.e., i) the non-signatory to the agreement played an important role in either the performance or conclusion of the main contract which consists of the arbitration agreement, ii) the common intention of the signatories was to also bind the non-signatory to the agreement[i]. However, this doctrine also seems to be contrary to the principle of separate legal entity which is in existence in both civil and common law jurisdictions. This doctrine acts as exception to the pre- condition of consent when a multi-party arbitration scenario exists. Here, there is a consent of the tributary companies however when it comes to the parent company, they are not included in the original arbitration agreement. This doctrine is widely based on the principle of agency as well as implied consent.
International perspective of the doctrine
The theme of “group of companies” doctrine was initiated in the Barcelona traction case. In this case it was observed that the concept of separate legal entity is not absolute and occasionally its disregard may be justified. However, the actual doctrine emerged in the case of Dow Chemical[ii], where it was held that those non- signatories that had a major role in carrying forward the performance of the contract can become a party to an arbitration proceeding, merely establishing corporate ties with the signatory is not a sufficient parameter and in this case the non-signatory which was a parent company controlled and directed the actions of the signatory company which was understood as implied consent to also bind the non-signatories to the arbitration agreement.
A major turning point in the application of the doctrine roughly after 20 years of its existence was noted in the case of Peterson farms v. CM farming. In this case the court observed that the concept that has been established behind the doctrine needs to be derived and not applied, this was because it was losing its meaning due to direct application without providing any kind of rationale behind it. In order to keep the doctrine relevant and evolving, its important to derive its application.
In the case of Darlah Real Estate, while the UK courts held that the Pakistan government didn’t have any direct connection with the main contract and any agreement with a state entity is different from having an agreement with a state. This decision was then appealed in the court of Paris where it was observed that Pakistan was a party to the economic transaction of the trust and so it will be rightfully assumed that they had knowledge about the contract therefore clarifying their implied intent of indulging in the same. Here it can be noted that both the courts while applying the same legal principle, had a different outcome. The former focused on intention while the latter tried to understand commercial relations as well as presumed intent. All these cases give a clear picture that the application of this doctrine has evolved with time and is still expected to expand and grow as and when the complexities increase.
Also, while this doctrine has been accepted under French law, the application of this doctrine has been rejected by the English courts. However, US while not recognizing this doctrine has in fact identified five separate doctrines on the basis of which a non-signatory can become a party to an arbitration agreement and these are(i) Estoppel; (ii) Incorporation by Reference; (iii) Assumption; (iv) Agency; and (v) Veil piercing/Alter Ego[iii].
Indian Perspective on this Doctrine
This doctrine is a novel concept under the Indian jurisprudence and just like various other jurisdictions, even here the doctrine is not expressly identified and recognized by the Act[iv]. In Indian jurisprudence the obligation of a non-signatory to an arbitration agreement can be extended largely on the basis of Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc.. Here the court established that “it is very pertinent to understand the intention of the parties before extending the scope of the arbitration agreement to signatory and non-signatories as well”. In order to understand the scope of the doctrine, the court had also set out four factors that have to be taken into consideration while applying this doctrine i.e., i) establish a ‘direct relationship’ between the non-signatory and the signatory to the arbitration agreement; ii) establish clear intention to bind the non-signatory to the arbitration proceeding as well; iii) the third party (non-signatory) is directly involved in the termination or the execution of the contract; iv) both the signatory and the non-signatory form a tight single economic unit.
This judgement had completely altered the way this doctrine was viewed, as prior to Chloro Controls Judgement, the courts in the case Sukanya Holdings v. Jayesh H. Pandya did not refer the dispute to arbitration because they were of the view that since some of the parties were non-signatories to the arbitration agreement therefore the claim fell outside the ambit of arbitration. However, the judgment of Sukanya Holdings can be separated with Chloro Controls due to the fact that S.8 of the Act at that time did not include the phrase “Claiming through or under”. In the case Cheran Properties Limited vs Kasturi And Sons Limited, the court in fact held that an arbitral award can also be enforced against a non-signatory only after understanding the facts and circumstances of the case, here the court tired to understand the exceptional nature of the said doctrine and stated that its application will be based on how the arbitration agreement is constructed and the background of the dispute.
In a very recent controversial dispute between Amazon and the Future Group, during the proceedings it was argued by the Future Group that Future Retail Ltd. (FRL) was a non-signatory to the arbitration agreement and therefore the application of the ‘group of companies’ doctrine by the emergency arbitrator was incorrect, however FRL and the signatory i.e., the Future Group were associated with the same main group i.e., the Biyanis and FRL also fulfilled all the parameters stated above in order to implead a non-signatory via this doctrine, therefore the application by the emergency arbitrator was accurate.
Conclusion
The international commercial arbitration has differentiated Group of Companies doctrine with the legal principle of ‘piercing of the corporate veil’[v]. However not every nation has accepted the application of this doctrine, Swiss and German courts have refused refer to this doctrine[vi]. One of the main reasons for a complete disregard by these nations is due to the fact that this doctrine doesn’t comply with “the legal principle of privity of contract as well as separate legal entity, which leads to fading away with the requirement of “consent” in the realm of International Arbitration”. Even in the case of Manuchar Steel, the Singapore courts refused to apply this doctrine due to the fact that as per company law in Singapore, any company and its shareholders are a complete different legal personality. Those who defend this doctrine belief otherwise and state that the intention of this doctrine is not to disregard the principle of separate corporate personality, but its application is only achievable in those cases where the third party’s consent is proved. This doctrine is in fact based on the understanding of “implied consent”[vii]. Also in the case of Cheran Properties, the court had an enforced an arbitral award against a non-signatory, by doing this they have gone beyond the scope and application of the doctrine. This judgement has set a dangerous precedent and has also raised various concerns for the non-signatories.
This doctrine is in complete alignment with the principle of “implied consent” and is based on parties’ intention whether they wish to bind any third party to an arbitration agreement or not, however this doctrine has also established a complex relationship in the field of international commercial arbitration. Many courts have been very critical of this doctrine. If a bare reading of the observations made by the Indian Courts is made, then it does create enough room to critique this doctrine since the judgements passed by the Indian courts seem to have overstepped the set original ambit of this doctrine in terms of its applicability. It is therefore very pertinent for the Supreme Court to revisit this doctrine in its entirety in order to determine its scope and parameters to judge the same.
[i] Richard Bamforth, Irina Tymczyszyn, Olswang, and Allan Van Fleet, Mark A Correro, Greenberg Traurig “Joining Non-Signatories to an Arbitration: Recent Developments” (2007/08), Cross-Border handbook, Dispute Resolution 2007/08 Volume 2: Arbitration at 11
[ii] Dow Chemical v. Isover-Saint-Gobain, ICC Award No. 4131, YCA 1984, at 131.
[iii] Simon Greenberg, Christopher Kee & Romesh Weeramantry, “International Commercial Arbitration: an Asia-Pacific Perspective” (2011), Cambridge University Press at 165
[iv] The Arbitration And Conciliation Act, 1996
[v] Pietro Ferrario, \’The Group of Companies Doctrine in International Commercial Arbitration: Is There any Reason for this Doctrine to Exist?\’, (2009), 26, Journal of International Arbitration, Issue 5, pp. 647-673,
[vi] Bundesgericht [Bger] [Federal Supreme Court] Jan. 29, 1996, 14(3) ASA BULL. 496 (Switz.); see also Daniel Girsberger & Natalie Voser, International Arbitration: Comparative And Swiss Perspectives 101 (3d Ed. 2016); See Also Andrea Meier, Multi-Party Arbitrations, In Arbitration In Switzerland: The Practitioner’s Guide 2505, 2508 (Manuel Arroyo Ed., 2d Ed. 2018); Oberlandesgericht Hamburg [Olg Hamburg] [Higher Regional Court of Hamburg] Nov. 8, 2001, 2002 Oberlandesgericht-Report 305 (Ger.)
[vii] Gary Born, International Commercial Arbitration 280–81 (3d Ed. 2021) at 1564.
*The author is a 4th year student of B.A. LL.B (Hons) at Jindal Global Law School, India.