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Whether Non-signatory Party bound by Arbitration? Doctrine of group of companies

Whether Non-signatory Party bound by Arbitration? Doctrine of group of companies

Section 7 Arbitration and Conciliation Act 1996 recognizes Arbitration Agreement that an Arbitration Agreement means 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. (2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

Arbitration is a creature of contract which has been provided statutory backing under the Arbitration Act, to usher in party autonomy, quick disposal, and an efficacious alternative remedy. Arbitration has been a great boon for Indian jurisprudence, wherein numerous cases have been methodically dealt with in an effective manner without taking the meandering course of litigation before Courts.

One of the most challenging areas of Arbitration practice, both theoretical and practical, relates to multi¬party and multi¬claim proceedings. Usually, arbitration involves parties who have explicitly entered into an arbitration agreement, or parties with successor interests, claiming under them. In some cases, it happens that third parties are bound by an arbitration clause by tacit consent, etc.

Doctrine of group of companies is one such area which is utilized to bind third parties to an arbitration agreement. Theoretically, the policy consideration of efficiency is argued to allow such joinders. However, until a legal basis for the same is provided, efficiency cannot itself be the sole ground to bind a party to arbitration.

The doctrine as evolved by the judicial precedents says that Arbitration is usually limited to parties who have consented to the process, either by agreeing in their contract to refer any disputes arising in the future between them to arbitration or by submitting to arbitration when a dispute arises. A party who has not so consented, often referred to as a third party or a non-signatory to the arbitration agreement, is usually excluded from the arbitration. There are however some occasions when such a third party may be bound by the agreement to arbitrate. For example, …, assignees and representatives may become a party to the arbitration agreement in place of the original signatory on the basis that they are successors to that party’s interest and claim “through or under” the original party. The third party can then be compelled to arbitrate any dispute that arises.

The doctrine of ‘Group of Companies’ had its origins in the 1970’s from   French arbitration practice.   The ‘Group of Companies’ doctrine indicates the implied consent to an agreement to arbitrate, in the context of modern multi¬party business transactions. It was first propounded in the case of Dow Chemical v. Isover¬Saint-Gobain, where the arbitral tribunal held that: “… the arbitration clause expressly accepted by certain of the companies of the group should bind the other companies which, by virtue of their role in the conclusion, performance,   or termination of the contracts containing said clauses, and in accordance with the mutual intention of all parties to the proceedings, appear to have been veritable parties to these contracts or to have been principally concerned by them and the disputes to which they may give rise”. The ‘Group of Companies’ doctrine has been invoked by courts and tribunals in arbitrations, where an arbitration.

agreement is entered into by one of the companies in the group; and the non-signatory affiliate, or sister, or parent concern, is held to be bound by the arbitration agreement, if the facts and circumstances of the case demonstrate that it was the mutual intention of all parties to bind both the signatories and the non-signatory affiliates in the group.

Authorities from virtually all jurisdictions hold that a party who has not assented to a contract containing an arbitration clause may nonetheless be bound by the clause if that party is an “alter ego” of an entity that did execute, or was otherwise a party to, the agreement.

Though the scope of an arbitration agreement is limited to the parties who entered into it and those claiming under or through them, the courts under the English law have, in certain cases, also applied the “group of companies doctrine”. This doctrine has developed in the international context, whereby an arbitration agreement entered into by a company, being one within a group of companies, can bind its non-signatory affiliates or sister or parent concerns, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates. This theory has been applied in a number of arbitrations so as to justify a tribunal taking jurisdiction over a party who is not a signatory to the contract containing the arbitration agreement.

This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, “intention of the parties” is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties.

The Court held that it would examine the facts of the case on the touch-stone of the existence of a direct relationship with a party which is a signatory to the arbitration agreement, a ‘direct commonality’ of the subject matter and on whether the agreement between the parties is a part of a composite transaction.

A ‘composite transaction’ refers to a transaction which is inter-linked in nature; or, where the performance of the agreement may not be feasible without the aid, execution, and performance of the supplementary or the ancillary agreement, for achieving the common object, and collectively having a bearing on the dispute.

The group of companies doctrine is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories.

The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory.

Explaining the legal basis that may be applied to bind a non-signatory to an arbitration agreement, this Court held thus:

“The first theory is that of implied consent, third-party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights. This theory relies on the discernible intentions of the parties and, to a large extent, on good faith principle. They apply to private as well as public legal entities.

The second theory includes the legal doctrines of agent-principal relations, apparent authority, piercing of veil (also called “the alter ego”), joint venture relations, succession and estoppel. They do not rely on the parties' intention but rather on the force of the applicable law.

Under the group of companies doctrine, an arbitration agreement entered into by a company within a group of companies can bind its non-signatory affiliates, if the circumstances demonstrate that the parties' mutual intention was to bind both the signatory and the non-signatory parties.

The requirement of a signed agreement in writing, however, does not altogether exclude the possibility of an arbitration agreement concluded in proper form between two or more parties also binding other parties. Third parties to an arbitration agreement have been held to be bound by (or entitled to rely on) such an agreement in a variety of ways: first, by operation of the ‘group of companies’ doctrine pursuant to which the benefits and duties arising from an arbitration agreement may in certain circumstances be extended to other members of the same group of companies; and, secondly, by operation of general rules of private law, principally on assignment, agency, and succession.

The group of companies doctrine has been applied to pierce the corporate veil to locate the “true” party in interest, and more significantly, to target the creditworthy member of a group of companies.

The group of companies doctrine is akin to principles of agency or implied consent, whereby the corporate affiliations among distinct legal entities provide the foundation for concluding that they were intended to be parties to an agreement, notwithstanding their formal status as non-signatories.

There have also been diversant view of different benches of the Supreme Court like in the case of Chloro Controls Vs. Severn Trent Water Purification Inc (2013) 1 SCC 641 wherein it has been held that reference of dispute to arbitration at the instance of party to an arbitration agreement or any person claiming through or under such party.

From the judgments of the Supreme Court, four factors emerge while falling under the consideration of extending the scope of Arbitration Agreement to the non-signatory parties-

(a)    Direct relationship of non-signatory to the signatory
(b)    Commonality of the subject matter
(c)    Common nature of the transaction
(d)    Intention of the parties
(e)    Serving the end of justice

The issue has also been referred to a Constitution Bench by a bench of three judges of the Supreme Court in the case of Cox and Kings Ltd on the same issue. The questions which have been referred to the larger bench by Justice Surya Kant are as under:-

A. Whether the Group of Companies Doctrine should be read into Section 8 of the Act or whether it can exist in Indian jurisprudence independent of any statutory provision?
B. Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’? 
C. Whether the Group of Companies Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?
D. Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the Group of Companies Doctrine into operation even in the absence of implied consent?

References:-  

1.    Cox and Kings Vs. (2022) 8 SCC 1 - Read the judgment (Cox and kings)
2.    Cheran Properties (2018) 16 SCC 413 Read the Judgment (Cheran Properties)
3.    MTNL V. Canara Bank (2020) 12 SCC 767
4.    ONGC V. Discovery (2022) 8 SCC 42
5.    Arbitration & Consciliation Act, 1996

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