Group of Companies Doctrine Day #2Group of Companies Doctrine in Arbitration Proceedings
The 5-Judge Constitution Bench led by CJI D.Y Chandrachud heard arguments by senior advocates A.M. Singhvi and Kapil Sibal, as well as other advocates, in favour of incorporating the group of companies doctrine in Indian arbitration law. Today’s arguments primarily focused on ascertaining the ‘real intent’ of the parties, signatory or not to the arbitration agreement, to determine if they must be included in arbitration proceedings.
Dr. A.M. Singhvi commenced today’s arguments by outlining the following principles to justify upholding the Group of Companies (GoC) doctrine:
- The GoC doctrine identifies the real intent of the parties involved in arbitration and not just the parties who signed the arbitration agreement.
- The doctrine evolved in the context of related entities that play a predominant role in the negotiation and performance of contracts without being signatories.
- Without the GoC doctrine, parties will be able to evade collective responsibility that may otherwise arise out of a contract.
- Rejecting the doctrine would allow parties to evade the law through a ‘hypertechnical’ approach by claiming they were not signatories, even if they performed a crucial role in the dispute.
- The GoC doctrine is a reasonable and natural extension of the ‘piercing of the veil’ doctrine in corporate law. (The piercing of the veil doctrine allows Courts to look past a company’s corporate personality and directly hold the persons controlling the company responsible for lapses in following the law.)
- The GoC doctrine is fully justifiable and is required when there is common ownership of assets between different entities, even though all of them may not be signatories to the arbitration agreement.
- Not applying the doctrine will lead to gross injustice.
- The doctrine of implied consent justifies the application of the GoC doctrine. The doctrine of implied consent is a principle in contract law where a party’s actions indicate that they have accepted an agreement without actually signing one.
- There is no justification to exclude a non-signatory party from arbitration if they have a direct relationship with a signatory, have directly common subject matter, and are involved in interlinked transactions.
- Renowned experts in the field, such as Professor Gary Born, have argued that the GoC doctrine is justifiable based on established consensual theories of agency, assumption, and assignment, and non-consensual theories such as estoppel and alter-ego.
- The GoC doctrine is vital to ensure that arbitration disputes are dealt with efficiently, as opposed to multiple overlapping proceedings.
- The doctrine is especially important in India due to the prevalent traditional forms of family-run businesses.
- The doctrines of purposive interpretation (where the Courts examine the purpose and intent behind a law) require the application of the GoC doctrine to identify and deal with the core issues in an arbitration dispute.
- The alter ego doctrine in corporate law similarly assumes that two or three entities that are formally distinct, but are in effect alter egos of each other must be considered together while dispensing justice.
Justice P.S. Narasimha voiced his doubts on the matter. He pointed out that the proposal to recognise the doctrine affected a private remedy and would not be applicable in public law. Private remedies are strictly based on agreements between parties. Parties not involved in this agreement cannot be treated as part of the agreement.
CJI Chandrachud highlighted that S. 7(3) and S. 7(4) of the Act state that the arbitration agreement must be in writing. Further, for the real intent of the parties to be determined, documents, letters, and other written material must be examined.
Dr. Singhvi disagreed. He claimed that S.7 of the Act, along with a few other sections, indicate that ‘parties’ should be understood expansively. The language in these sections imply that arbitration must include all ‘parties’ and not ‘signatories’. He explained with an example. Suppose a construction company engages with three foreign entities for the construction of a bridge to perform different but closely connected functions. The company may have an arbitration agreement with only one of these entities, but the conditions of S.7(4)(b), which require written communication about the arbitration agreement between the parties will be fulfilled.
Sr. Adv. Kapil Sibal continued arguments in favour of the group of companies doctrine albeit with a different perspective. He compared arbitration to other forms of dispute resolution in ordinary law. Pointing out that the concept of choice was not addressed in this case so far, he noted that it is only in arbitration that the parties decide the applicable law, the location, the procedure, and the arbitrators who will decide the dispute.
He highlighted S.2(h) of the Act which defines ‘party’ and does not limit it to those who have signed the arbitration agreement. S.7 similarly talks about an agreement between the parties. Expounding the implications of such phraseology, he argued that parties to an arbitration agreement must have a defined legal relationship, contractual or otherwise. This does not require being a signatory to an arbitration agreement.
Whether a group of companies will be bound by an arbitration agreement will depend on whether the affiliates of the signatory company have expressed common choice through their knowledge, actions and communication with the signatory company. Further, if a signatory company has direct control over a subsidiary company—a ground shared with the piercing of the veil doctrine.
The case will next be heard on March 28th, 2023.