- Vighnesh Kumar Sharma[1]
Introduction
Consent has been the cornerstone of arbitral proceedings, and any deviation from the practiced norm is likely to create a challenge in the proceedings as well as the dispute resolution process. As Arbitral proceedings are consensual, the parties to the dispute provide their consent to resolve the matter through arbitration rather than taking it to the courts. The core principle of mutual consensus is said to be undermined by one of the operating doctrines in the field of Arbitration law that is the ‘Group of Companies Doctrine’, which states that a non-signatory may be bound by the agreement if it is a member of the same group of companies, as that of the signatory and all the parties to the agreement must mutually agree to make the non-signatory a party to the agreement. The basis of arbitration proceedings is that there shall be consensus-ad-idem between the parties, and the doctrine has been criticized on this issue, as it blurs the line between consenting and non-consenting parties, thus changing the method in which arbitration is conducted.
However, the Apex Court has accepted this doctrine in the Cox and King Judgement with open arms, as it held that the doctrine is a means of recognizing the common intention of parties to bind a non-signatory by analysing the corporate affiliation. The court emphasized the fact that in some situations the signatory does not perform the contractual obligations, and following the strict rule of making signatories liable would lead to the exclusion of non-signatories, which would be unjust to the signatory as well as the party that suffered. The Hon’ble court concluded that the definition of parties under Arbitration Act includes both signatory as well as non-signatories. The requirement of written arbitration agreement has been excluded and the actions of the non-signatory will be analysed to apply the doctrine.
Party autonomy or party independence is required for a party to provide its consent to submit the dispute through arbitration. Phrase claiming through or under has neither been defined under the act nor been used. A person claiming through or under a party to agreement is merely standing at the spot of the original party.
Evolution of Group of Companies Doctrine
The doctrine was first used in France in the case of Dow Chemicals vs. Isover Saint Gobian, in this case, the non-signatories did not raise an issue of being held accountable under the arbitration agreement. Hence, the group of companies’ doctrine was formed. In India, the Apex court in Chloro Controls Case recognized that the non-signatory can be made party to the arbitration clause if it can be recognized from the circumstances that the intent of the parties was to make the non-signatory a party to the agreement. The court summarized that the underlying basis for application of this doctrine rests on maintaining corporate separateness while determining the intention of parties to bind themselves. Before this, the judiciary followed a strict approach by ensuring that any claim that falls beyond the scope of the agreement and in which there are parties, who are not signatories to the agreement cannot be referred to arbitration.
The Apex Court in Chloro Controls, recognized the need to make the party subject to arbitration even without prior consent. This was based on different factors to examine the situations in composite transactions where multi-party agreements are involved; the nature and obligation of the task performed by the non-signatory needs to be considered. The courts can follow this approach if they feel that, ends of justice will be served, or if the courts by examining came to the conclusion that the work couldn’t have been completed without the aid and execution of the non-signatory party.
Striking the Balance
By acknowledging and applying this doctrine in arbitration cases, the defence of the corporate veil has been pulled off. Economic entities will be held liable for their actions even if they were not a part of the arbitration agreement between the parties. The doctrine ensures that a party that has played a role in the contract should not go unrecognized in case a dispute arises. The doctrine interprets the action and role played by the parties in order to make them liable. The courts apply this doctrine to check the interconnectedness of the work done between the parties, this helps in avoiding parallel proceedings in court. Doctrine plays an important role in international transactions, or cross-border contracts, as it helps in identifying the responsibility and due diligence between the parties.
Critics have argued that by applying this doctrine, the intent behind the contract and arbitration agreement between the parties gets destroyed, as they explicitly choose to keep the third parties out of the agreement. However, this doctrine is being applied to widen the scope of arbitration agreements, by prioritizing the substantive commercial reality over formal structure of agreements, by not following the strict approach of excluding parties who are not a signatory. The doctrine recognizes the realistic approach of the corporate world, where the subsidiaries of a company can play an active role in the transaction as a whole.
Doctrine in Foreign Jurisdictions
In France, the courts have followed a liberal approach in applying this doctrine. The doctrine can be applied under certain conditions. Firstly, if the third party has played an active involvement in the transactions. Secondly, if the parties to the arbitration agreement have a mutual consent/interest in bringing in the third party in proceedings. An Arbitration agreement can be extended to a non-signatory if it can be established that all parties had common intention to be bound by the agreement.
The US and UK are skeptical about the use of the doctrine, by following the age-old privity rule, believing that the old contract theory ensures consent between the parties. The English courts have laid down the rule that the non-signatories can be a party if they are claiming under the original party. As the privity principle is followed strictly, the arbitration agreement is extended to non parties on the basis of agency, assignment, novation etc. The US courts have recognized this doctrine. The US courts have also used non-consensual doctrines to extend arbitration agreement to a non-signatory, for example the courts have pierced corporate veil where the parent company exercised control over the subsidiary company.
In India, the Supreme Court has held that piercing of the corporate veil or doctrine of alter ego cannot be the foundation for applying Group of Company Doctrine. Piercing of corporate veil is invoked on basis of two theories- Instrumentality theory which state that when a company is merely an instrument when the director or owner uses its corporate personality for benefit of owner and the theory of Alter ego which states that there exists a unity of interest between the company and its owner, and thus the separate legal existence feature of the company has ceased. The distinction between the two entities will be blurred and the company acts as a puppet to carry out illegal activities.
Conclusion
The acceptance of the doctrine marks a change from a strict rule-based approach to a more flexible and analytical approach. While the doctrine challenges the core principles of arbitral proceedings, it ensures that corporate entities cannot avoid the liabilities by exploiting their corporate structure in multiparty agreements/transactions.
The adoption of the doctrine highlights the recognition of interconnected economic units in the society by the Indian Judiciary. However, there is still some grey area, regarding its applicability where the seat of the arbitral proceedings is India, and the law governing the proceeding is foreign law. Such clarity will be helpful in ensuring consistency and uniformity in cross-border disputes.
The judgment has provided clarity on the validity and the requirements for the application of the doctrine. Parties can now be aware of the manner in which they want to proceed with the proceedings. Though the doctrine diverts from the traditional view of arbitration proceedings, it ensures that no party can escape the liability by being non-signatory. By emphasizing substantive intent, it underscores the intent of the judiciary to adapt frameworks according to the complexities of modern commerce.
[1] Vighnesh Kumar Sharma is a third-year student at National Law University Odisha. He is interested in dispute resolution and is also actively exploring other others of law.
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