- Ryan Joseph, Aswath Srinivasan
Consent Matters! Finding Consent in the Group of Companies Doctrine
[Ryan and Aswath are students at Jindal Global Law School.]
The Supreme Court of India (SCI) in Cox and Kings Limited v. SAP India Private Limited, referred the application of the group of companies doctrine to a larger bench. In this case, Justice Ramana, writing for the majority, questioned the validity of the doctrine on the ground that such a doctrine disregards parties’ consent. This article traces the origins of the group of companies doctrine and analyses its transplantation into India to find that the doctrine was always founded in consent. This article then analyses cases that adjudicated over the doctrine to find that due to a misunderstanding of the doctrine, Indian courts have applied it in a manner where party’s consent has been entirely disregarded, which has caused the doctrine to become synonymous with non-consensual ways of joinder such as “lifting the corporate veil”. This article then concludes that the error (of lack of consent) lies in the historic application of the doctrine and is not an error that is inherent in the doctrine.
What is the Group of Companies Doctrine?
When two parties enter a contract with an arbitration clause, then under certain circumstances and subject to certain conditions, a group company of either party, despite being a non-signatory to the contract, can be made a party to such arbitration proceedings arising out of that contract. In Ameet Lalchand Shah v. Rishabh Enterprises, the SCI read the “claiming through or under” in Section 8 of the Indian Arbitration and Conciliation Act 1996 to allow for the joinder of group companies in arbitration. Prima facie, it appears that such a joinder is in contravention of the principle of party autonomy and does not sit well with the fact that arbitration is a consensual exercise. It appears all that is needed for such a joinder to be permissible is the fact that the party being joined is a part of the group of companies of one of the parties to the parent contract. This apparent lack of consent in allowing such joinders under the group of companies doctrine is the fundamental argument that Justice Ramana has made in his judgement.
He stated that the application of the impugned doctrine in the foregoing manner erases the legal distinction between a parent company and its subsidiary. While substantiating his claim, he delves into the analysis of recent judgements of the SCI. He critiques Chloro Controls v. Severn Trent Water Purification Inc. on the ground that it applied the contract law principle “consent” to the group of companies doctrine, which has its evolution within the realm of arbitration and has never intermingled with contract law principles. By bifurcating the two, he is stating that it is futile to engage in consent analysis in extending arbitration proceedings to non-signatories through the group of companies doctrine because it has nothing to do with contractual principles and is purely an arbitration law phenomenon. It can be inferred from this that Justice Ramana finds the basis of consent only in contract law and not within the group of companies doctrine. However, the court in Chloro Controls undertook a consent analysis in the process of extending the arbitration clause to a non-signatory through the doctrine because consent has always been an inherent trait of the doctrine. The decoupling of the doctrine from consent is a result of myriad judgements that have only focused on the effect of the doctrine of joining non-signatories and ignored its purpose of finding parties who may have not signed the contract but consented to the terms and performed actions in pursuance of those terms.
Consent and Group of Companies Doctrine
Decoupling arbitration from contract law is a sin in law, for the genesis of arbitration is in the consensus ad idem of the parties that is manifested vide an arbitration agreement. Without an agreement, you do not have arbitration. Party autonomy and consent are the grundnorms of arbitration. Therefore, the argument that “consent analysis” is shoehorned into arbitration does not hold water. The fact that consent was always a key element in the group of companies doctrine is evident from the jurisprudential evolution of the doctrine. The most important case to be considered in understanding the roots of the consent element in the group of companies doctrine is the ICC arbitration proceedings of Dow Chemical France v. ISOVER Saint Gobain that birthed this doctrine. The arbitral tribunal held that the fact that the non-signatory party, in this case, was involved in the negotiation stage of the agreement, was bestowed with the responsibility of performing the obligations incurred by the signatory group company and was also responsible for the termination of the agreement, signified the existence of consent of the contracting parties to bind the non-signatory group company to the agreement as well. This exercise was carried out in Dow Chemicals to allow the holding company of Dow Chemicals AG and another group subsidiary, to be parties to the arbitration as these entities had a huge role to play in bringing the contract into existence even though neither formally signed the agreement. Similarly, in other cases, this doctrine may also be used to ensure defendants are not allowed to absolve themselves of liability accruing from a contract by transferring the risk of performance of the contract to a group company that was not a signatory to the contract previously.
In essence, this exercise is a reaction to the complexities that have arisen in transnational disputes due to the ubiquitous use of subsidiaries post the advent of globalisation. In line with the global trends in arbitration, to accommodate for group company structures, the SCI in Cheran Properties v. Kasturi and Sons held that the group of companies doctrine facilitates the mutual intention of the signatories to the arbitration agreement to bind both signatories and non-signatories when such intention was apparent. To extend the arbitration agreement through this doctrine, the court would have to find an intention to bind a non-signatory who has “assumed the obligation to be bound by the actions of the signatory”. As a sequitur, in Reckitt Benckiser v. Reynders Label Printing, it was held that there must be evidence to show that the non-signatory group company was involved in the negotiations or closing of the parent agreement, and without such evidence, even if the non-signatory company and one of the signatory companies were part of a group of companies, the arbitration agreement cannot be extended to the non-signatory.
The foregoing ratios adumbrate that the group of companies doctrine is not a utilitarian exercise that is undertaken to allow the claimants to maximise damages by roping in group companies; rather, it is a legitimate exercise undertaken to identify all the parties that consented to arbitration despite not being signatories to the contract. It was this understanding that ensured that whenever courts do apply the doctrine, they only rope in parties that consented to the arbitration. However, this understanding was eventually muddled in a frenzy of case laws where the doctrine was used as a tool to maximise damages. In fact, J Ramanna in Cox and Kings even admitted that the group of companies doctrine “appears to have been based, more on economics and convenience rather than law.”
With the shift in the usage of the doctrine, courts started making entities parties to the arbitration on extremely flimsy grounds. For instance, in SEI Adhavan Power Private Limited and Others v. Jinneng Clean Energy Technology Limited, the court made non-signatory group companies a party to an arbitration proceeding regarding the breach of an undertaking, based solely on the fact that the non-signatories were part of the same group of companies as the signatory, as both shared common email addresses, had common centralised control, and that the transactions in question pertained to a common project. No consideration was given to whether the parties intended to bind non-signatory group companies to the arbitration clause. Similarly, in RV Solutions Private Limited v. Ajay Kumar Dixit and Others, the court extended the arbitration proceedings to non-signatories on grounds of common interests, parties, and subject matter. No consideration was given to any other doctrinal elements. In fact, in Shapoorji Pallonji and Company Private Limited v. Ratan India Power Limited, the court applied the group of companies doctrine by roping in the theories of piercing the corporate veil and alter ego, which are non-consensual modes of lifting up a corporate structure to find one controlling force and have nothing to do with the principle of the group of companies under arbitration.
It is important to recognise that the group of companies doctrine is not problematic. It neither violates party autonomy, nor does it rest uneasily with the consent-based nature of arbitration. The problem lies with the decoupling of consent from the doctrine. While party’s consent is clearly present in the landmark cases that shaped the application of this doctrine, with time, the focus of the doctrine shifted from identifying parties who may not be signatories to the contract but consented to it, to applying the doctrine to any group company. The larger bench that adjudicates upon this doctrine must open its eyes to this departure from the foundational rationale of the doctrine. It must consider the utility accruing from the correct application of the doctrine and instead of focusing on the problems caused by its fallacious application and doing away with the entire doctrine itself. Rather, reaffirming the importance of engaging in consent analysis before applying the doctrine would go a long way in bolstering India’s growing arbitration framework.
 Manasi Kumar, ‘The ‘Composite Transaction’ and Extension of Arbitration Agreements in India’ (2020) 37(3) Journal of International Arbitration 363.