Group of Companies Doctrine in Arbitration Proceedings | Judgement SummaryGroup of Companies Doctrine in Arbitration Proceedings
On 6 December 2023, a five-judge Constitution Bench of the Supreme Court unanimously upheld the validity of the ‘Group of Companies Doctrine’ (GOCD) in the Indian arbitration jurisprudence.
Led by Chief Justice D.Y. Chandrachud, the bench comprised Justices Hrishikesh Roy, P.S Narasimha, J B Pardiwala, and Manoj Misra. CJI Chandrachud wrote the majority opinion and Justice Narasimha authored a concurring opinion in the case.
The judgement elucidated the importance of consent, and mutual intention to enter into arbitration and affirmed the need to retain the GOCD as a means of determining the intention of the parties in complex transactions and agreements involving multiple parties
In October 2015, Cox & Kings Ltd. entered into three agreements with SAP India Pvt. Ltd. to develop an e-commerce platform using SAP’s ‘Hybris Solution’ software. However, the project to implement the software faced a number of difficulties despite assurances that it was compatible with C&K’s current software. C&K reached out to SAP SE, the parent company of SAP India which is based in Germany. SAP SE created a team of experts and took over the project, but they too failed to implement the software.
In November 2016, C&K terminated their contract with SAP India and demanded ₹45 crores to recoup the payments made so far. SAP India refused and in turn claimed that C&K wrongfully terminated the contract and demanded ₹17 crores themselves. The parties went to arbitration as per one of their agreements. However, the arbitration was adjourned in November 2019 by the National Company Law Tribunal as C&K was facing bankruptcy.
C&K took the opportunity to initiate fresh arbitration proceedings and sent notices to SAP India and SAP SE, despite the latter not being a signatory to any of the agreements. When SAP refused to appoint an arbitrator, C&K approached the Supreme Court and requested the Bench to appoint an arbitrator instead, as per Section 11 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act). C&K claimed that SAP SE gave implied consent to the agreement and, as the parent company of SAP India, they should be included as a party.
On May 6th, 2022, a Bench led by former CJI Ramana expressed concerns about adopting the Doctrine and referred the case to a 5-Judge Constitution Bench. The Bench held that an authoritative decision was necessary to clearly define the contours of the Doctrine.
Setting the context
Before delving into the issues of the case, the Chief detailed the comprehensive legal background of the GOCD in India and other countries like the USA, France, England, Switzerland and Singapore. He classified the development of the GOCD into two stages, before and after Chloro Controls India (P) Ltd v Severn Trent Water Purification Inc (2013).
Before Chloro Controls, the Chief said, the Courts had a strict and formal approach to those who could be considered parties to an arbitration agreement. They limited it to those who were signatories to the agreement. However, in Chloro Controls the Court held that non-signatories could be parties to an arbitration agreement without their prior consent. This was based on four determinative factors: a direct relationship with the signatory party, direct commonality of the subject matter between the parties, composite nature of the transaction and if the reference of such parties would serve the ends of justice. The GOCD was laid down in this case through the phrase ‘claiming through or under’ which appeared in Sections 8 and 45 of the Arbitration Act, 1996.
GOCD around the world
The Chief then elaborated upon the position of other countries on GOCD jurisprudence.
France, in the Dow Chemical v Isover Saint Gobain (1982) case, extended an arbitration agreement to non-signatories, provided all the parties had a common intention to be bound by that agreement.
Switzerland recognizes any expressed or implied consent, by way of conduct, to be bound by an arbitration agreement.
English law, however, has taken a conservative approach to the application of the GOCD to extend the agreement to non-signatories. Similarly, Singapore has expressly rejected the application of GOCD to bind non-signatories to an arbitration agreement.
Although the USA has not used the GOCD to bind non-signatories to the arbitration agreement, it has used various other consensual as well as non-consensual doctrines to bind non-signatories to the arbitration agreements.
Arbitration agreement as a creature of contract
The judgement explained, in detail, the features of an arbitration agreement. In arbitration, it said, parties ‘consensually’ decide to submit any dispute between them to an arbitral tribunal outside domestic courts. The Chief wrote that arbitration is a contractual undertaking even if it is without any contractual obligations. Thus, it is also bound to follow all general principles of contract law.
This includes principles such as consensus ad idem (meeting of minds or common understanding of parties in the formation of a contract), doctrine of privity (a third party cannot benefit or be held liable under a contract he is not party to), and the like. Chandrachud stressed the importance of consent in arbitration agreements. Typically, this means that non-signatories would not be forced to be a part of an arbitration agreement as that would violate certain principles, such as the principle of party autonomy and doctrine of privity, which underpin the arbitration processes. However, this becomes harder to establish in the case of multi-party contracts.
Then the CJI moved focus to multi-party contracts and the determination of parties to an arbitration agreement. He noted that the general method to determine parties to an agreement would be to look for entities named and signed in the agreement. However, this did not entail that those who were not signatories to the arbitration agreement could never be called to be parties to it.
Differentiating between ‘non-signatories’ and ‘third parties’, he writes that non-signatories are those who express consent through means other than signatures. When a party is implicated in a dispute which is a subject matter of an arbitration, they become non-signatories even if they weren’t formally a part of the initial agreement. What is important, in these cases, is to determine if the non-signatories ‘intended to effect legal relations’ with the parties of the agreement. This intention, as principles of contract law establish, may be expressed or implied, he said.
The Chief went on to give a comprehensive reading of section 7 of the Arbitration Act. Section 7(3), requires an arbitration agreement to be in writing and Section 7(4) lays down the three circumstances that would count as an agreement in writing. The aim in all three of them, the CJI wrote, is to determine the mutual intention of the parties to be bound by the arbitration agreement. An agreement is said to be in writing in several situations. First, if the parties are formal signatories to the agreement. Second, when there is a “documentary record of evidence” proving their consent or intent to enter into legal relations. Third, when there is an exchange of claim and defence between the parties wherein one claims the existence of the agreement and the other does not deny it. With this reading of Section 7, the judgement concluded that a party didn’t need to be a signatory to an arbitration agreement to be a ‘party’ under Section 2(h) of the Arbitration Act.
Group of companies doctrine in India
CJI Chandrachud defined “group of companies” in the Indian context as “an agglomeration of privately held and publicly traded firms operating in different lines of business, each of which is incorporated as a separate legal entity, but which are collectively under the entrepreneurial, financial, and strategic control of a common authority, typically a family, and are linked by trust-based relationships forged around a similar persona, ethnicity, or community.”
A common criticism of the GOCD is that it violates the principle of “separate legal personality”, a cornerstone of corporate law. As per the Companies Act 2013, subsidiary companies have been statutorily recognized as separate legal entities. However, in exceptional situations, when the holding company dominates the affairs of the subsidiary company, the court applies what is called the ‘doctrine of alter ego’, or ‘piercing the corporate veil’. This is applied only when the maintenance of the principle of separate corporate personalities opposes justice, convenience and public interest. The judgement reiterated that the only cases in which the fundamental principle of separateness of corporate personalities is breached would be in exceptional situations of fraud and such.
The judgement pointed to the need to adopt a pragmatic approach to consent without compromising on the fundamental principles of arbitration law, contract and company law.
The Chief concluded that the GOCD would be applied when the involvement of the non-signatories was to the extent of making the parties believe that they were genuine parties to the contract. Therefore, the underlying basis for the application of the GOCD rests on maintaining the separateness of the corporate entities while determining their mutual intention to be bound by an arbitration agreement. The judgement also noted that the existence of a group of companies is a “factual element” that the Court or tribunal has to reconsider while analysing the consent of the parties.
The judgement distinguishes between ‘piercing the corporate veil doctrine’ and the GOCD. While the former disregards corporate separateness, the latter identifies the mutual intention of the separate legal entities to enter into the arbitration agreement without disturbing the separateness of legal personalities.
To identify this mutual intent, the judgement said, “circumstances that surround the conclusion and characterise the performance and later the termination of contracts” must be considered.
The Court held that the burden of proof lies on the party seeking the joinder of the non-signatory party and that the threshold for the proof of mutual intention would be high for the application of the group of companies docrine. This means that whether the two or more entities constitute a “single economic unit” also depends on the concerted efforts of the companies in the execution of a common subject. So, the principle of a “single economic entity” cannot be the sole basis to invoke the GOCD.
The Group of Companies Doctrine has an independent existence
The Court in Chloro Controls had held that the phrase “claiming through and under”, which appears in Sections 8 and 45 of the Arbitration Act, could be interpreted to include the group of companies doctrine. However, in this judgement, the Court held that usual scenarios where a person claims through or under are ‘assignment, subrogation and novation’. This can only be done in a derivative capacity.
In his opinion, the CJI further elaborated on the difference between “party” and “persons claiming through or under” by pointing out that the use of the word ‘and’ in the said sections tells us the legislative intent to differentiate the two entities. Therefore, the judgement observed that the approach adopted by the Court in Chloro Controls was incorrect to the extent that it traced the GOCD to the phrase “claiming through or under”, as it went against the established principles of contract and arbitration law.
Instead, the Court held that the GOCD has a separate existence in the Indian arbitration jurisprudence – founding itself on the principle of mutual intent of parties to an agreement.
The standard of determination at the referral stage
Section 8 of the Arbitration Act requires the referral court to ‘prima facie’ verify the validity of the arbitration agreement and Section 11 empowers the Supreme Court and High Courts to appoint arbitrators on the failure of the parties to follow the agreed arbitration procedure.
The referral Court will adjudicate the validity of the arbitration agreement and the veritability of the parties in two scenarios. First, when a signatory seeks the joinder of a non-signatory to the agreement. Second, when the non-signatory itself seeks to be a part of the arbitration agreement. However, in the case of complex transactions and contractual agreements, the Bench viewed that the arbitral tribunals were best suited to decide whether a non-signatory is a true party to the arbitration agreement and not the referral Court. This, the judgement said, adhered to the principle of competence-competence enshrined by Section 16 of the Arbitration Act, which allows the arbitral tribunal to rule on its jurisdiction.
Justice Narasimha’s Concurring Opinion
In his concurring opinion, Justice Narasimha agreed with the majority opinion on all aspects. He concluded that the group of companies doctrine would be subsumed under Section 7(4)(b) of the Arbitration Act and that the Court’s approach in Chloro Controls was erroneous.
He placed special emphasis on the need for the arbitration agreement to be in writing, as opposed to an oral agreement.