Group Of Companies' Doctrine Needs To Have Relook – Supreme Court Refers Matter To Larger Bench
A three-judge Bench of CJI NV Ramana, Justice Suryakant, and Justice AS Bopanna analyzed the various ingredients involved in the applicability of the 'Group of Companies' doctrine which is generally applied to bind non-signatories to an arbitration agreement and referred the issues involved to a larger bench.
The Bench observed –
"There is a clear need for having a relook at the doctrinal ingredients concerning the group of companies doctrine."
The Group of Companies doctrine is utilized to bind third parties to an arbitration agreement.
In this case, an application was filed by the Appellant under Section 11 of the Arbitration Act wherein the appointment of an arbitrator was sought in the international commercial arbitration subsequent to a dispute that arose between the Appellant (Cox and Kings Ltd.) and Respondent (SAP India Pvt. Ltd.).
The issue arose when the Appellant arrayed Respondent No. 2 (the holding company of Respondent No.1) in the arbitration proceedings.
The Apex Court found that the judgments rendered in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc., Cheran Properties Ltd. v. Kasturi & Sons Ltd., Mahanagar Telephone Nigam Ltd. v. Canara Bank, Reckitt Benckiser (India) (P) Ltd. v. Reynders Label Printing (India) (P) Ltd.. and Oil and Natural Gas Corporation Ltd. v. M/s Discovery Enterprises Pvt. Ltd. & Anr. were decided by the Apex Court without referring to the ambit of the phrase 'claiming through or under' as occurring under Section 8 of the Arbitration Act and were inconsistent.
Through the Arbitration Petition, the Bench was examining the scope of the 'Group of Companies' doctrine in the context of corporate personality under company law.
The Bench also noted that in its earlier decisions, the Apex Court one hand reduced the threshold of the arbitration being a consensual affair, and on the other, the group of companies doctrine is transposed on requirements under contract law to bind the party to an arbitration.
The Court also held that the ratio of Chloro Control (supra) alludes to the subjective intention of the parties to be bound by the arbitration agreement when the parties have clearly not been a signatory to the agreement. In this context, the Court held that reconciling the two is difficult and requires exposition by the Apex Court.
Further, the Court observed –
"The areas which were left open by this Court in Chloro Control (supra) case has created certain broadbased understanding of this doctrine which may not be suitable and would clearly go against distinct legal identities of companies and party autonomy itself. The aforesaid exposition in the above case clearly indicates an understanding of the doctrine which cannot be sustainable in a jurisdiction which respects party autonomy. There is a clear need for having a relook at the doctrinal ingredients concerning the group of companies doctrine."
The Bench further held that it would be appropriate to refer the matter to a larger Bench to provide clarity on the aspect as 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, which may not be a correct approach.
The Court framed the following questions to be determined by the larger Bench –
i) Whether the phrase 'claiming through or under' in Sections 8 and 11 could be interpreted to include the 'Group of Companies' doctrine?
ii) Whether the 'Group of companies' doctrine as expounded by Chloro Control Case (supra) and subsequent judgments are valid in law?
- Justice Surya Kant's Analysis
Justice Surya Kant chose to author the judgment separately.
The Judge after concurring with the findings of CJI NV Ramana and Justice AS Bopanna noted that one of the objectives in introducing the amended Section 8 of the Arbitration Act was to accord tacit recognition and acceptance of the Group of Companies Doctrine in India.
Justice Surya Kant also observed that the current interpretation of the Doctrine 'does not disturb or affect' the separate corporate form of different entities within a group of companies. Neither does the act of piercing the corporate veil necessarily cause the separate legal entity of the third party to collapse.
The Judge also added, "…in this approach, the separate legal form of the parent company remains undisturbed and the application of veil piercing or alter ego is merely for identification of duplicitous acts by a third party which would then lead to application of the Group of Companies Doctrine to bind them to arbitration."
While holding that where a closely-knit group exists, the Court held that the interpretation of a third party's intent to be bound to the arbitration would be construed from facts and circumstances specific to that group and the manner in which it functions.
"It must be emphasized that the Doctrine is an exception to the general rule of arbitration. However, where the facts of a case indicate that the intention of the parties was to bind the nonsignatory, the Courts, after exercising due care and caution, will be justified in invoking the Doctrine to do substantial and complete justice," the judge opined.
Justice Suryakant also held, "There are additional benefits of having the Group of Companies Doctrine in Indian jurisprudence. These arise from the peculiar circumstances and manner in which Indian business entities transact with each other and establish commercial relations. A large chunk of Indian business houses are composed of family run entities or groups. The individuals running these entities often occupy multiple roles in different companies within the group. Thus, the commonality in terms of key managerial personnel and the preponderance of family members occupying these positions moulds the way these companies conduct business. Entering into commercial transactions involves informal understandings based on familiarity with persons who run the overall group of companies even if not the specific entity with which a contract is formally executed."
Justice Suryakant framed his own set of questions to be referred to the larger Bench –
i) 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?
ii) Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of 'single economic reality?
iii) Whether the Group of Companies Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?
iv) 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?
Click here to read/download the Judgment