[Reader’s Submission] A Rendezvous with the “Group of Companies Doctrine”.

INTRODUCTION-  The guiding principle of Arbitration is “l’autonomie de la volonte”, that is arbitration is based on the autonomy of the parties. The Supreme Court of Texas has said that “consent is the cardinal principle of the practise of arbitration”. Arbitration only commences when the parties themselves have resolved to submit themselves to the authority of an arbitrator or an arbitral tribunal, such arbitrator or tribunal drawing its adjudicatory mandate through an arbitration agreement or arbitration clause.

The importance of consent in arbitration proceedings is such that the Supreme Court in Stolt Nielsen SA vs Animal Feeds International Corporation[1] said that arbitration is a matter of consent, not coercion. This principle is the main reason why the position of “non-signatories” to arbitration agreements is difficult to ascertain, and implead them in arbitral proceedings.

It is estimated that more than 40% of international arbitration cases involve more than two parties , this challenges the conventional  notion that arbitration is a “bi-polar dispute”. In India the jurisprudential basis for “extension of non-signatories” has been established through “Chloro Controls vs Severn Trent Water Purification Inc & Ors”[2]. This case to some extent introduced the “ Group of Companies Doctrine” in India however this Doctrine still remains to be fructified in the system of Indian Jurisprudence, although it has been   recognized through various Apex Court and High Court judgements.

This Article shall endeavour to first of all explain the definition of “Alter Ego” and “Group of Companies”. It shall analyse these principles through very recent judgements of the Supreme Court and the Delhi High Court. It shall conclude with a in depth analysis of similar practises in the world of arbitration that can be adopted by our National Courts and Arbitral Tribunals when faced with such situations.

ALTER EGOThe definition of Alter Ego does not have any singular approach, and it can be described through  a plethora of  terms. The concept of Alter Ego is found in many jurisdictions, it is called “Durchgriff” in Germanic Law, levee du voile social in France and ‘piercing/lifting the corporate veil in the English Legal system.[3]

The principle is difficult to define in a straight jacketed manner, however certain underlying principles can be ascertained. When a Court or Tribunal comes to the conclusion that an entity is the ‘alter ego’ of another , the question arises whether the two corporate bodies have a discernible separate corporate identity or not.

It is clear to us however that there has to be a discernible element of fraudulent activity for the concept of alter ego to be invoked in Arbitration or any other legal scenario. In the Indian scenario  this is notalways the case   as the Indian Courts have taken a hugely pro Arbitration stance by extending the purview of the Arbitration agreements to Non-Signatory Parent Companies as well. We must however be conscious of the differentiating factor between them as explained by Gary Born wherein he says –“The alter ego theory is  a rule of Law that is invoked to disregard or nullify the otherwise applicable effects of incorporation or separate legal personality. The outcome is that one entity is deemed non-existent or merely an unincorporated part of another entity”.[4]  I shall thus attempt to elucidate the differentiating factors of this theory with the Group of Companies Doctrine in the subsequent paragraphs of this Article.

GROUP OF COMPANIES – This Doctrine has gained recognition due to the case of Dow Chemicals [5]. The Interim Award pronounced in this case held that “the group of Companies are part of the one and same economic reality “ and  considered factors indicating that-1)companies in the group due to their role in the conclusion, performance and termination of contracts containing the arbitration clause 2)the common intention of the parties to include them as concerned parties to the contract made the arbitration clause binding on them. [6]

Gary Born in his assessment of the Doctrine concisely summarizes the case Law on this Doctrine, and while he does maintain that the Dow Chemical definition of the same would include the parties intentions to bind and be bound, recent Arbitral Awards suggest that a departure from the traditional approach , and holding the Non- Signatory parent Company bound for such reasons like “ security of International Commercial Arbitrations” which would be compromised if the economic reality of the situation is not taken into account[7].

We can draw an inference that within the domain of Arbitration the “Group of Companies”  Doctrine would include a two part assessment of 1)whether the company belongs to a closely knit group commercial group which functions as a single economic entity and 2)whether both the parties intended the parent Company to be bound by the arbitration.

THE INDIAN SAGA –  Indian Courts have often been vexed with the question of” extension to Non- Signatories”, there a number of Case Laws which provide us illumination in this regard, there have been Supreme Court and High Courts . We shall attempt to elucidate this Doctrine through these Judicial Pronouncements of the Supreme Court of India which have elucidated and expanded the scope of this Doctrine .

The Regime of Chloro Controls –

This is perhaps the most Landmark Judicial pronouncement in Indian Jurisprudence pertaining to “extension to non-signatories”, wherein a 3 Judge Bench of the Supreme Court gave recognition to the principles of alter ego and the Group of Companies Doctrine [8].

The question was  whether “non-signatories to an agreement containing the arbitration clause was addressed as per Legal principles and the Court relying on International Scholarly opinion gave its pronouncement.

The Court observed that the “ Group of Doctrines” Doctrine can bind a Non Signatory affiliate Company to a contract entered into by another Company within the group, and held that “if circumstances demonstrate that if the mutual intention of the parties was to bind both signatory as well as non- signatory Companies then the Doctrine will bind them also. ”

It is based on this legal proposition and principles that the Courts in India have extended this Doctrine in various factual scenarios.

RECENT CASE LAW-In this part of the Article we shall explore the approach taken by the Supreme Court in relation to this Doctrine  in 2 recent case Laws . The Legal principles enunciated in the Chloro Controls case Laws have been distinguished and utilized  in these Judgements .

In the case of Cherian Properties vs Kasturi & Sons Ltd and Ors[9] which was delivered by a 3 Judge Bench of the Supreme Court , Justice Chandrachud embarked on a detailed analysis of the Chloro Controls Judgement. In this case the Appellants contended before the Court that the binding precedent of Chloro Controls would only be applicable in the factual scenario of a Joint Venture agreement and a mother agreement containing arbitration clauses. They also contended that the

Chloro Controls cases would be applicable only in International Arbitration, and not in Domestic Arbitration.

Justice Chandrachud explained the scope of the earlier Judgement and has wrote that –“modern business transactions are effected through multiple layers and agreements”[10] and “the circumstances in which they have entered into them may reflect an intention to bind both signatory and non-signatory[11]”. The factors like 1)relationship between signatory and non-signatory, 2)commonality of the subject matter, 3)composite nature of transaction are mentioned in considerations while determining cases on extension to non-signatories.

The Judgement also quotes the works of Gary Born in order to expound the meaning of this Doctrine and to draw parallels between the Group of Companies Doctrine and Alter Ego stating that “ While the alter ego principle is a rule of Law which disregards the effect of incorporation or separate Legal personality, in contrast to the Group of Companies Doctrine is a means of identifying the intentions of the parties and does not disturb the legal personalities.

The second Key Judgement propounded by the Supreme Court is the case of Ameet Lalchand Shah and Ord vs Rishabh Enterprises[12], a Division Bench  dealing the extension of whether an arbitration agreement under one contract can be extended to non-signatories. The Factual scenario is elucidated below.

In this case , there existed three contracts signed in 2012 by Rishabh enterprises and different enterprises and service providers on the other. It arose out of a project related to a Solar project installation in Uttar Pradesh. The first was a “ Equipment and Material Supply Contract as well and Commissioning Contract”, was signed between Rishabh Enterprises and M/S Juwi India. Rishabh Enterprises had also entered into a Sale and Purchase Agreement with Aston Renewables Pvt Ltd for purchase of Photo voltaic products to be leased to Appellant No.3  Dante Energy Pvt Ltd to be installed in the Solar Planet.

There arose disputes between the parties related to the “Sale and Purchase Agreement”, party sought reference to Arbitration on the basis of the “Equipment Lease Agreement” which contained an arbitral clause.

It was submitted by the Respondents that the since all the parties are not signatories to the agreement(herein Asttonfield to the Sale and Purchase Agreement), and hence the Chloro Controls Judgement would not apply herein.

The Court held that even though the Sale and Purchase Agreement  did not contain the Arbitration clause it was intimately connected to the project in question , and therefore by virtue of the Group of Companies Doctrine the arbitral clause in the Equipment Lease Agreement was deemed to have extended to the Sale and Purchase Agreement as well.

CONCLUSION

Arbitration has become the preferred mode of dispute resolution all over the word, more specially in the commercial world. A recent study by the Boston Consulting Group has concluded that more than 80 percent of commercial disputes have inbuild arbitral clauses and a growing number of businessmen prefer to resolve their disputes through arbitration. Governments around the world have recognized this trend, including the Government of India which has amended the Arbitration Act to make in tune with the UNICTRAL model Law on Arbitration, and other model legislations. The Legislature can take a number of steps to ensure that the extension regime in India is at par with the international system and it doesn’t create difficulties for opting for Arbitration to remove the uncertainty of outcomes caused by arbitrary inclusion or non inclusion of Non-Signatory Companies.

The Legislature must provide a minimum standard for application of this Doctrine and must specify by means of amendment to The Arbitration and Conciliation Act, 1996 and codify the principles already enunciated by the Apex Court and the High Courts in relation to the Doctrine  around the country in the Act.

It is also important that the Legislature in a revivalist mode does not negate the cornerstone of Arbitration,  that is consent, because it is consent which gives the Arbitration process  its legitimacy .

In concluding we must ask ourselves at this time whether India should emulate the British and American approach to the extension regime . The answer to that should be in the affirmative as adopting the approach of these countries towards the extension regime will go a long way in making India an Arbitration friendly jurisdiction.

-Advait Ghosh

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[1] 363 U.S. 564 (1960);

[2] (2013) 1SCC641

[3] Jason Varady, International CommercialArbitration-A Transnational Perspective, 201-202.

[4] Born, International Commercial Arbitration(n11) 1435

[5] Dow Chemicals vs Isover Saint Gobain , ICC Interim Award in Case No 4131

[6] Born, International Commercial Arbitration(n24)1447

[8]( 2013) 1 SCC 421

[9] (2019) 4  SCC 421

[10] Ibid para 17

[11] Ibid para 17

[12] Civil Appeal No 4690 of 2018, Supreme Court of India(Civil Appellate Jurisdiction)

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