"Group Of Companies" Doctrine Needs Relook, Says Supreme Court; Refers Issues To Larger Bench

Analysis by the Supreme Court

The Court thought it fit to examine the ambit of doctrine of 'Group of Companies', which is utilised to bind third parties to an arbitration agreement. It noted that under Section 7, the consent of the parties is integral to arbitration and the same ought to be expressed in a written form. The intention of the parties can be construed from written communication, like, letters, telex, telegram and even electronic messages. The doctrine originated in Dow Chemical France, the Dow Chemical Company v. Isover Saint Gobain, (ICC Case No. 4131). Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531 dealt with the same in domestic arbitration, wherein the Apex Court held that under Section 8 of the Arbitration Act, that causes of action cannot be bifurcated in an arbitration, and non­ parties to an arbitration agreement cannot be included in the same arbitration. Next in line was Chloro Controls India Pvt. Limited v. Seven Trent Water Purification Inc. (2013) 1 SCC 641, wherein the Court held that that arbitration is possible between signatory and a third party and the ratio of Sukanya Holdings was restricted to domestic arbitration. However, to proceed with such arbitration, there must be a legal relationship between the non-signatory and the party to the arbitration agreement. Therein, Group of Companies doctrine was accepted as a sufficient basis to establish a legal relationship.

Based on the ratio of  Chloro Controls, 246th Law Commission Report recommended amendment to Section 2(1)(h)(which defines "party") and Section 8 of the Arbitration Act to modify the definition of 'party' to 'a party to an arbitration agreement or any person claiming or through or under such party'.

Subsequently, the legislature in 2015 amended Section 8(1) to include 'any person claiming through or under him', but did not amend Section 2(1)(h).

The scope of the doctrine was expanded further in Cheran Properties Ltd. v. Kasturi And Sons Ltd. (2018) 16 SCC 413, wherein the Court interpreted Section 35 of the Arbitration Act to enforce an award against a non-signatory, who had not participated in the proceedings. In Mahanagar TelephoneNigam Ltd. v. Canara Bank, (2020) 12 SCC 767, it was observed that the group of companies doctrine can be utilized to bind a third party to an arbitration, if a tight corporate group structure constituting a single economic reality existed.

In the instant case, the Court noted that these cases have been decided by this Court, without referring to the ambit of the phrase 'claiming through or under' as occurring under Section 8 of the Arbitration Act. It observed -

"It may be noted that the doctrine, as expounded, requires the joining of non­-signatories as 'parties in their own right'. This joinder is not premised on non­-signatories 'claiming through or under'. Such a joinder has the effect of obliterating the commercial reality, and the benefits of keeping subsidiary companies distinct. Concepts like single economic entity are economic concepts difficult to be enforced as principles of law."

It noted that the group of companies doctrine must be applied with caution and mere fact that a non­-signatory is a member of a group of affiliated companies will not be sufficient to claim extension of the arbitration agreement to the non­-signatory.

Stating that the ratio in Chloro Controls is based on economic convenience rather than correct application of law, the Court referred the aspect of interpretation of 'claiming through or under' as occurring in amended Section 8 of the Arbitration Act qua the doctrine of group of companies to a larger Bench.

"The law laid down in Chloro Control (supra) and the cases following it, appear to have been based, more on economics and convenience rather than law. This may not be a correct approach. The Bench doubts the correctness of the law laid down in Chloro Control (supra) and cases following it".

The issued framed by CJI Ramana and Justice AS Bopanna are as under -

1. Whether phrase 'claiming through or under' in Sections 8 and 11 could be interpreted to include 'Group of Companies' doctrine?
2. Whether the 'Group of companies' doctrine as expounded by Chloro Control Case (supra) and subsequent judgments are valid in law?

Separate Judgment authored by Justices Surya Kant

In a separate, but concurring opinion authored by Justice Surya Kant, he acknowledged the significance of the doctrine, but also the inconsistencies that exist in terms of the judgment of the Apex Court. For instance, he noted -

"…it seems that while the Chloro Controls places a premium on the intent of parties, it also advocates taking an equity based approach to discard intent completely if so required in the interest of justice.

In Mahanagar Telephone Nigam Ltd. the Court had applied the Group of Companies Doctrine where a tight structure with deep financial and organization links existed between a signatory and non­-signatory to the extent where they constituted a "single economic unit". Such an approach has the tendency to overlook the principle of separate legal entity and seems to dispense almost entirely with the intent and/or consent of parties."

Justice Kant further observed that the decision of the Apex Court in Reckitt Benckiser (India) (P) Ltd. v. Reynders Label Printing (India) (P) Ltd. (2019) 7 SCC 62 and Oil and Natural Gas Corporation Ltd. v. M/s Discovery Enterprises Pvt. Ltd. & Anr. Civil Appeal No. 2042 of 2022, poses questions regarding the standard of proof to be applied to the doctrine.

Considering the inconsistencies, he opined that the same need to be resolved, but without uprooting the doctrine from the sphere of arbitration.

He framed his own set of issues to be referred to the larger bench 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?

Case Name: Cox and Kings Limited v. SAP India Private Limited And Anr.

Citation: 2022 LiveLaw (SC) 455

Case No. and Date: Arbitration Petition (Civil) No. 38 of 2020 | 6 May 2022

Corum: Chief Justice of India, N.V. Ramana; Justices Surya Kant and A.S. Bopanna

Authored By: CJI, N.V. Ramana and Justices Surya Kant

Apperances : Senior Advocate Kailsash Vasudev for appellant; Senior Advocates Ritin Rai and Neeraj Kishan Kaul for respondent.

Head Notes

Arbitration and Conciliation Act 1996 - Group of Companies Doctrine requires relook -There is a clear need for having a re­look at the doctrinal ingredients concerning the group of companies doctrine -3 judge bench dobuts the decision in Chloro Controls India Pvt. Limited v. Seven Trent Water Purification Inc. (2013) 1 SCC 641 - Referred to larger bench

Arbitration and Conciliation Act 1996 - Whether phrase 'claiming through or under' in Sections 8 and 11 could be interpreted to include 'Group of Companies' doctrine -Whether the 'Group of companies' doctrine as expounded by Chloro Control Case (supra) and subsequent judgments are valid in law - Issues referred to larger bench (by CJI NV Ramana & Justice Bopanna)

Arbitration and Conciliation Act 1996- 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-Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of 'single economic reality'?- Whether the Group of Companies Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?- 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?(Issues referred by Justice Kant)

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