Group of Companies Doctrine: Making a non-signatory party to Arbitration Proceedings

Vikas Dutta

Prelude: On July 23, 2018, Division Bench of Hon’ble High Court of Madras in SEI Adhavan Power Private Limited matter[i], (SEI Judgment) while appreciating complex factual matrix of the case held that Non-signatory parties to Agreement should also join Arbitration Proceedings before Singapore International Arbitration Centre.

While holding this, Madras High Court took further the concept of business efficacy as laid down in Chloro Controls Judgement[ii] in which Apex Court held that the duty of the Court is to impart to commercial understanding a sense of business efficacy.

This article is an attempt to analyse SEI Judgment, along with other Indian and International Judgments on the captioned Doctrine.  In the end, this Article will conclude how Indian Courts are making every efforts to bring commercial law and commercial prudence as interchangeable terms.

This Article proudly concludes that Indian Courts are more innovative, bold and faster than any other jurisdiction in accepting and applying International concepts more specifically Group of Companies Doctrine (Doctrine).

Historical Significance

First significant recognition of the Doctrine was by International Court of Justice while proceeding with the Barcelona Traction case[iii] between Belgium and Spain.  This recognition is evident from the para 56 of Judgment dated February 05, 1970 in following words:

“56.  ….Here, then, as elsewhere, the law, confronted with economic realities, has had to provide protective measures and remedies in the interests of those within the corporate entity as well as of those outside who have dealings with it: the law has recognized that the independent existence of the legal entity cannot be treated as an absolute. It is in this context that the process of “lifting the corporate veil” or “disregarding the legal entity” has been found justified and equitable in certain circumstances or for certain purposes. The wealth of practice already accumulated on the subject in municipal law indicates that the veil is lifted, for instance, to prevent the misuse of the privileges of legal personality, as in certain cases of fraud or malfeasance, to protect third persons such as a creditor or purchaser, or to prevent the evasion of legal requirements or of obligations.”

Another leading case law concerning this Doctrine is Dow Chemical Case[iv]. In this case, French Court of Appeal refused to interfere with Arbitrator’s decision that non-signatory companies in a group could rely on an arbitration clause in contracts between Isover St Gobain and two Dow Chemical group companies. Court refused to change the finding of the tribunal that a group of companies constituted the same economic reality of which the tribunal should take account when it ruled on its jurisdiction.

While these are good examples but the truth remains that internationally there was a constant reluctance world over in recognising and relying upon this concept despite earlier mentioned path-breaking judgments. Such reluctance is  evident from the following observation of United Kingdom Supreme Court in Dallah Real Estate and Tourism Holding Company case[v] passed in 2010 (after 40 years of ICJ’s observation in The Barcelona Traction case):

“One of the most controversial issues in international commercial arbitration is the effect of arbitration agreements on non-signatories”.

Within this background, let us evaluate SEI judgment.

Brief Factual Matrix concerning the Case:

Seminal facts concerning SEI Judgment relating to four commercial entities.   First Appellate M/s SEI Adhvan Power Private Limited (A1) is an Indian Company involving itself in the process of constructing a 50 MW AC power plant in Tamil Nadu. M/s Sun Edison Energy Holding (Singapore) Private Limited (R2) was holding 99.99% of aggregate equity capital in A1.

A1 engaged Appellate No. 2 (A2) as the contractor to provide certain construction-related services qua the project. A2 in turn entered into a subcontract with R1 for such supply.  R2 issued purchase order qua such sub-contract.  Few invoices raised by R1 remained unpaid by R2/A2.  There are other factors like the use of shared office, emails, agent relationship between A1, A2 and R2.  Hence, all three are related parties and alter ego to each other.

The bone of contention is the execution of Non-Disposal undertaking dated 17.03.2016 (Agreement) executed by R2 in favour of R1.  It was agreed that this Agreement should be co-terminus on the satisfaction of payment obligation of A2.  Also, R2 shall hold and retain at least 24% of the equity in the A1 Company. This Agreement contains three member Arbitration Clause governed by the rule of International Chamber of Commerce and seat of Arbitration is Singapore International Arbitration Centre (R3).

Contrary to the understanding (supra), the shares were sold by the R2 and resultant invocation of Arbitration by R1.  After issuance of Arbitration notice, A1 & A2 (Appellants) filed an anti-suit injunction against R1. To counter, R1 filed application thereby seeking plaint rejection application in this suit. R1’s application got allowed, and Interim applications of Appellants got dismissed by the Single Judge. Accordingly, Appellants filed original side appeal before the Division Bench.

Issue

Whether non-signatories to the Agreement can be added as parties to Arbitration proceedings?

Held

Yes.  The undertaking stated in the Agreement does refer to the Appellants and put them in the same basket as that of R2. Therefore, the Appellants cannot contend that the agreement is inoperative on the sole basis that they are not signatories in a literal sense. Division Bench held further that this is an unsustainable technical plea to avoid participation before the R3.

Reasons

Division Bench in SEI Judgment, primarily relied upon the ratio of Choro Controls (supra) and commentary of Russell on Arbitration, in keeping reliance on the Doctrine.

Division Bench observed that though the scope of an arbitration agreement is limited to the parties who entered into it but under of Doctrine which is developed internationally, whereby an arbitration agreement entered into by a company, is one within a group of companies, can bind its non-signatory affiliates or sister or parent concern, provided such view can be taken if the circumstances demonstrate that mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates.

Court also observed that this Doctrine is one of legal basis to bind a non-signatory to an arbitration agreement, other being implied consent, agent-principal relations.

Other Indian Case Law on the Doctrine

Supreme Court

In Cheran Properties Limited case[vi], three judges bench of the Supreme Court was dealing with an appeal under Section 423 of Companies Act, 2013 against Judgment passed by NCLAT.  One of the argument by the Respondent, in this case, was the by virtue of principle set under Chloro Controls Judgment arbitration award binds a group company also.  In this context, Apex Court observed various definition and passages of the Doctrine and while doing so noted observation of Garry B Born;

“The group of companies doctrine is akin to principles of agency or implied consent, whereby the corporate affiliations among distinct legal entities provide the foundation for concluding that they were intended to be parties to an agreement, notwithstanding their formal status as non-signatories.”

Delhi High Court

Though not discussed or relied in SEI judgment but in order to have a holistic understanding of the doctrine and/or circumstances where non-signatory can be part of an arbitration proceeding, three judgments of Delhi High Court deserves special mentioning here:

1. Dorling Kindersley (India) Pvt. Ltd. vs Sanguine Technical Publishers & Ors. – [“Dorling Case”][vii]
2. VLS Finance Ltd. vs BMS IT Institute Private Limited [“VLS Finance Case”][viii]
3. Goyal MC Gases Pvt. Ltd. vs Air Liquide Destchland GmBH & Ors. [“Goyal MC Case”][ix]

To avoid prolixity and to keep objectivity, though factually set out in a different background, all these three cases are about Section 9 Petitions filed under The Arbitration and Conciliation Act, 1996.

Another common element in these three cases is the fact that respective Respondents took the plea that they are not signatories to the contract containing respective arbitration clauses. Therefore, the same is not binging.  In all these three cases, various single benches of Delhi High Court passed orders against non-signatories and directed them to join Arbitration.

In Dorling Case,  ratio set out by Delhi High Court is that Section 9 can be invoked even against a third party who is not a party to an arbitration agreement or arbitration proceedings, if he were to be a person claiming under the party to the Arbitration agreement and likely to be affected by the interim measure.

In VLS Finance Case, ratio provides that it cannot be said that Section 9 puts any impediment on the jurisdiction of the Court in passing interim measures or orders which may affect a third party who is deriving title from the party to the agreement, unlike a third party having an independent right.  Therefore, it is clear that while considering a petition under Section 9 of the Act, the Court is within its right to pass an order against the third party.

Lastly, in Goyal MC case, Delhi High Court observed that where there is commonality of interest between parties to arbitration agreement and some others, who are actively engaged in frustrating the legal rights of a party to the arbitration agreement, the interim measures under section 9 of the Act may cover even non-parties to the agreement with a view to ensuring complete justice between the parties.

Conclusion

As evident from above discussion, the importance of the SEI Adhavan Power Private Limited judgment is due to the reason that this is the First Judgment of any division bench dealing with such an important issue having substantial effects on the way Complex Commercial Arbitrations are conducted in India.

The Choro Controls Judgment & Cheran Properties Limited Judgment though passed by Supreme Court are not exclusively on this very issue.  Similarly, three mentioned Delhi High Court Judgments (supra) are not evaluating this doctrine.

However, for the first time, Division Bench of any High Court is comprehensively dealing with this issue.  Most encouraging part of this discussion is that the law is catching up fast with a situation where complex corporate structures are used to enter into a commercial understanding then there is an attempt to defeat the administration of justice on technicalities.

Therefore, this judgment is another step in right directions to ensure that India improves further on ease of doing business and more importantly the message that is getting conveyed is that business understanding should not get defeated or diluted behind the complex web of structures and technicalities.

The Author is a Corporate Commercial Litigator and is a Litigation Partner in Kapil Sapra & Associates (“KSA”).   KSA is a full service corporate commercial law firm with offices in New Delhi & Bangalore.  KSA focuses its practice in all major areas of corporate and commercial laws.

[i] SEI Adhavan Power Private Limited and Ors. Vs. Jinneng Clean Energy Technology Limited and Ors.

[ii] Chloro Controls (I) P. Ltd. vs. Severn Trent Water Purification Inc. and Ors. (28.09.2012 – SC) : MANU/SC/0803/2012

[iii] Barcelona Traction, Light and Power Company, Limited, arrêt, C.I.J. Recueil 1970, p. 3.  Alternatively please refer the web link at: http://www.icj-cij.org/files/case-related/50/050-19700205-JUD-01-00-EN.pdf

[iv] 1984 Rev Arb 98

[v]Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan: MANU/UKSC/0075/2010

[vi] Cheran Properties Limited vs. Kasturi and Sons Limited and Ors.-MANU/SC/0427/2018

[vii] Dorling Kindersley (India) Pvt. Ltd. vs. Sanguine Technical Publishers & Ors – 2013 SCC OnLine Del 2319

[viii] VLS Finance Ltd. vs. BMS IT Institute Private Limited – 2015 SCC OnLine Del 9292 – [“VLS Finance Case”]

[ix] Goyal MC Gases Pvt. Ltd. vs. Air Liquide Destchland GmBH & Ors. – MANU/DE/0098/2005