India: Supreme Court's Nod For The 'Group Of Companies' Doctrine – A Judicial Legislation?

Introduction

Justice Chandrachud authored Cox and Kings¹ judgment of the constitution bench of the Supreme Court of India approving the 'Group of Companies' doctrine, poses difficulties. The constitution bench in Cox and Kings whilst approving the 'Group of Companies' doctrine made applicable an arbitration clause in an agreement to parties who were not signatories to either the arbitration or parent agreement.

The 'doctrine' was first approved by the Supreme Court (a three-judge bench) in Choloro Controls² and the legislative intent while approving the 'doctrine' was found in the expression, "if a party to the arbitration agreement or any person claiming through or under him" appearing in sections 8 and 45 of the Arbitration Act, 1996, as amended ("Act"). This legislative intent to support the 'doctrine' and also the use of the 'doctrine' in the arbitration jurisprudence was questioned by a three-judge bench of the Supreme Court in the Cox and Kings, that referred the issue to the constitution bench.

The constitution bench led by the Chief Justice approved the 'doctrine' subject to certain 'terms and conditions', which is discussed below. But interestingly the constitution bench found the legislative intent (and justification) for the 'doctrine' in section 2(1)(h) and 7 of the Act. Under Section 2(h) a "party" is defined to mean a "party to an arbitration agreement" and Section 7(4)(b) permits an arbitration agreement in the form of exchange of letters, and other means of communication. This demonstrates the Court's attempt to 'shoe horn' the doctrine in the Act and find the legislative intent where none exist.

Legislative Intent

The constitution bench ruled that reliance on the expression, "any person claiming through or under him" to justify the 'doctrine' is incorrect, and instead ruled that the 'Group of Companies' doctrine has an independent existence that stems from Section 2(1)(h) and 7 of the Act.

The Court interpreted the expression "parties" under section 2(1)(h) together with section 7 as to include both the "signatory" parties and "non-signatory" parties. The Court also relied on the 'conduct' of the non-signatory parties for their consent to be bound by the arbitration agreement. This position of the Court is against the settled principles of the interpretation of the statues. Justice G.P.Singh in his book, "Principles of Statutory Interpretation" notes that "it is contrary to all rules of construction to read words into an Act unless it is absolutely necessary to do as". Was it 'absolutely necessary' to interpret section 2(1)(h) and 7 of the Act in the way the Court did? Or the Court should have left this to the legislature? Perhaps a larger bench may revisit this question in future. But as of now, the 'doctrine' finds place in Indian arbitral law.

The Doctrine – A Confused Guideline?

The only plausible explanation for the 'doctrine' is the sophisticated commercial structures being used in India, involving joint ventures, and multi-layered companies. But the question is whether the judiciary should try to fill a legislative gap.

The Court, however, has justified the 'doctrine' because of market expectations and to avoid litigating disputes before courts, which are overburdened.

But how will a court determine that a 'non-signatory' is bound by an arbitration agreement? The Court suggests certain criteria for determination such as (a) if a non-signatory is actively involved in the performance of a contract; (b) the conduct of a non-signatory is in harmony with the other members of the group, and such conduct leads the other party to believe that the non-signatory is a veritable party to the contract; and (c) the other party relies on the appearance created by the non-signatory so as to bind it to the arbitration agreement.

The courts should also rely on the cumulative factors suggested by the Supreme Court in Oil and Natural Gas Corporation Ltd. v. Discovery Enterprises Pvt. Ltd. and Ors which includes: (a) mutual intent of the parties; (b) relationship between a non-signatory and signatory to an arbitration agreement; (c) commonality of the subject-matter; (d) composite nature of the transactions; and (e) performance of the contract. How courts will rely (or interpret) these guiding principles will be curiously watched.

Section 9 and Section 8 Applications

On section 9 petitions seeking interim reliefs, the Court rules that once a 'tribunal' determines that a non-signatory is a party to the arbitration agreement, then such non-signatory can seek interim relief from the court. The 'tribunal' used here by the Court should have been a 'court' dealing with a section 9 petition. But basically, a 'non-signatory' to an arbitration agreement can seek interim reliefs if it is able to satisfy the court that the 'doctrine' applies to it.

The Court's ruling on the application of the 'doctrine' at the section 8 or section 11 application stage is a lot to talk about. In a section 8 application, a referral court has to 'prima facie' determine the existence of the arbitration agreement before referring the parties to the arbitration. And section 11 of the Act empowers the Supreme Court and the high courts to appoint an arbitrator (or arbitrators) if the parties fail to do so. In both these applications, the Court rules that a referral court is expected to 'prima facie' determine if a "non-signatory" is a party to the arbitration agreement and then let the arbitral tribunal decide on whether the non-signatory is indeed a party to the arbitration agreement or not. This will be tested in real-life situations. Also, the Court has added one more layer of 'prima facie' determination (in addition to determining the existence of the arbitration agreement) by a referral court – and again, without any legislative backing.

Conclusion

The constitution bench while appreciating the concerns on the 'doctrine' raised by the three-judge bench in the Cox and Kings rules that by fitting the 'doctrine' in the definition of 'parties' under section 2(1)(h) of the Act and the definition of 'agreement' under section 7 of the Act removes all anomalies (and concerns) regarding the 'doctrine'. The Court believes that the 'doctrine' is required because the commercial market is fast-changing and therefore, the law must align with the same. It is a pragmatic and forward-thinking approach. But whether the Court should have waded in to fill the legislative gap is a big question. Secondly, will the 'doctrine' work without appropriate changes to other sections of the Act? Only time will tell.

Footnotes

1. Cox and Kings v SAP India (Arbitration Appeal No. 38 of 2020)

2. Choloro Controls India v Severn Trent

The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client's objectives and specific commercial agreements reached. Please do reach out to us at mail@zba.co.in for any queries.