Cox And Kings; Supreme Court On Group Of Companies Doctrine

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.