In Cox and Kings vs. SAP India Pvt. Ltd. & Anr. (‘Cox vs. SAP’) the Constitution Bench of the Hon’ble Supreme Court was called upon to deliberate over the Group of Companies doctrine (‘GOC doctrine’) and its validity in the context of the Arbitration and Conciliation Act, 1996 (‘Act’). The decision in Cox vs. SAP was answering a reference made in Cox and Kings vs. SAP India Pvt. Ltd. & Anr (‘reference order’), which sought to revisit the GOC doctrine as first applied in Chloro Controls India (P) Ltd v. Severn Trent Water Purification Inc (‘Chloro Controls’).
In Chloro Controls, the Hon’ble apex court read the GOC doctrine into the phrase ‘party and any person claiming through or under him’ [Section 45, Arbitration and Conciliation Act, 1996] to hold that a non-signatory to an arbitration agreement could be referred to arbitration in exceptional cases, so long as the transactions in the agreement containing the arbitration agreement reflected a clear intent to bind the signatories and non-signatories. This decision prompted a conflicting judicial approach in applying the GOC doctrine and this triggered the reference order which questioned the appositeness of being guided by equity considerations over settled legal principles in relation to a separate legal entity in respect of a company and so on.
The Constitution Bench in Cox vs. SAP examined the GOC doctrine and had occasion to deal with other doctrines such as alter ego/ piercing of the corporate veil, single economic entity/reality and so on rather briefly. If one had to take a step back and analyse the true purport of these doctrines, it is not only to avoid satellite litigation but also to identify the real perpetrators on whom the liability ought to be fixed. In the process, it is important to understand that the applicability of a doctrine in any form cannot be restricted to the joinder of non-signatories as a defendant alone, since a non-signatory in theory could equally invoke this doctrine to make their claims or counterclaims. The observation of the Supreme Court in this regard tends to give the impression that the GOC doctrine is to be applied only in a situation where non-signatories are compelled to arbitrate as defendants.
As such, the GOC doctrine emanated from the Dow Chemicals case, an International Chambers of Commerce (‘ICC’) arbitration involving French Law where a non-signatory did not resist arbitration or to the impleading. This important aspect was not considered in Cox vs SAP even as the Constitution Bench goes on to observe that Swiss law is no different in incorporating the GOC doctrine. As regards its reception in the United States jurisprudence, it was rightly observed that the GOC doctrine was not accepted, and the Courts in the United States have resorted to the other five exceptions as recognized under that law. It is in this backdrop, upon having observed that courts in Singapore and the United Kingdom also do not embrace the doctrine, the Constitution Bench has noted that the doctrine gained acceptance in countries with a pro-arbitration regime.
Interestingly, both France and Switzerland are civil law jurisdictions, meaning that statutes and written contracts are given importance and considered relevant in contrast to judicial precedents or doctrines which enjoy priority in common law jurisdictions.
The reason that Singapore, the United States and the United Kingdom have not recognized this doctrine seems to be hinging on the fact that arbitration as a mechanism could only be invoked between parties who have expressly consented to the form of dispute resolution that is envisaged – a concept universal and fundamental to arbitration. It is no doubt important that for a pro-arbitration regime to be adopted, parties including non-signatories ought not to resort to satellite litigation and attempt to escape the clutches of the law by prolonging matters. What is crucial though is how to justify the application of the doctrine within the framework of arbitration.
It is in this context that the Hon’ble Supreme Court in Chloro Controls acknowledged how the doctrine is essential to render substantial justice in matters where it is apparent that the non-signatories are to be held liable. That said, Chloro Controls was cautious in ensuring that the judgment was in line with the statute by holding out that these non-signatories would fall within the words “claiming through or under." This finding was also in line with the fundamental ingredient of arbitration, that there had to be express consent in some form to invoke the mechanism. For the Supreme Court to upset this finding in Chloro Controls is probably an exercise in eagerness to foster a pro-arbitration regime.
In fact, the decision in Chloro Controls was causal to the referral as the reference order highlighted an apparent inconsistency [see paragraph 84 of Reference order] emerging from paragraphs 72 and 73 of Chloro Controls. Where paragraph 72 emphasized on intention of the parties being significant, paragraph 73 held that a non-signatory / third-party could be subjected to arbitration without their consent. A relook at paragraph 72 would reveal no inconsistency - all that paragraph 72 states is that intention of parties, i.e. the signatories, play a crucial role in including a non-signatory, when the underlying transactions involve a group of companies. The essence of paragraph 72 is that the signatories must have intended to include a non-signatory for such a non-signatory to be bound by the arbitration agreement between the signatories. Paragraph 73 only states that a non-signatory/third party could be subjected to arbitration without their prior consent in exceptional cases. In fact, the Hon’ble Supreme Court in Chloro Controls had underscored the significance of party autonomy and consent, reiterating that arbitration agreements could generally be deployed only against the signatories and could bind a non-signatory without their prior consent only in exceptional circumstances. To this extent, it is clear that Courts were empowered to test the applicability of the exceptions from the touchstone of various factors laid down in paragraph 73.
The Constitution bench in Cox vs. SAP sought to harmonize the so-called contradictions in paragraphs 72 and 73 of Chloro Controls by clarifying that non-signatories could be subjected to arbitration as the phrase “without their prior consent” in paragraph 73 ought to be read as “without prior formal consent”.
The Supreme Court, while discussing the meaning of the term parties as provided under Sections 2(1)(h) and 7, concluded, by relying on the UNCITRAL Model Law as amended in 2006, that the term ‘party’ also includes a non-signatory. The UNCITRAL Model Law was amended to provide for situations where the arbitration agreement is said to be in writing if its content was recorded in any form, even if concluded orally, by conduct or by other means. The Constitution Bench has come to such a conclusion despite noting that consequential amendments were not made to the Indian legislation.
The 246th Law Commission in its Report had proposed this change under Section 7(3A), which seems to have been deliberately not incorporated. In the same context, Section 8 was specifically amended to substitute the word “party” with “a party to the arbitration agreement or any person claiming through or under him.” Therefore, the effect of the amendments in 2015 was to ensure that a non-signatory is made a party to the arbitration agreement through this route. What the Supreme Court has now done in Cox vs SAP is to read the term ‘party’ in Sections 2(1)(h) and 7 as one that includes a non-signatory as well.
The course correction, as the Supreme Court thought fit, was based on the aspect of conduct of the non-signatory as well as the basic principles of contract law surrounding consent. Specifically, the concept of implied/tacit consent is now sought to be invoked to ensure that a non-signatory is bound as a party to the arbitration.
It is in this context that the discussion with respect to Dow Chemicals gains further significance. Dow Chemicals considered two crucial factors as relevant in applying the Group of Companies Doctrine.
i. the concept of a single economic entity/ reality,
ii. the conduct of the non-signatory in the negotiation, performance, and termination of the contract.
While the Supreme Court acknowledges the two ingredients as considered necessary by Dow Chemicals as crucial, it probably could have delved deeper into the concept of single economic entity per se.
At para 88 of the judgment, the Constitution bench does examine the ‘single economic entity’ doctrine in a case from the United Kingdom, where Lord Denning had held that the determination of whether two or more companies constitute a single economic entity depends upon the concerted efforts of the companies to act in pursuance of a common endeavour or enterprise. While concluding that the principle of single economic entity could not form a standalone basis to invoke the GOC doctrine, the judgment does not further examine the reasons to so arrive at this conclusion. After all, given that the single economic entity doctrine can only be invoked in exceptional circumstances and given that the second ingredient in Dow Chemical relates to the conduct of a party, the discussion at para 88 seems to conclude that if two or more companies act in a concerted manner for a common endeavour, then that by itself reflects on the conduct so as to satisfy the single economic entity doctrine. With such a conclusion, there is no requirement to further examine the conduct of the parties in relation to negotiation, performance and termination of the contract.
Unlike the concept of single economic entity, which is tried and tested in the United Kingdom and accepted in Indian jurisprudence, the GOC Doctrine which was evolved pursuant to an arbitration can at best be called a subset of the single economic entity theory.
The second issue with the Dow Chemicals conclusion is that the conduct of a non-signatory in relation to negotiation of the terms of the contract or performance of some part of the contract or its role towards the termination of a contract can at best be an inference of an implied consent of the non-signatory to the main contract. It is not out of place to mention that the Supreme Court of Turkey had specifically observed this aspect while testing the application of the Group of Companies Doctrine. The Constitution Bench, however, at para 106, after holding that the courts and tribunals are required to consider the commercial circumstances and the conduct of the parties to device the common intention to arbitrate, crucially noted that the GOC doctrine only concerned the arbitration agreement and not the underlying contract. Consequently, it held that the non-signatory could be held to be a party to the arbitration agreement without becoming a formal party to the underlying contract and further stated that this has been the consistent position of law starting from the Dow Chemicals award.
While there is no doubt that a court/ tribunal could decipher/ infer that a party has impliedly given its consent to the main contract, there cannot be many situations where an implied consent to an arbitration clause could be deduced based on conduct. The situation seems to be quite the converse; while it could be said that a non-signatory is bound by the terms of the main contract based on its conduct, it may not be a party to an arbitration agreement as the fundamental principle behind arbitration law is that any person cannot be forced to arbitrate.
In its eagerness to apply the GOC doctrine which undoubtedly has to be made available to parties under exceptional circumstances, the Constitution Bench could perhaps have avoided the rerouting to invoke this doctrine by way of implied/ tacit consent. The theory behind this may be strictly academic, but nonetheless, the practical effect of this derivation should not lead to further litigation. Take for example, the case of a group company which is neither a holding nor a subsidiary of another company in the group, which participated in the negotiation of the substantive terms of the contract and its performance. Based on the dicta of the Constitution Bench, it could be argued with force that the very act of the non-signatory group company in negotiating the contract but not the arbitration clause proves that It Impliedly consented to the arbitration. In simple terms, a non-signatory that had never negotiated the arbitration clause, but still had a role to play in the performance or termination of the contract could be compelled to arbitrate which seems to ride against the tide of fundamentals. This causes material violence to the very concept of arbitration, as agreeing to arbitrate a dispute necessarily entails a surrender of the right to judicial remedy to that extent.
Piercing of corporate veil/ alter ego doctrines are doctrines primarily to identify the real perpetrator hiding behind the façade of corporate personality. This concept is quite distinct from the single economic entity concept, which is more a case of joint and several liability. The GOC doctrine has a two-fold application – (i) where the claimant seeks a non-signatory as a party respondent and (ii) where the non-signatory by itself seeks to initiate arbitration by invoking the GOC doctrine. The Constitution Bench does not delve into the concept of the non-signatory being a claimant or a party seeking interim measures in the Court. Therefore, apart from the issue of consent, the deliberation in respect of non-signatories initiating arbitration is also yet to be clarified. The Constitution bench also curiously concludes that the Group of Companies doctrine is a fact-based doctrine like agency, assignment, subrogation, etc. While the majority of cases under agency or assignment would have both the parties to such a contract agree with open eyes to such a relationship, the group of companies doctrine is at best a theory based on inference. So it is not clear if the comparison and grouping in this regard is appropriate.
The decision also left in its wake a catch-22 situation in respect of the scope of an Arbitral Tribunal’s powers to effect the joinder of non-signatories. While on the one hand, the referral Court is required to leave it to the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement, the proposition that operates as on date is that an Arbitral Tribunal does not have the power to implead non-signatories to an arbitration agreement. Moreover, the Constitution Bench has used the words court/ tribunal in tandem in the context of the forum that can test the application of this doctrine. This is yet another practical issue. The reference by itself stems out of an application under Section 11. This judgment on the Group of Companies doctrine and the judgment in relation to the validity of arbitration clauses in unstamped agreements have been delivered a few days apart. While in NN Global, the seven-judge Bench observed that a court under Section 11 could only satisfy itself on the existence of an arbitration agreement, it has not been clarified whether the courts under Section 11 will test the application of the doctrine and if such conclusions would only be prima-facie, given that the words prima-facie are absent (unlike Section 8).
Some of the practical questions or situations that may emerge from this judgment are:
A. Could a non-signatory invoke the GOC doctrine for reliefs under Sections 9 or 11?
B. Since the Constitution Bench has implicitly granted powers to both the tribunals/courts to test the application of the GOC doctrine, would the decision of a Court under Sections 9 or 11 be prima-facie or binding on tribunals?
C. What is the stage at which a conclusive finding on the application of GOC doctrine is to be rendered? Is it during the Section 16 stage where questions of jurisdiction are decided based on law?
D. As the Constitution Bench has held that the application of the GOC doctrine must be tested on the basis of evidence, does that mean that the issue could be decided only after trial?
E. If the application of GOC doctrine is to be decided after trial, does the judgment afford an opportunity to the non-signatory to file its counter-claims prior to the commencement of trial or would such filing of the counter-claims be considered as deemed consent?
F. Does this judgment pave the way for the tribunals to test the application of other doctrines such as piercing of corporate veil/ alter ego and single economic entity, the power of which so far has been vested only in courts and not Tribunals? Do Tribunals have the power to implead non-signatories by invoking these doctrines?
G. Does this judgment conclusively decide that negotiation/ performance by a group company/non-signatory of the substantive terms of the contract would form the basis to infer implied consent even if the arbitration clause, which is a stand-alone agreement, has not been negotiated upon by the group company?
H. If the application for impleading the group company has been dismissed by a tribunal, could the unsuccessful party file an application under Section 34 as it has conclusively decided the issue and the rights of parties as against the non-signatory or should such applicant wait for the outcome of the entire award?
The judgment in Cox vs SAP is probably, as on date, meant to be an authoritative primer on the joinder of non-signatories to an arbitration at the instance of one of the signatories. Despite the practical predicaments, the judgment is premised on pragmatism and cohesion to retain the GOC doctrine to ensure a systematic approach to modern-day commercial transactions while pruning the pattern to hyperextend the doctrine to all situations. Ultimately, there is no doubt that the doctrine must be made applicable, but whether ‘implied consent’ is a germane test remains to be seen. Therefore, in addition to the above questions there is no doubt that this decision would influence arbitrations across various stages including the stage of negotiation and formulation of such arbitration clauses.
About the authors: M Sricharan Rangarajan is a Senior Advocate practicing at the Madras High Court. Krithika Jaganathan is an Associate Partner at Lakshmikumaran and Sridharan.