Changing times, changing contours: The test for arbitration in India

India is certainly becoming a strong player in the field of arbitration. With world class facilities being developed and some of the finest counsel and arbitrators, it is unequivocally a force to be reckoned with. In its quest for arbitration, an extremely interesting and impactful matter is currently the centre piece of this dynamic field.

The forthcoming decision in the case of Cox & Kings Ltd v. SAP India (P) Ltd will be significant in deciding the future course of commercial arbitration jurisprudence in India. The Supreme Court is adjudicating upon the Group of Companies doctrine in arbitration and dovetailing its contradictory relationship with the somewhat settled concepts of consent and privity.

According to the general principle of privity of contract, only parties to an arbitration agreement are bound by its terms and conditions. However, the Group of Companies doctrine proposes that even non-signatories to an arbitration agreement may be bound if there seems to be a “mutual intent” of parties to bind such non-signatories.

The doctrine was propounded by the International Chamber of Commerce in the case of Dow Chemical France, the Dow Chemical Company v. Isover Saint Gobain. The ICC observed that Dow Chemicals operated as a “single economic unit”. Interestingly, in the case of Cox & Kings, the concept of category of single economic unit has been questioned.

The questions referred by the Court to a larger bench are:

A. 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?

B. Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?

C. Whether the Group of Companies Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?

D. 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?

Curiously, it is not the first time the apex court is adjudicating on this issue. In the case of Chloro Controls India (P) Ltd v. Severn Trent Water Purification Inc, the Court introduced a three-fold test called the “mutual intention test” to mark those exceptional cases where the Group of Companies doctrine shall apply. To gather mutual intent, such non-signatory party must have a “direct relationship” with the signatory of the agreement, “direct commonality” of subject matter, and “composite nature” of transaction where the performance of the arbitration agreement is contingent upon some other agreement where the non-signatory party is involved. The Court, placing reliance on Section 45 of the Arbitration and Conciliation Act, 1996, held that the words “any person claiming through or under” envisaged the application of the Group of Companies doctrine and the interference of non-signatory parties.

In line with the judicial responses to the doctrine, the Law Commission, in its 246^th report of 2014, recommended a consequent amendment in Section 8 of the Act, which deals with the powers of the judicial authority to refer parties to arbitration where there is an arbitration agreement. In quick succession, the legislature amended the law to incorporate the suggestion made by the Commission in 2016. Through a catena of cases including Ameet Lalchand v. Rishabh Enterprise, Cheran Properties v. Kasturi and Sons Ltd, MTNL v. Canara Bank and ONGC Ltd v. Discovery Enterprises (P) Ltd, the Court has reiterated the significance of Group of Companies doctrine and applied it to the Indian context.

However, the Court is again examining the application of the doctrine in the Cox & Kings case. Though the Court has referred the case to a larger bench, which has started hearing the arguments, the 2:1 judgment raised critical and pertinent questions regarding the applicability of the doctrine. Two of the judges were concerned that its application would negate the benefit accrued due to subsidiary companies. Further, the Court found material contradictions in the assertion that the subjective intention of parties are to be bound by an arbitration agreement when the parties have clearly not been signatories to the agreement. Therefore, the two judges were of the opinion that the doctrine seems more about economic convenience than legal erudition. They finally go on to claim that even the Arbitration Amendment Act of 2016 cannot be interpreted to have legislatively introduced the Group of Companies doctrine. It appears to be a case where the legislative intent cannot be read in abstraction divorced from the events that had occurred only a few years ago.

In contrast, Justice Surya Kant, in a concurring but separate opinion, acknowledged that the doctrine is an integral part of arbitration jurisprudence in India. He rejected the averment made by his brother judges that the Group of Companies doctrine is based on the idea of “single economic entity,” and opined instead that it is about implied consent. According to him, the doctrine unveils the form that the corporate dons in order to avoid responsibility and be subjected to arbitration. However, he did opine that the doctrine needs to be better fleshed out and delineated by a larger bench.

The position of the Group of Companies doctrine is to be decided by the five-judge bench headed by the Chief Justice of India. The decision would mark a milestone in the journey of arbitration law. One can only hope that in a globalized setup where multi-party disputes involving transnational corporations are increasing, party autonomy and intent would be safeguarded successfully. It will, in any event, be an important moment in India’s tryst with arbitration. Many countries, including those in the Commonwealth, will certainly be looking at the contours of the decision that the Indian Supreme Court makes.

Vishavjeet Chaudhary is a Delhi-based Advocate. He is also a door tenant at a Barristers’ set in London.