Group of companies doctrine: An analysis in view of Cox and Kings

On May 6, 2022, a three-judge Bench of the Supreme Court in the matter of Cox and Kings Limited v. SAP India Private Limited, had referred a few questions of law including one pertaining to the group of companies doctrine, to a larger bench of the apex court.

The question was whether third parties can be arrayed as a party to an arbitration based on the interpretation of ‘claiming through or under’ under Section 8 of the Arbitration and Conciliation Act, 1996.

The Supreme Court, while making the reference, questioned the rationale of the application of the group of companies doctrine in its decision in Chloro Controls India Pvt Limited v. Seven Trent Water Purification Inc and subsequent decisions following it in Mahanagar Telephone Nigam Ltd v. Canara Bank.

On December 6, 2023, a Constitution Bench of Chief Justice of India DY Chandrachud and Justices Hrishikesh Roy, PS Narasimha, JB Pardiwala and Manoj Misra upheld the group of companies doctrine and its application to binding non-signatories to an arbitration agreement with certain observations, which we shall discuss after deliberating upon the concept of the ‘group of companies’ doctrine.

Party autonomy is the bedrock of any arbitral process. Consent of parties to a contract is essential for arbitration. Article 7 of the UNCITRAL Model Law on International Commercial Arbitration defines an ‘arbitration agreement’ as under:

“Arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.”

Noted arbitrator, arbitration practitioner and author Gary Born discusses this issue as under:

“Application of an arbitration agreement to a non-signatory raises questions of formal requirements, under many legal regimes, for a “written” arbitration agreement. Those authorities which have addressed the issue have adopted a variety of means of satisfying or avoiding applicable form requirements in non-signatory contexts.

There is no rule forbidding an agreement from being signed by one entity on behalf of another entity (most obviously, in the case of agency relations). For example, though Article II(2) of the New York Convention requires an arbitration agreement that is “signed by the parties”, it is clear that a “party’s” signature can be provided by another on its behalf (most obviously, an agent, alter ego or merger partner).

To the same effect, one may also reason that the “writing” requirement of the Convention and most national laws can be satisfied by the existence of a written arbitration agreement which is consented to by a non-signatory via an “exchange” or writings (e.g., guarantees, assignments, agency agreements, other written communications).

More broadly, some authorities have held that form requirements apply only to the initial arbitration agreement itself and not to extra-contractual mechanism by which an entity may succeed to assure a party’s obligations and rights under that agreement (e.g., by merger, group of companies doctrine, alter ego theory); this reduces the relevance of form requirements in non-signatory contexts to a very small set of cases.”

Binding third parties to arbitration agreements

Of late, courts have leaned towards bringing non-signatories to an agreement within the ambit of an arbitration agreement by applying certain judicially evolved principles such as the group of companies doctrine or the doctrine of alter ego. The basis of this extension of the arbitration agreement also vaguely finds reference in the phrase ‘claiming through or under’ appearing in certain domestic legislation.

For instance, Section 8(1) of the Arbitration Act states:

“A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facile no valid arbitration agreement exists."

Similarly, Section 58 of the UK Arbitration Act, 1996 reads as under:

“58 Effect of award.

(1)Unless otherwise agreed by the parties, an award made by the tribunal pursuant to an arbitration agreement is final and binding both on the parties and on any persons claiming through or under them.”

Domestic legislation in the UK, Australia, Singapore and Hong Kong have accorded the status of a ‘party’ to third parties who are non-signatories to an arbitration agreement, but who are ‘claiming through or under’ a party to the arbitration agreement. This status is recognised not only for the purposes of anti-arbitration suits, but also for binding such parties to an award.

A recent judgment by the High Court of Australia in Rinehart v. Hancock Prospecting Pty Ltd has taken a different approach to the one prevailing in England as to the range of persons who are capable of ‘claiming through or under’ a party to the arbitration agreement. This approach has significantly expanded the range of disputes involving non-signatories that must be referred to arbitration.

Group of companies and alter ego

The doctrine of group of companies (a commonly used mechanism to bind third parties), in the context of a corporate structure, was first expounded by an International Chamber of Commerce (ICC) Tribunal in the case of Dow Chemicals v. Isover Saint Gobain.

The ICC Tribunal emphasized that factors such as ‘conclusion, performance and termination of a contract’ which indicates a ‘common intent of the parties’, would be crucial to determine the applicability and scope of an arbitration agreement to third parties.

Similarly, the doctrine of ‘alter ego’ has been used to pierce the corporate veil to determine the identity of the real players behind the performance of an agreement. This makes the conduct of the parties the true test and indicator for applying this doctrine.

Globally, the group of companies doctrine is not carved in stone since several jurisdictions have questioned or rejected the rationale and scope of the application of this doctrine.

While referring the matter to a Constitution Bench in Cox and Kings, the Supreme Court of India considered the view of Professor William Park to air caution on the application of such doctrines to bind third parties to an arbitration agreement:

“For arbitrators, motions to join non-signatories create a tension between two principles: maintaining arbitration’s consensual nature, and maximizing an award’s practical effectiveness by binding related persons. Pushed to the limit of their logic, each goal points in an opposite direction. Resolving the tension usually implicates the two doctrines discussed below: implied consent and disregard of corporate personality...

The term “non-­signatory” remains useful for what might be called “less­ than ­obvious” parties to an arbitration clause: individuals and entities that never put pen to paper, but still should be part of the arbitration under the circumstances of the relevant business relationship.

The label does little harm if invoked merely for ease of expression, to designate someone whose right or obligation to arbitrate may be real but not self-evident...

Most significantly, the fact that a “non-signatory” might be bound to arbitrate does not dispense with the need for an arbitration agreement. Rather, it means only that the agreement takes its binding force through some circumstance other than the formality of signature.”

Conclusions of the Supreme Court in Cox and Kings (2023)

While pronouncing the judgment on December 6, the Constitution Bench considered the factors discussed in the foregoing paragraphs and held that:

i. The High Court/Supreme Court at the referral stage under Section 11 of the Arbitration Act must leave it to the arbitral tribunal to decide whether non-signatories are bound by the arbitration agreement or not.

ii. 'Parties’ as defined under Section 2(1)(h) read with Section 7 of the Act, includes both signatory and non-signatory parties to the arbitration agreement.

iii. The role and relationship of a third-party, as may be specified in the agreement, could be a factor of their consent to be bound by the arbitration agreement.

iv. Section 7 of the Act does not exclude the possibility of binding third-parties.

v. The principle of alter ego or piercing the corporate veil cannot be made the basis for the application of the group of companies doctrine.

vi. The principle of group of companies has an independent existence as a principle of law which stems from a balanced reading of Section 2(1)(h) along with Section 7 of the Act.

vii. To apply the group of companies doctrine, courts or tribunals have to consider all cumulative factors as laid down in ONGC v. Discovery Enterprises, in which the Supreme Court held that that in addition to the cumulative factors laid down in Chloro Controls, the performance of the contract was also an essential factor to be considered by the courts and tribunals to bind a non-signatory to the arbitration agreement. Resultantly, the principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine.

viii. The persons claiming 'through or under' can only assert rights in a derivative capacity.

ix. The judgment in Chloro Controls is erroneous to the extent it held that non-signatories can be roped in by invoking the phrase 'parties claiming through or under,' as the said phrase is used to bind successors-in-interest of party in a derivative capacity.

x. An arbitration agreement must be written, but it need not be signed.

With this judgment, the Constitution Bench of the Supreme Court solidified the importance of Indian courts having a pro-arbitration stance, not just regarding the Group of Companies Doctrine, but also in general. The Supreme Court has largely refrained from disrupting the previous authorities on this doctrine. By doing this, it signifies a commitment to enhancing the efficacy of arbitration in India. The recognition and application of the group of companies doctrine reflects a nuanced understanding of corporate relationships and complex commercial transactions between multiple inter-connected parties.

The Supreme Court has highlighted the importance of delving deep into the molecular details of such complex commercial transactions and focusing on the substance of the relationships within a corporate group to identify the true intent of the parties to the agreement and the non-signatories concerned with the performance of the agreement. In essence, the Supreme Court has placed ‘conduct’ of signatories and non-signatories, on a pedestal. This approach aligns with the overarching goal of fostering a pro-arbitration environment, even when multiple parties including non-signatories, are involved.

However, this anatomization would remain incomplete without stating that extreme caution must be exercised while applying the group of companies doctrine. The misconstruction of this doctrine may result in involving non-signatories in an arbitration which were not originally intended to be bound by the arbitration agreement. Inevitably, this would prejudice the paramount and fundamental principle of arbitration: consent, resulting in notoriously lengthy litigation, defeating the object of the Act.

Vijay Purohit is a Partner, Pratik Jhaveri is a Principal Associate and Faizan M Mithaiwala is a Senior Associate at P&A Law Offices.