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The (Mis)Application of the Group of Companies Doctrine in India

Soumil Jhanwar

Introduction

The applicability of the ‘Group of Companies’ [“GoC”] doctrine under the Indian Arbitration Act, 1996 [“Arbitration Act”] was affirmed in the (in)famous Chloro Controls case. Since then, the doctrine has been applied by various other cases. This paper argues that the Indian Court has been erroneous in its manner of application of the doctrine. The paper also proposes a legislative solution for the Indian policymakers to work around the problems regarding the erroneous application of the doctrine.

Indian Case Law on Group of Companies

In Sukanya Holdings,[1] the Apex Court held that unrelated non-signatories cannot be compelled to collectively arbitrate under Section 8, attaching importance to party-autonomy. However, the later Chloro Controls[2] presented the Court with a peculiar case involving several related agreements. The relevant arbitration clause pertained to a shareholders’ agreement governed by English substantive law and providing for an English arbitration. However, the shareholders’ agreement acted as a mother agreement to several other agreements, that collectively facilitated the same transaction. These other agreements were signed by companies related with each other, though not identical as entities. The Apex Court referred all the parties under all agreements for collective arbitration. The Court justified a deviation from Sukanya Holdings, emphasizing that, while Sukanya Holdings pertained to Section 8, Chloro Controls pertained to the wider Section 45. It said that the words ‘claiming through or under him’ in Section 45 justified compelling joinder of non-signatories that were involved in the composite performance of a larger transaction facilitated by a main shareholders agreement.[3]


The 2015 amendment to the Arbitration Act altered the phrasing of Section 8 to make it as wide as Section 45, incorporating the words ‘claiming through or under’.[4] Soon after this, the question of a joint reference of non-signatories under Section 8 of the Act came before the Supreme Court in Duro Felguera.[5] In this case, a Spanish company and its Indian subsidiary had submitted a joint tender bid to Gangavaram Port, in which they had succeeded. The work was subsequently divided into 5 different packages under 5 different contracts, only one of which had been signed by the Spanish company. All contracts had identical arbitration clauses seated in India. The Supreme Court denied a joinder of the Spanish company for a dispute under one of the contracts not signed by it. It differentiated Chloro Controls and said that the same rationale could not apply, as separate inclusion of arbitration clauses in each of the agreements envisaged separate arbitrations.[6]


In Ameet Lalchand,[7] the Apex Court held that, where 4 agreements had been signed for a single purpose of commissioning of two photovoltaic solar plants at Dongri, they could be seen as forming a single project. Since the respondents had raised allegations of fraud against all the appellants in civil suit, the Court referred the same to collective arbitration under all disputes at the request of various appellants under different interconnected agreements. Chloro Controls’ interpretation of Section 45 was used to refer parties to collective arbitration under Section 8, saying that the parties could be interpreted as ‘parties claiming through or under’ each other.[8]


In Cheran Properties,[9] the Supreme Court used Chloro Controls to hold that even an arbitral award may be binding on a third party, who was a nominee of a judgement-debtor. The principal agreement in this case had been a share purchase agreement. The Court used the wide construction of the agreement and the use of the phrase ‘parties claiming under’ in Section 35 to bind the nominee of one of the parties. The Court also emphasized that the nominee knew about the original agreement and agreed to abide by its terms under its own later agreement. Therefore, it was held to be bound to arbitrate under the same.[10]


In Reckitt Benckiser,[11] the appellant sought to compel a non-signatory respondent to arbitrate collectively, as the main agreement had provided that, in case of the signatory respondents’ liability, the non-signatory respondent (a group company of the former) would indemnify the appellant. However, the Court denied a joinder as the non-signatory company itself was never involved in the negotiations of the agreement that mentioned so.[12]


Finally, recently, the Supreme Court has laid down guidelines as to the applicability of the GoC doctrine in Canara Bank.[13] It was said that the same can only be applied, either when the non-signatory is part of a composite transaction facilitated by an agreement, or when it is the ‘same economic entity’ as one of the signatories. Interestingly, in this case, the original arbitration had been between a signatory (MTNL) and a non-signatory (Canara Bank), which was the holding company of another signatory (CANFINA). The party brought in through the application of GoC was in fact the subsidiary signatory (CANFINA) itself.[14]

The Errors in the Indian Approach

There are several problems with the Indian Apex Court’s imperfect application of the GoC doctrine. First, the doctrine has erroneously been sourced in provisions of the Arbitration Act (Sections, 8, 35 and 45). While the actual legal origins of the doctrine are unclear, most believe it to be sourced in the substantive principle of ‘good faith’.[15] Therefore, the applicability of the doctrine can be assessed by looking at whether law governing the arbitration agreement allows it.[16] It is rather absurd that the Court has used procedural ‘reference’ provisions, intended for the limited purpose of allowing courts to compel arbitration when the same is required under an agreement, to deviate from the respective agreements by joining non-signatories.


The erroneous sourcing of the doctrine can be fatal. For example, in Chloro Controls both the seat and the substantive law had been English.[17] The Apex Court applied Section 45 – a provision from a law not even adopted by the parties – to join non-signatories. Such joinder would have been invalid as per English law (which was the appropriate applicable law), which does not recognize the GoC doctrine.[18] Further, an award in such a case would risk being set aside by English courts, that are infamous for non-enforcement of awards, when they believe that a party had erroneously been compelled to arbitrate.[19]


Second, the terminology in Sections 8 and 45 indicates that a person ‘claiming under a signatory’ can only ‘apply for’a reference from a Court. The provision does not indicate that a person ‘claiming under a signatory’ can ‘be referred to’ collective arbitration. Essentially, even in the unlikely scenario that a reference to collective arbitration with a non-signatory is envisaged under Section 8, the same can only be made with the consent of the non-signatory.[20]


Use of Section 35 to enforce an arbitration against a non-signatory is also illogical. Notwithstanding the above highlighted misinterpretation, the ‘right to be heard’ is a fundamental tenet of arbitration.[21] Therefore, direct enforcement, without allowing a party to present its case, is fundamentally flawed.


Third, the judgements after Chloro Controls did not even involve scenarios where the use of the GoC doctrine was appropriate. GoC is only applied in cases where a non-signatory company related to a signatory is so involved in the negotiations or the implementation of an agreement, that it must be compelled to arbitrate under the same.[22]


However, in Ameet Lalchand, the factum of facilitation of a ‘single commercial transaction’ by various agreements, was used to compel collective arbitration.[23] This was, in fact, the application of the ‘group of contracts’ doctrine, that does not require the non-signatory joinee to be related to either of the original parties. It only requires the agreements to be so symbiotic in their relationship, that separate dispute resolution of intertwined disputes could not have been envisaged.[24]


In Cheran Properties, the nominee was compelled to arbitrate, because it had agreed to terms of the main contract and therefore was bound by its arbitration clause.[25] This was a mixed application of the ‘assignment’ and the ‘estoppel’ doctrines, whereunder an assignee that claims benefit of an agreement cannot refuse to arbitrate under the same.[26]


In Canara Bank, the party being joined was, in fact, a signatory to the contract; it was the non-signatory (Canara Bank) who had already been a party. MTNL was estopped from arbitrating against Canara Bank, as it had actively participated in the arbitral proceedings. This was an application of ‘equitable estoppel’.[27] Therefore, the Apex Court has erroneously been applying various other ‘good faith’ doctrines used in various legal systems, under the garb of GoC doctrine (intentionally or otherwise), to make its work easier.


Fourth, even the erroneous application of the GoC doctrine has been inconsistent. In Duro Felguera, presence of arbitration clauses in other agreements was used to infer intent of separate arbitration.[28] However, even in Chloro Controls, the export sales agreement had a separate arbitration clause, that (unlike in Duro Felguera) even provided for a different seat and different institutional rules.[29] Despite this, parties to that agreement were compelled to collectively arbitrate.


Further, in Reckitt Benckiser, lack of involvement of a non-signatory in the original negotiations was used to deny a joint reference.[30] However, the evident absence of the nominee during the original negotiations was not addressed in Cheran Properties. In fact, this was perhaps because the Court in Cheran Properties was unknowingly using the ‘equitable estoppel’ doctrine to prove a later consent to the agreement by the nominee.[31] Therefore, the Apex Court needs to reassess its reliance on the GoC doctrine and Sections 8 and 45, for mandating collective arbitration.

Efficiency against legal authority – A Possible Solution

Even ignoring that the GoC has been erroneously applied in India, the doctrine itself has been criticized for causing unforeseeable joinders and breaching party autonomy.[32] Having said that, collective arbitration with non-signatories may be necessary in scenarios where several agreements and disputes within them are inherently intertwined. In such cases, separate arbitrations would not only lead to overlaps and inefficiencies, but may also lead to inconsistent findings, which may exacerbate legal uncertainties.[33] Further, since modern-day large-scale transactions often involve interplay of various parties and agreements, such scenarios are almost inevitable.


As has been asserted, the solution cannot lie in an unwarranted wide interpretation of Section 8. Even the use of GoC doctrine as part of Indian substantive law would not be sufficient to cover scenarios where the contracts may be interrelated, but the parties may be different.[34] This is in addition to the criticisms of the doctrine of GoC itself.


One solution to the problem is to trust the business judgement of parties, to expect them to create mechanisms facilitating multi-contract/multi-party arbitrations within their agreements. However, past experience shows that even the most sophisticated of entities fail to do so.[35]


The better alternative is to provide for compelled (non-consensual) joinders/consolidations for India-seated arbitrations in the Arbitration Act itself. Various states in the US have incorporated such joinder/ consolidation provisions in their arbitration legislations, empowering courts to compel joinders and consolidations as long as all pertinent parties chose their state as the seat.[36] This obviates the need for a court to justify its legal authority for mandating collective arbitrations by shoehorning a given case into the pigeonholes of doctrines like the GoC. With such provisions, a court would be able to mandate collective arbitration under different contracts, in case the same is needed for prevention of delays and inconsistencies, as long as the pertinent contracts mention Indian law as lex arbitri.[37]


Collective arbitrations under such provisions cannot be challenged on the ground of ‘party autonomy’ either, as parties can be said to have impliedly consented to such provisions while choosing India as a seat.[38] Consequently, such provisions will allow courts to virtually achieve the same result, but on legally justifiable grounds. It would also negate the need for unnecessarily lengthy legal analysis for reliance on precedents to justify legal authority for mandating collective references. Lastly, use of such provisions would also allow courts to distinguish cases like Chloro Controls, and deny collective reference where the parties have neither chosen Indian substantive law nor Indian seat.

Conclusion

This paper has shown how the use of the GoC doctrine under Sections 8 and 45 of the Arbitration Act to compel collective arbitration under different agreements is legally erroneous. It has also been shown that the solution to the “efficiency vs. party consent” problem does not lie in use of substantive law (good faith) doctrines, but rather in altering the lex arbitri itself.


[1] Sukanya Holdings v Jayesh Pandya (2003) 5 531.

[2] Chloro Controls v Severn Trent (2013) 1 SCC 641.

[3] Ibid, ¶143.

[4] The Arbitration and Conciliation (Amendment) Act 2015, § 4(i).

[5] Duro Felguera v Gangavaram Port (2017) 9 SCC 729.

[6] Ibid, ¶60.

[7] Ameet Lalchand Shah v Rishabh Enterprises (2018) 15 SCC 678.

[8] Ibid, ¶28.

[9] Cheran Properties v Kasturi and Sons (2018) SCC 16 SCC 413.

[10] Ibid, ¶33.

[11] Reckitt Benckiser v Reynders Label Printing (2019) 7 SCC 809.

[12] Ibid, ¶13.

[13] MTNL v Canara Bank (2020) 12 SCC 767.

[14] Ibid, ¶11.

[15] Bernard Hanotiau, Complex Arbitration (2nd edn. 2020) 117, 149 [citing cases]; JM Waincymer, Procedure and Evidence in International Arbitration (2012) 512 [citing Dutco].

[16] Gary Born, International Commercial Arbitration (2nd edn. 2014) 1455.

[17] Chloro Controls (n 2) ¶25.

[18] See Peterson Farms v C&M Farming [2004] EWCH 121 (Comm).

[19] The Dallah Case is a prime example of this. See Dallah Real Estate and Tourism v Ministry of Religious Affairs, Pakistan [2009] EWCA Civ 755.

[20] See The City of London v Sancheti [2008] EWCA Civ. 1283, ¶29 et seq.; Vicky Priskich, ‘Binding non-signatories to arbitration agreements – who are persons claiming through or under a party’ [2019] 35(3) Arbitration International 375, 382-84.

[21] Indian Arbitration Act 1996, § 18; New York Convention 1958, art. V, §1(b); Nigel Blackaby et al., Redfern and Hunter on International Arbitration (6th edn. 2015) 328.

[22] Stavros Brekoulakis, ‘Parties in International Arbitration: Consent v. Commercial Reality’ in The Evolution and Future of International Arbitration (Kluwer International Law 2016) 137; Nathalie Voser, ‘Multi-party Disputes and Joinder of Third Parties’ in 50 Years of the New York Convention (ICCA & Kluwer International Law 2009) 373-74.

[23] Ameet Lalchand (n 7) ¶28.

[24] Hanotiau (n 15) 198 et seq; Manasi Kumar ‘The Composite Transaction and Extension of Arbitration Agreements in India’ [2020] 37(3) Journal of International Arbitration 363, 371.

[25] Cheran Properties (n 9) ¶33.

[26] See Difwind Farms v Viking Windfarms [1989] 15 Yearbook Commercial Arbitration611; Danisco v J Borsch Se [2003] 28 Yearbook Commercial Arbitration 1190.

[27] See Waincymer (n 15) 526-29.

[28] Duro Felguera (n 5) ¶60.

[29] Chloro Controls (n 2) ¶151.

[30] Reckitt Benckiser (n 11) ¶13.

[31] See text accompanying supra (n 26).

[32] See Yves Derains, ‘Is there a Group of Companies Doctrine?’ [2010] ICC Dossier 131, 142-43; Peterson Farms (n 18).

[33] Philippe Laboulanger, ‘Multi-Contract Arbitration’ [1996] 13(4) Journal of International Arbitration 43, 62-64; Born (n 16) 2566-69.

[34] This may be in scenarios involving main and sub-contracts and direct producer liability. See Ingeborg Schwenzer & Florian Mohs, ‘Arbitration Clauses in Chain of Contracts’ [2009] 27(2) ASA Bulletin 213, 215-217;Southern Illinois Beverage v Hansen Beverage Co [2007] WL 3046273 (SD Ill).

[35] All the cases cited in this paper evince this.

[36] Jonathan Waldron, ‘Resolving a Split: May Courts Order Consolidation of Arbitration Absent Express Agreement by Parties’ [2005] (1) Journal of Dispute Resolution 1, 7.

[37] See JC Oil Sands v Toyo Engineering [2018] ABQB 844; Garden Grove v Pittsburgh-Des Moines [1983] 191 Cal. Rep. 15.

[38] Ibid; Born (n 16) 2572.

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