Doctrine of Group of Companies in Arbitration

What is a ``group of companies’ doctrine’’?

The group of companies’ doctrine aims to extend, under certain conditions, the arbitration agreement signed only by one or some of the companies of a group, or a joint venture formed by these companies which may be individually non-signatory companies of the joint venture, also to the non-signatory companies of the same joint venture or group. This doctrine was developed in particular by a number of international Chambers of Commerce (ICC) arbitration tribunals, as well as the French courts.

The main problem with regard to the group of companies’ doctrine is linked to the contractual nature of the arbitration. Because of this contractual nature, each party must consent and clearly express their willingness to submit their disputes to arbitration proceedings instead of going to courts. It was observed that difficulties may arise in relation to the extension of an arbitration agreement where the contract, which contains it, has been negotiated or performed by a party who had not signed the contract nor, of course, the arbitration clause.

This is exactly the legal scenario in which the group of companies’ doctrine was developed and applied in appropriate legal situations.

How the concept of Group of Companies evolved?

The concept of Group of Companies doctrine is the most widely accepted principle for the extension of arbitration agreements. This doctrine was initiated in the Dow Chemical Case and it postulates that several companies forming a corporate group may be regarded as a single legal entity as they form the same economic reality despite the legal independence of the individual entities from one another where the circumstances of the contractor’s conclusion its performance, its (possible) subsequent termination, and the degree of control executed among the group companies warrants such an inference. However, in all ``group of companies’’ decisions, the finding of an express or implied consensus of the parties remains key in binding non-signatories to an arbitration clause, and this doctrine is not applied due to mere affiliation of the companies. In essence this doctrine asserts that when a non-signatory company of joint venture or group of companies is an active participant in the contractual relationship, then the arbitration agreement can be extended to it.

In the Dow Chemical, an ICC Tribunal sitting in Paris decided that the parent company Dow Chemical Company (USA) should become a party to an agreement applying to its subsidiaries Dow Chemical (France), for the following reasons:

``Considering that it is indisputable and in fact not disputed that DOW CHEMICAL COMPANY (USA) has and exercises absolute control over its subsidiaries having either signed the relevant contracts or like DOW CHEMICAL (FRANCE), effectively and individually participated in their conclusion, there performance and their termination’’.

In this case, French Court of Appeal refused to interfere with the Arbitrator’s decision that non-signatory companies in a group could rely on an arbitration clause in contracts between Isover St Gobain and two Dow Chemical Group Companies. Court refused to change the finding of the tribunal that a group of companies constituted the same economic reality of which the tribunal should take account when it rule on its jurisdiction.

First significant recognition of this Doctrine was by International Court of Justice (ICJ) while proceeding with the Barcelona Traction case between Belgium and Spain. The assertion of this Doctrine is evident from the para 56 of the judgement dated 05.02.1970 in following lines:

``56 …….. Here, then, as elsewhere, the law confronted with economic realities, has had to provide protective measures and remedies in the interests of those within the corporate entity as well as of those outside who have dealing with it the law has recognized that the independent existence of legal entity cannot be treated as an absolute. It is in this context that the process of `lifting the corporate veil’ or disregarding the legal entity has been found justified and equitable in certain circumstances or for certain purposes. The wealth of practice already accumulated on the subject in municipal law indicates that the veif in lifted for instance to prevent the misuse of the privileges of legal personality as in certain cases of fraud and malfeasance, to protect third persons such as a creditor or purchaser or to prevent the evasion of legal requirements or of obligations’’.

In a similar decision a Singapore International Arbitration Center Tribunal extended an arbitration clause to a parent non-signatory company on the basis of `` the true intent of the parties on the basis of the evidence before it’’

Further, in SARHANK V. ORCALE CORPORATION, a tribunal sitting in Cairo decided as a matter of Egyptian Law:

`` Despite their having juristic personalities subsidiary companies to one group of companies are deemed subject to the arbitration clause incorporated in the contract because contractual relations cannot take place without the consent if the parent company owning the trade mark be and upon which transaction proceed.’’

Veil – Piercing or Alter – Ego

A number if arbitral tribunals and judicial courts may have to decide whether an arbitration agreement concluded by a company may be binding on its group affiliated or even a natural person who is the group’s ultimate controlling shareholder.

Under the alter ego doctrine, a corporation may be bound by an agreement entered into by its subsidiary, regardless of the agreement’s structure or the subsidiary’s attempts to bind itself alone to its terms,`` when their conduct demonstrates a virtual abandonment of separateness’’. Alter ego determinate are highly fact based and require comprehensive determination of the overall circumstances. No individual factor in isolation may be considered final and conclusive. The courts have developed extensive list of circumstances to guide alter ego determinations. The courts explore the totality of the environment in which the party and non-signatory operate. If it is established that corporate form was used to effect fraud or another wrong on a third party, alter ego determinations then revolve around issue of control and use.

In ALPHA S.A. V BETA & CO. State Company of Ruritanian Law, the tribunal pierced the corporate veil of the signatory state owned entity to bind its non-signatory corporate parent to the arbitration agreement entered into by its subsidiary. The tribunal discussed case law and doctrine developed in connection with Swiss company law, in particular for so called `` One-man companies’’, and summarized that piercing the veil was only warranted where (i) a shareholder has total control over an entity, evinced by in sufficient capitalization, confusion in the administration and management and confusion of assets, and (ii) the totality of circumstances constituted an abuse of rights.

The veil-piercing issue generally includes those factors normally explored in the context of parent-subsidiary alter ego claims, such as whether:

• ·       The parent and subsidiary have common stock ownership;
• ·       The parent and subsidiary have common directors or officers;
• ·       The parent and subsidiary have common business departments;
• ·       The parent and subsidiary file consolidated financial statements;
• ·       The parent finances the subsidiary;
• ·       The parent caused the incorporation of the subsidiary;
• ·       The subsidiary operates with grossly inadequate capital;
• ·       The parent pays salaries and other expenses of the subsidiary;
• ·       The subsidiary receives no business except that given by the parent;
• ·       The parent uses the subsidiary’s property as its own;
• ·       The daily operations of the two corporations are not kept separate;
• ·       The subsidiary does not observe corporate formalities;

Additional factors which may be considered in alter ego determination:

• ·       Whether the directors of the subsidiary act in the primary and independent interest of the ``parent’’.
• ·       Whether others pay or guarantee debts of the dominated corporation: and
• ·       Whether the alleged dominator deals with the dominated corporation at arm’s length.

With this background, let us try to understand the implication of recent judgment of Madras High Court on 23.07.2018 regarding M/s SEI Adhavan Power Private Limited v. M/s Jinneng Clean Energy Technology Limited.

Brief Factual Matrix of the case:

1.   The appellants and respondent No. 2 constitute a single Economic Entity namely Sun Edison Energy Group of Companies along with M/s Sun Edison Energy Holding (Singapore) Private Limited (Respondent No. 2). The appellant No. 1 is a Indian Company involving itself in the process of constructing a 50 MW AC power plant in Tamilnadu (``Project’’). M/s Sun Edison Energy Holding (Singapore) Private Limited was holding 99.99% of the agree gate equity capital in the appellant No. 1. The appellant No.1 had engaged appellant No. 2 as the contractor to provide certain construction services qua the project. The appellant No. 2 in turn, entered into a sub-contract qua supply of modules to the respondent No. 1 in pursuant to the mutually agreed contracts executed vide purchase orders issued by respondent No. 2 – M/s Sun Edison Energy Holding (Singapore) Private Limited in favor of respondent No. 1. The respondent No. 1 raised certain invoices which were pending payment from the respondent No. 2 with the appellant No. 2. Thus the appellants and the respondent No. 2 are intrinsically connected to each other.

2.   Under these circumstances the respondent No. 2 executed a Non Disposal Undertaking in favor of respondent No. 1. The facts narrated above were reiterated in the aforesaid document. The Non-Disposal Undertaking was with respect to the shares held by the respondent No. 2 with the appellant No. 1. The document was signed by the president of Respondent No. 2. Incidentally he controlled all the operations of the appellant No. 12 as well.

3.   The respondent No. 1 was referred as `Contractor’, the respondent No. 2 as the ``Sun Edison’’, the appellant No. 1 as the ``Company’’ and the appellant No. 2 as the ``Client’’.

4.   While defining invoices it was made clear that they mean, the invoices issued pursued to the subcontractor agreements and other added to the Annexure by mutual agreement by appellant No. 2 and respondent 1 and 2. The payment obligation was defined as that of the appellant No. 2 to the respondent N. 1 qua the invoices raised.

5.   Accordingly the respondent No. 2 gave an undertaking which shall stand valid until the complete discharge of the Payment obligations by the appellant No. 2, to hold and retain at least 24% of the equity in the appellant No. 1 company.

6.   The appellants were working from the same office. The respondent No. 2 as per the undertaking appointed the appellant No. 1 as its Agent to receive and acknowledge any notice by way of writ in connection with the undertaking. The law of Singapore is to be applied. The Arbitration Clause is mentioned in the undertaking.

7.   Contrary to the undertaking, the shares were sold by the respondent No. 2. Thus, the respondent No. 1 invoked the arbitration clause. When notices were issued in terms of clause 9 of the undertaking, it was received by the appellant inter alia contending that they are not parties to the undertaking. Not stopping with that, the appellants filed for permanent injunction and interim injunction restraining the respondent No. 1 from proceeding with the Arbitration against the Appellant before the Arbitration Tribunal at Singapore.

8.   The judge by a common order allowed the applications filed by the respondent No. 1 and thus dismissed that of appellants. Aggrieved the appellant approach High Court of Madras.

9.   The appellant submitted that they are not parties to the Non Disposal Undertaking. They are separate and distinct legal entities. Their knowledge cannot be inferred. They did neither sign nor authorize the undertaking on behalf of the respondent No. 2 alone in his capacity as the President of specific operation. Similarly Mr. Vinay Bhatia signed the undertaking only on behalf of the respondent No. 2 notwithstanding he being Director with one of the appellants viz, the appellant No. 1. Thus the inter se relationship between the aforesaid persons on one hand and the appellants on the other hand would not create a binding agreement. There is no relief that can be claimed against the appellants. There is no material to hold that the appellants were aware of the undertaking. Therefore, in the absence of privity of contract between the appellants and the respondent No. 1 clause 9 of the undertaking cannot be invoked.

10. They further submitted that section 45 of the Arbitration and Conciliation Act 1996 does not have any application to the case on hand. It can be invoked against the non-signatories only on exceptional circumstances, which are not available in the case on hand. The appellants are legal entities o their own.

11.   They made reliance on following decisions:

·       Shriram EPC Limuted V. Rioglass Solar SA (MANU/TN/1399/2018)

·       Hansraj Ayyar Medical India V. Smith Medical International Limited (20(4) SCC Online Bom. 696

·       Modi Entertainment Network and Another V. W.S.G Cricket Pvt Ltd (MANU/SC/0039/2003)

12. The respondent No. 1 submitted that the appellants and respondent No. 2 are parts of the same entity having common central control. Their email ID domain name is same. The appellants have their offices in the same building.  99.99% of the paid up share capital of the appellant No. 1 was held by respondent No. 2. The appellants were the subsidiary of respondent No. 2. All of them represented as the common business venture at the time of the execution of the undertaking. The contractors of the appellant No. 2 were marked with the copies of the relevant E-mail correspondence. The transactions took place with respect to the same project. The project involves the appellants. The undertaking was given to honor the outstanding invoice from appellant No. 2.the purchase orders along with invoices would clearly show that the appellant and respondent No. 2 are the one and the same though operating as different entities.

13. The modules were supplied and delivered to the appellant No. 2 and the purchase orders were raised in relation to the project of the appellant No. 1. The purchase orders themselves clearly states the involvement of the appellants and the respondent No. 2. The appellants were very much aware of the purchase orders, invoices and the resultant due payment. Deliberately these documents were not filed.

14. The judge observed that suits do not disclose any cause of action. Merely because the undertaking was signed at Chennai, no cause of action would arise. The suits are to be dismissed on the principle of forum non convenience. The seat of arbitration is at Singapore. It is only the Singapore law that would apply. The proceedings are governed by ICC Rules.

15. The issue involved in squarely covered by the judgment of Apex Court in ``Chloro Control India Pvt. Ltd. V. Severn Trent Water Purification Inc. & Ors ((2013)1. Supreme Court Cases 641) and thus section 45 of the Arbitration and conciliation Act 1996 would certainly apply. The appellants are in fact parties to the undertaking. Thus, the appeal will have to be dismissed.

16.   That the appellants and respondent No. 2 are part of the same group is not dispute. The transactions were with respect to ``Project’’. The Respondent No. 2 was holding 99.99% aggregate equity capital in the appellant No. 1. The respondent No. 2 did give and undertaking. It emanated due to the non-payment of the obligations arose in pursuant to the invoices raised against the appellant no. 2. It is the appellant no. 1, who was in process of constructing the project. It did engage the appellant no. 2 as the contractor. Therefore, for the convenience sake the group of companies divided the work into themselves to carry out different activities among which the project is one. With respect to the same project, the appellant No. 2 entered into the such contract resulting in purchase orders issued by Respondent No. 2. The Respondent No. 1 did comply with these obligations against the appellants No. 2. Factually there was a breach. Therefore, the undertaking came into being. The relationship between Mr. Pasubathy Gopalan and Mr. Vinay Bhatia on the one side with the appellants and respondent No. 2 on other side is not in dispute.

17. It is interesting to note that the very undertaking itself makes abundantly clear that the appellants and respondent No. 2 were each other’s alter ego. That is the reason why, the obligation was read into that of the others. Not only has the E-mail address, office address mode of service, the obligation and terms are also meant to be applied by inter changing on many aspects. The arbitration clause clearly puts the appellant and respondent No. 2 in one basket with respondent No. 1 the other. On the question of cause of action, judges find that the mere signing of undertaking will not create one and to contend that the undertaking does not bind them. After all a cause of action involves materials facts. A real cause of action has arisen only because of the fact that the first respondent has invoked the arbitration clause. Thus, the High Court is of the opinion that the learned Single Judge was right in holding that no cause of action was available to the appellants to maintain the suit. As a result, the only way open to the appellant is to contest their case before the third respondent.

18. It is to be noted that the execution of the undertaking is not in dispute. The Apex Court in ``Chloro Controls India Private Limited V. Severn Trent Water Purification Inc. and others ((2013) 1 Supreme Court Cases 641) has considered the principle governing ``Group of Companies Doctrine’’ and held that in a given case an arbitration agreement entered into by a company within the group of companies can bind its non-signatory affiliates. It was further held that what is important is the intention of the parties. Thus, the ``group of companies’ doctrine’’ was made applicable and read into section 45 of the Act 26 of 1996. Similarly the circumstances under which a third party can be made to go through the arbitration proceedings is also dealt with. Therefore, the non-signatory third party also would come within the purview of an arbitral agreement.

70.   Normally, arbitration takes place between the persons who have from the outset been parties to both the arbitration agreement as well as the substantive contract undertaking the agreement. But it does occasionally happens that the claim is made against or by someone who is originally named as a party. These may create some difficult situations, but certainly, they are not absolute obstructions to law/the arbitration agreement. Arbitration thus could be possible between a signatory to an arbitration agreement and a third party. Of course heavy onus lies on that party to show that in fact and in law it is claiming `through’ or `under’ the signatory party as contemplated in Section 45 of the 1996 Act. Just to deal with such situations illustratively reference can be made to the following examples in Law and Practice of Commercial Arbitration in England (Second Edn.) by Sir Michael J. Mustill:

``1. The claimant was in reality always a party to the contract, although not aimed in it.

2. The claimant has succeeded by operation of law to the rights of the named party.

3. The claimant has become a part to the contract in substitution for the named party by virtue of a statutory or consensual novation.

4. The original party has assigned to the claimant either the underlying contract, together with the agreement to arbitrate which it incorporates or the benefit of claim which has already come into existence.’’

71. 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 which is not a signatory to the contract containing the arbitration agreement [Russell on Arbitration (Twenty Third Edition)].

72. This evolves the principle that as 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 signatories 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 non-signatory parties.

73. A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The court will examine these exceptions from the party signatory to the arbitration agreement, direct commonality of the subject matter and the agreement between the parties being a composite transaction. The transaction should be of a composite nature where performance of mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreement, for achieving the common object and collectively having bearing on the dispute. Besides all this the court would have to examine whether a composite reference of such parties would serve the end of justice. Once this exercise is completed and the court answers the same in the affirmative, the reference of even non-signatory parties would fall within the exception afore-discussed.

103. Various legal basis may be applied to bind a non-signatory to an arbitration agreement.

103.1 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 discernable intentions of the parties and to a large extent, on good faith principles. They apply to private as well as public legal entities.

103.2 The second theory includes the legal doctrines of agent-principle relations, apparent authority, piercing of veil (also called the ``alter-ego’’), joint venture relations, succession and estopped. They do not rely on the parties’ intention but rather on the force of the applicable law.

104. We may also notice the Canadian case of the city of Prince George V. A.L. Sims & Sons Ltd. [YCA XXIII (1998, 223)] wherein the court took the view that an arbitration agreement is neither inoperative nor incapable of being performed if a multi-party dispute arises and not all parties are bound by the arbitration agreement; the parties bound by the arbitration agreement are to be referred to arbitration and court proceedings may continue with respect to other parties even if it creates a risk of conflicting decisions.

105. we have already discussed that 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 mutual intention of parties to bind both the signatory as well as the non-signatory parties’’

19. The present case is better case compared to one dealt with the Apex Court cited supra. The undertaking does refer to the appellants and put them in the same basket as that of respondent No. 2. Therefore, the appellants cannot contend that the agreement is inoperative on the sole basis that they are not signatories in a literal sense. This is an unsustainable technical plea to avoid participation before the Arbitration Panel.

20. The purchase orders produced by the respondent No. 1 in pursuant to the direction of the court will not help the case of the appellant. The purchase orders have already been mentioned in the undertaking. Invoices have also been defined therein. The appellant No. 2 did not deny the factum of supply. In pursuant to the supply there is also no denial of transfer made.

21. The decision relied upon by the appellants are not cases in point. In INDOWIND ENERGY LTD. V. WESCARE INDIA LTD. & ANOTHER ((2010) 5 SC 306), the Apex Court was dealing with Section 11 of the Act which comes under PART-1. Similarly, in ECONOMIC TRANSPORT ORGANISATION V. CHARAN SPINNING MILLS ((2010) 4 SC 114) the Apex Court was dealing with the Consumer Protection Act. The issue was on the interpretation of contract of subrogation in an insurance policy. So also the facts of the case in DURO FELGUERA V. GANGAVARAM PORT LTD. ((2017) 9 SC 729). Even here the Apex Court was concerned with section 11 of the Act, which comes under part 1. In this connection it is to be noted that the Apex Court in AMEET LACHAND SHAH AND OTHERS V. RISHABH ENTERPRISES AND OTHERS (CIVIL APPEAL NO. 4690 of 2018) decided on 03.05.2018 reported in MANU/SC/0501/2018 was pleased to held that the principles laid down in CHLORO CONTROLS INDIA PRIVATE LIMITED cited supra can also be applied for section 8 of the Act as well. The following are the relevant paragraphs.

22.   What is evident from the facts and the intention of the parties is to facilitate procurements of equipment’s, sale and purchase of equipment’s, installation and leasing out the equipment’s to Dante Energy. The dispute between the parties to various agreements could be resolved only by referring all the four agreements and the parties thereon to arbitration.

23. Parties to the agreements mainly Rishabh and Juwi India:- (i) Equipment and Material Supply Agreement; and (ii) Engineering, Installation and Commissioning Contracts and the parties to Sale and Purchase Agreement between Rishabh and Astonfiled are one and the same as that of parties in the agreement namely Equipment Lease Agreement. All the four agreements are interconnected. This is a case where several parties are involved in a single Commercial project (Solar Plant at Dongri) executed through several agreements/ contracts. In such a case, all the parties can be covered by the arbitration clause in the main agreement i.e. Equipment Lease Agreement.

48. `` The basic principle which must guide judicial decision-making is that arbitration is essentially a voluntary assumption of an obligation by contracting parties to resolve their disputes through a private tribunal. The intent of the parties is expressed in the terms of their agreement. Where commercial entities and persons of business enter into such dealings, they do so with a knowledge of the efficacy of the arbitral process. The commercial undertaking is reflected in the terms of the agreement between the parties. The duty of the court is to impart to that commercial understanding a sense of business efficacy.

24. The respondent No. 1 has already initiated the process by invoking clause 9 of the undertaking before the respondent No. 3. Thus there is nothing wrong in directing the appellants to participate in the proceedings before the Arbitration Tribunal. This is even assuming that the application under 45 is not maintainable. The learned single judge has rightly taken into consideration of the undertaking given and its effect on the appellants.

Conclusions:

The Supreme Court’s decision in Chloro Control has set the trend for binding non-signatories to an arbitration proceeding. In Chloro Control, the Supreme Court held that the legal basis to bind alter ego to an arbitration agreement are implied consent, third party beneficiary, guarantors, assignment or other transfer mechanism of control rights, apparent authority, piercing of corporate veil, agent principle relationship etc. The Delhi High Court had recently in GMR Energy Limited v. Doosan Power Systems India6 followed Chloro Control and directed non-signatories to arbitration.

Although the Madras High Court relied on the Chloro Control, it did not attempt to satisfy the threshold laid down in Chloro Control with the facts of the case. Instead, the Madras emphasized on the surrounding facts and intention behind the NDA and directed the Appellants to arbitration. Overall, the ruling applies the law and is a step forward towards ensuring that the defaulters do not take shelter under the garb of different corporate entities. It also demonstrates an interpretation giving the parties’ commercial understanding a sense of business efficacy.