Group of Companies Doctrine – An Analysis under Indian Law.

Group of Companies Doctrine – An Analysis under Indian Law.

The group of companies doctrine originated in France from the case of Dow Chemical France V. Saint Globain [1]. The correct usage of this doctrine is to include or join non-signatories in an arbitration proceeding. This doctrine states that a non-signatory may be additionally bound via the arbitration agreement if the non-signatory and the signatory belong to the identical organization or the enterprise and all of the parties that are mutual to the arbitration settlement have agreed that the non-signatory will also be bound by means of the regulation of arbitration. what's crucial to notice here is that the events’ aim may be figured out or implied via their behavior as well as by means of the term conduct. Talking about it in a practical context, the value of this doctrine is continually growing because of the complex nature of society. This doctrine seems to be opposite to the very fundamental or essential principles of a criminal persona that is very important in commonplace as well as civil jurisdictions.

This doctrine follows a threefold test which includes the presence of a tight group structure, involvement of the non-signatory in the conclusion of the agreement, and the mutual intention of the parties to bind the non-signatory party to the agreement. Indian courts have quite a mixed reaction to the “group of companies ‘ doctrine and to some extent are quite willing to adopt the “group of companies” doctrine. The Indian law does not put emphasis on signed arbitration agreements because they gave validity to both oral and written contracts. In the Chloro Control India case, the court allowed this doctrine. For the doctrine to be applied in India the court said that there should be enough commercial evidence to show that the non-signatory has been involved during the performance of the court by the signatory party. It is also important to note that there is no hard and fast rule for this doctrine to be applied and the only way this doctrine can be applied is on a case-to-case basis. In India, the Chloro has dealt with the applicability of the doctrine but there are still some problems with solving the disputes relating to the enforcement of the awards.

The Supreme Court adopted this doctrine in  Chloro Controls (I) P. Ltd. v. Severn Trent Water Purification Inc. & Ors[2] which was in reference to section 45 of Arbitration and Conciliation Act 1996 (“Act “). The adoption of this doctrine solved a bigger problem by permitting arbitration of disputes which involved multi-layered agreements, some of which contained arbitration agreements while others did not this was not only a step towards pro arbitration while also served an important role as parties avoided multiple proceedings. The landmark judgment held that a non-signatory forming a part of the same corporate group as a signatory could be made a party to the arbitration where it is clear from circumstances that the “mutually held intent” was to bind the non-signatories to the agreement. Even today the doctrine is not accepted universally. For example, the scenario is a little different for the landmark judgment of Cheran Properties Ltd V. Kasturi & Sons Ltd & Ors [3], the Supreme Court applied the doctrine to enforce an award against a non-signatory even though there was no composite transaction and the non-signatory was therefore never sought to be joined as a party. The complete opposite of the above statement was established in another landmark judgment. Finally, in another case of MTNL V. Canara Bank[4], the Apex Court extended the above doctrine’s application and verified the threefold test so as to constitute a single economic structure, thus making the piercing of the veil more circumvented through the group of companies doctrine.

All these developments by the Apex Court have left High Court apparently in a strenuous situation. Recently in the case of Shahpoorji Paalonji & Co.Pvt Ltd. V. Rattan India Power Ltd, the High Court applied the doctrine with a mix of other principles to join non-signatories to arbitration. In this case, it was applied along with the principle of alter ego and lifting of the corporate veil.

Although the creates efficiency the doctrine has certain pitfalls too.

Firstly, it is poorly understood and not correctly applied. Along with the doctrine, the courts resort to multiple corporate law principles, such as alter ego and lifting of the corporate veil, since these are additional justifications in support of the result indicated by the doctrine. As a result, in some cases, substantive liability under the contracts could arise rather than just a joinder of non-signatories, even if it is a prima facie assessment. Also that it is a truth universally acknowledged that the group of companies doctrine dilutes the contours of consent in arbitration.

Thus according to me, the reliance has been on contract and company law principles will guide the operation of the group of companies doctrine in a holistic manner and will shift the emphasis from the role of non-signatory within a corporate structure to its nature of consent to arbitrate. 

CONCLUSION

In light of the aforesaid, while the academic debate surrounding the applicability of the 'group of companies doctrine is worth pondering over, it should not dilute the significance of the growing acceptance of the doctrine across courts in India. The Supreme Court of India, across a number of judgments, has struck the right note by emphasizing fundamental principles of mutual intention and implied consent. It is also important to distinguish the 'group of companies' doctrine from 'piercing of the corporate veil', a question that is dealt with very often in arbitral proceedings.

It is without a doubt that the notion that an award can be enforced against a non-signatory does raise serious concerns regarding due process. If a non-signatory is included as a party to the arbitration, the appropriate due process would be to give the non-signatory an equal opportunity to be heard and to properly defend its claims. Furthermore, the judgment in Cheran Properties also expands the doctrine beyond its original purpose, which was simply to bind non-signatories to an arbitration agreement. Taking into consideration the precedent set out in Chloro Controls and Cheran Properties creates a dangerous scope for the use of the doctrine to enforce awards against non-parties to the arbitral proceedings. In fact, the threshold of 'common intent' also seems to have lowered in the case of Mahanagar Telephone Nigam Ltd. v. Canara Bank, wherein the Supreme Court while building on Chloro Controls stated that, "there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit or a single economic reality".


 


[1] ICC Award No. 4131, YCA 1984, at 131 et seq. 

[2] (2013) 1 SCC 641.

[3] (2018) 16 SCC 413.

[4]  2019 SCC OnLine SC 995.

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