Group Of Companies' Doctrine & Impact On Public Share-Holders

The judgment lays down two important principles, firstly it recognizes that the group of companies' doctrine is based on “implied intent” that enables non-signatories to become a “party” the arbitration contract. The secondly, it recognized that in addition to the group of companies' doctrine there are other consensual as well as other non-consensual legal principles which can make a non-signatory a 'party' to the arbitration contract. The Court noted that the Group of Companies' doctrine ensures that a dogmatic emphasis on express consent is eschewed in favor of a modern approach to consent which focuses on the factual analysis, complexity of commercial projects, and thereby increases the relevance of arbitration in multi-party disputes. Such an analysis not only makes the non-signatory not just a 'party' to the arbitration but plausibly a 'party' to commercial contract itself (which houses the arbitration clause); a result which may never have been intended and certainly not as easily achievable in the non-arbitral court proceedings.

In general, commercial disputes which are not the subject matter of arbitration, the limited liability across various group companies are ideally respected by Courts of law except in cases of fraud or the like. Now, with the increasing burden on courts and a general desire to promote arbitration mechanism, these consensual and non-consensual doctrines which are seldom invoked in court litigation, are now increasingly invoked in large commercial arbitration.

Investors of publicly listed companies may in no uncertain terms wake up one day to realize that an arbitration clause in a contract signed by a remote group company or a special purpose vehicle has been used to make the listed company a 'party' to an arbitration proceeding where a substantial award has been passed against the listed company. A negative or positive outcome in large commercial disputes relating to a listed company or its subsidiaries can have material impact on the balance sheet of the listed company. One cannot entirely exclude the materiality of impact that positive arbitration awards of Reliance Infrastructure Ltd and, of its subsidiaries may have had on the share price of Reliance Infrastructure Ltd. in recent time.

Interestingly, Listing Regulations as on date do not require any specific disclosure that an arbitration contract is part of any commercial contract entered into by the listed company or any subsidiary. Materiality attaches to the commercial contract, rather than the existence of an arbitration contract which may or may not be invoked. However, it is quite possible for SEBI to positively mandate such a disclosure, especially if the material event is a commercial contract entered into a group company.

As far as the actual arbitration proceedings is concerned, disclosure of the same may not be possible even though material ongoing litigations are required to be disclosed under SEBI's Listing Regulations. This is because as a deemed 'party' under the Group of Companies' doctrine, the listed company would be bound to maintain confidentiality under Section 42A of the Arbitration and Conciliation Act, 1996. Section 42A introduced in 2019 is armed with a Non-Obstante Clause and overrides any disclosure requirement imposed by SEBI. It declares in no uncertain terms that the arbitrator, the arbitral institution and the parties to the arbitration agreement shall maintain confidentially of all arbitral proceedings except award where its disclosure is necessary for the purpose of implementation and enforcement of award. Unlike other jurisdictions, where public interest exceptions are recognized in some form or the other, Section 42A recognizes none. Given the confidentiality now imposed, public investors are made to play blind till the award is disclosed for the purpose of implementation and enforcement, while 'insiders' who are aware of the possible outcome and the merits of the company's claims can trade early while remaining undetected over the time-consuming pace of arbitration proceedings in India.

In the present scenario, public share-holders invested in listed companies, forming part of large conglomerates, need appropriate disclosure of ongoing arbitrations which may materially impact listed companies, by making appropriate changes in law. Similarly, if required regulatory bodies should also be able to access information relating to arbitration if required for the purpose of any investigation.

There is also a need for curtailing the application of Group of Companies' doctrine and other consensual doctrines from enlarging the scope of arbitration. In so doing the Court may itself have created a possible escape route for large conglomerates to limit the application of this Group of Companies' doctrine and other consensual doctrines by rooting them in 'intent' and 'implied consent'. Large business houses may yet positively require that arbitration clauses in commercial contracts declare that other than the signatories, the arbitration clause does not extend to any non-signatory company and is expressly intended to exclude the application of the Group of Companies' doctrine and other consensual doctrines by which a non-signatory company may be deemed to be a 'party' to the arbitration contract. In doing so the scope of the Court to expand the scope of the arbitration by interpreting the arbitration contract can quite possible be curtailed by expressing a contrary intent in writing, as a court does not re-write the bargain struck between the parties. If it does indeed so happen, it is the non-consensual doctrines that will take the center-stage of arbitral disputes in the coming years.

The authors are Advocates at Bombay High Court. Views are personal.