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

The Supreme Court, on Friday, referred various aspects regarding the application of the doctrine of 'Group of Companies', which is often utilised to bind non-signatories to an Arbitration Agreement, to a larger Bench."There is a clear need for having a relook at the doctrinal ingredients concerning the group of companies doctrine", observed a Bench comprising Chief Justice of India, N.V. Ramana, Justices Surya Kant and A.S. Bopanna.The bench doubted the decision in Chloro Controls India Pvt. Limited v. Seven Trent Water Purification Inc and subsequent decisions following it which applied the "Group f Companies Doctrine".The bench took note of the inconsistencies that exist in terms of the judicial pronouncements of the Apex Court regarding the underlying basis for the Group of Companies Doctrine, particularly in Chloro Controls India Pvt. Limited v. Seven Trent Water Purification Inc., Cheran Properties Ltd. v. Kasturi And Sons Ltd., Mahanagar Telephone Nigam Ltd. v. Canara Bank, 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.The development happened in an application filed under Section 11 of the Arbitration Act by Cox and Kings Ltd(CKL) seeking the appointment of arbitration in an international commercial arbitration in a dispute related to SAP India Private Ltd. The issue was where the German holding company of SAPIPL could be roped in to arbitration(Cox and Kings Limited v. SAP India Private Limited And Anr). Analysis by the Supreme CourtThe 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...

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

Sohini Chowdhury

Tags