While on the surface it may seem like the reference made by a bench, of three judges, of the Supreme Court of India, in the matter of Cox and Kings[1] was to determine the applicability of the Group of Companies doctrine, under the Indian Arbitration & Conciliation Act[2], but peel the layers away and we shall find that the whole question, pivots on accountability. The contours...
While on the surface it may seem like the reference made by a bench, of three judges, of the Supreme Court of India, in the matter of Cox and Kings[1] was to determine the applicability of the Group of Companies doctrine, under the Indian Arbitration & Conciliation Act[2], but peel the layers away and we shall find that the whole question, pivots on accountability. The contours of reference, in terms of inquiry by the court, sought clarity on the interpretation of the phrase “claiming through or under” appearing in Sections 8[3], 35[4], and 45[5] of the Act and whether the same can be interpreted as a legislative nod to the Group of Companies Doctrine. Tracing the journey leading to the present reference, it is worth noting that post the Law Commission Report[6], section 8, as it stands today, has scope for wider connotations in terms of who can make an application for a dispute to be referred to arbitration. The judgment conclusively holds the Group of Companies Doctrine to be deeply entrenched in Indian arbitration jurisprudence and in doing so, it places persuasive value on various Swiss judgements that allow for non-signatories to be bound by a contract while acknowledging the fact that English and Singaporean law expressly rejects the same.
The case forming a part of the terms of reference, Chloro Controls[7], allowed for arbitration between a signatory and non-signatory only in cases where the latter piggybacks its claims “through or under a signatory party” whereas cases[8] preceding Chloro Controls place significant emphasis on “formal consent” as “opposed to implied consent” where the word “party” was understood to only mean signatories to the contract without envisaging the existence of any other party essential to the fulfilment of the contract. Chloro Controls recognised certain 'exceptional circumstances' that may bind a non-signatory to arbitration and the most crucial of these factors imagines a “composite transaction”. Unpacking this term divulges a layered transaction involving units, of a larger multinational entity, operating at varying levels of effective control and management. Describing these entities within a single economic unit, Chloro Controls used a rather interesting terminology for sister affiliates calling them “descendants in interest or subsidiaries of the signatory parties”.
Tracing the advent of the Doctrine back to an arbitral award rendered by an ICC tribunal, in 1982[9] as its internationally dependable source of reasoning, the operative part of the judgement decodes implied consent through intention of the parties and surrounding circumstances that may rightfully bind a third party. Similar to analysing legislative intent when interpreting statutes (applying the golden/purposive rule), this judgment lays down a test that aims to ascertain the business intent behind the business arrangement in question. But what if the enforcement of an arbitral award or admission to arbitral proceedings demands a facet of accountability that may only be fulfilled by binding non-signatories to a contract thereby vitiating the doctrine of privity of contract and party consent?
Arbitration, being a creature of the contract, necessitates consent to submit to arbitration as its underpinning. Privity of contract is a tenet of contract law that sits at the very heart of arbitration and helps restrict liability or enforcement, arising out of a contract, against third parties.[10] The Group of Companies Doctrine, in itself, may be colloquially understood to be a common umbrella shared by a gamut of individually varying but interlinked fields of businesses, all part of one compound structure.
The judgement goes on to say that the proportionality between intention and consent must be direct, objective and obvious if not glaring. The way a modern day, myriad, multinational entity is structured may require some or multiple of its subsidiaries to carry out different parts of a contract which is why the judgment allows those parties, not initially bound by the contract in question, to adhere to it because the true nature, proper performance and substantive import of the contract is such that requires those non-signatory parties to carry out a portion or all of the contract for it to be effectively concluded. Instead of pandering to the idea that the Group of Companies Doctrine is the antithesis of party consent and privity of contract, the judgement sets the record straight by establishing the Group of Companies Doctrine as one that actually “gives effect to mutual intent and autonomy”. It definitively recognises the term 'Party', used in the Act, as a causation of intent and circumstances that gives rise to a legal relationship with the contract. Above all, the five judge bench finds congruence in the meaning of the word “parties” mentioned in both section 2 (1) (h) and section 7 of the act to include non-signatory third parties, and most importantly, the very doctrine under question - the Group of Companies doctrine - finds place in the harmonious reading between the two sections.
Courts, around the world, have previously walked the thin line between rigidity and flexibility when it comes to deciphering consent.[11] Even once it has been ascertained what consent really construes, one is still left with balancing the scales between intention of the parties and their consent to the contract.[12] But the approach taken by the Indian Supreme Court solves the paradox, akin to the ship of Theseus, by asserting the commonality of the subject matter, composite nature of the transactions, and the performance of the contract as a cumulative set of factors to be considered by courts and arbitral tribunals in order to identify the intention of the parties.
Aaliya Waziri is an advocate at the High Court of Delhi and the author of “In The Body of a Woman” published by Simon & Schuster India. Views are personal.
[1] 2023 LiveLaw (SC) 1042
[2] 1996
[3] Power to refer parties to arbitration where there is an arbitration agreement. - (1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.
[4] Finality of arbitral awards.—Subject to this Part an arbitral award shall be final and binding on the parties and persons claiming under them respectively
[5] Power of judicial authority to refer parties to arbitration. —Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
[6] in 2014; https://cdnbbsr.s3waas.gov.in/s3ca0daec69b5adc880fb464895726dbdf/uploads/2022/08/2022081615.pdf
[7] Chloro Control India (P) Ltd. v. Severn Trent Water Purification Inc. (2013) 1 SCC 641
[8] Sukanya Holdings (P) Ltd v. Jayesh H Pandya (2003) 5 SCC 531; Indowind Energy Ltd v. Wescare (I) Ltd (2010) 5 SCC 306
[9] Dow Chemical v. Isover Saint Gobain, Interim Award, ICC Case No. 4131, 23 September 1982
[10] Ferrario P, 'The Group of Companies Doctrine in International Commercial Arbitration: Is There Any Reason for This Doctrine to Exist?' (2009) 26 Journal of International Arbitration 647
[11] Jack Graves, “Court Litigation over Arbitration Agreements: Is it Time for a New Default Rule?”, (2012) 23 Am. Rev. Int'l Arb. 1,16
[12] Indulia B and Ridhi, 'The Group of Companies Doctrine in India – Antithetical to Free Consent?' (SCC Blog, 4 May 2023)