Should MNCs be mindful of the contracts entered by their Group Companies

Should MNCs be mindful of the contracts entered by their Group Companies

The “group of companies doctrine” allows non-signatories to be bound by arbitration agreements under certain conditions. In India, the Arbitration and Conciliation Act, 1996, led to a shift from a restrictive to a more liberal approach. The Supreme Court’s decision in Chloro Controls India (P) Ltd v. Severn Trent Water Purification Inc (2013) marked the application of the group of companies doctrine in India for the first time. The Court ruled that a non-signatory could be subjected to arbitration if there was a clear intention to bind both signatory and non-signatory parties. Subsequent decisions further refined the doctrine. The recent judgment by the Supreme Court of India in Cox and Kings Ltd. v. SAP India Pvt. Ltd. examined the validity and applicability of the group of companies doctrine in the Indian context. This judgment is expected to bring clarity and coherence to Indian arbitration jurisprudence on this issue.

The present case arose out of a reference made by a three-judge bench of the Supreme Court in in Cox and Kings Ltd. v. SAP India Pvt. Ltd (2022) where the bench examined the group of companies doctrine as expounded by three-judge bench in Chloro Controls. The cardinal issues before the constitution bench were: (i) whether the Act allows joinder of a non-signatory as a party to an arbitration agreement; (ii) whether section 7 of the Act allows for determination of an intention to arbitrate on the basis of the conduct of the parties; and (iii) whether the group of companies doctrine is valid and applicable in Indian arbitration law and, if so, under what circumstances and conditions.

The bench also highlighted some subsidiary considerations, such as whether the group of companies doctrine should be read into section 8 of the Act or whether it can exist independent of any statutory provision; whether the doctrine should be invoked on the basis of the principle of “single economic reality”; whether the doctrine should be construed as a means of interpreting implied consent or intent to arbitrate between the parties; and whether the principles of alter ego and/or piercing the corporate veil can alone justify the application of the doctrine even in the absence of implied consent.

The ruling expounded that Act does not prohibit the joinder of a non-signatory as a party to an arbitration agreement, provided that there is a defined legal relationship between the non-signatory and the parties to the arbitration agreement, and that the non-signatory has consented to be bound by the arbitration agreement, either expressly or impliedly. It further clarified that section 7 of the Act does not preclude the determination of an intention to arbitrate on the basis of the conduct of the parties, as long as such conduct is evidenced in writing or by reference to a document containing an arbitration clause. The conduct of the parties must demonstrate a clear and unequivocal intention to submit to arbitration.

The Court established the group of companies doctrine as a valid and applicable theory in Indian arbitration law. The doctrine can be invoked to bind a non-signatory entity within a corporate group to an arbitration agreement, if the following factors are satisfied: (i) a direct relationship to the party which is a signatory to the arbitration agreement; (ii) a direct commonality of the subject-matter and the agreement between the parties being a composite transaction; (iii) the transaction being of a composite nature where performance of the mother agreement may not be feasible without the aid, execution, and performance of supplementary or ancillary agreements for achieving the common object and collectively have a bearing on the dispute; and (iv) a composite reference of such parties will serve the ends of justice.

The Court further held that the joinder of a non-signatory as a party to an arbitration agreement is a matter of contractual interpretation, which should be left to the arbitral tribunal to decide in the first instance, unless the court is satisfied that there is a prima facie case of no consent or intention to arbitrate on the part of the non-signatory. With respect to section 7 of the Act, he reiterated that the same should be construed in a flexible and purposive manner, to give effect to the true intention of the parties and the commercial realities of modern transactions. The conduct of the parties should be assessed objectively and contextually, to determine whether they have manifested an intention to arbitrate.

Additionally, it was also clarified the relationship and distinction between the group of companies doctrine and other doctrines and principles that have been used to bind non-signatories to an arbitration agreement, such as the alter ego doctrine, the piercing the corporate veil doctrine, and the single economic unit principle. The judgement held that the group of companies doctrine stood on its own right and did not depend on or derive from these other doctrines and principles. The judgement also held that the group of companies doctrine was not based on the concept of “persons claiming through or under” a party to the arbitration agreement, as envisaged under sections 8 and 45 of the Act. Thus, the judgment has settled the long-standing issue of binding non-signatories to arbitration agreements and has provided a comprehensive and pragmatic framework for the application of the group of companies doctrine in the Indian context.

However, this also means that the MNCs constituents Companies falling under a Group must tread carefully in their conduct so as not to expose other group companies to be legally bound while even though not being a signatory to the contract.