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  • Harsh Bansal

The Unanswered Question of Oral Referencing of Arbitration Agreements: The Limit of Group of Companies Doctrine

[Harsh is a student at Rajiv Gandhi National University of Law.]


The much-awaited Cox and Kings Limited judgement (Cox) marks a milestone in the Indian arbitration landscape, significantly clarifying the scope of applicability of the group of companies doctrine (GoCD). However, on a separate note, in paragraph 76, the Supreme Court (SC) aligning with Article 7(1), option 1 of UNCITRAL Model Law (ML) and modern arbitration principles, provided judicial acceptance to arbitration agreements concluded orally or tacitly, insofar their content is recorded in writing. Inspired by Ronal Dworkin’s Law’s Empire, the SC considered this as the last chapter of the novel seriatim of GoCD in India. However, the question regarding the application of GoCD over parent companies that do not possess a similar mutual intention as the subsidiary to arbitrate remains unanswered, especially if the arbitration agreement is concluded orally in line with Article 7(1), option 1 of the ML.


Four-Pronged Test


The GoCD binds non-signatory-affiliates of the signatory company if the surrounding circumstances imply a mutual intention to arbitrate. The SC laid down the following four-pronged test to seek joinder by applying the GoCD:


1.      The interconnectedness of the parties;

2.      Participation in negotiation, performance, or termination of contract;

3.      The commonality of the subject matter;

4.      Composite nature of the transactions.


Let us take a hypothetical situation to understand the application and the limits of this doctrine.


Hypothetical Situation


ABC, a stationary supplier, regularly supplies to XYZ, a stationary retailer. ABC relies on a local stationary manufacturer for its stock. When ABC and XYZ started dealing, they chalked out a commercial contract, which referred to a separate agreement containing an arbitration clause. However, as the relationship evolved, the product managers of both companies started dealing via call, orally. Since there arose some issues between ABC and the local manufacturer, PQR, the parent company of ABC, stepped in the shoes of the manufacturer and started manufacturing shoes for ABC to supply to XYZ and other retailers.


PQR was not a signatory to the underlying contract, and when an issue of quality arose between ABC and XYZ, XYZ sought the joinder of PQR since it is the parent company, has been involved in the performance of the contract, the subject matter is common to both the companies, i.e., stationary business, and the transactions are composite given the recurring single transactions of manufacturing and supplying.


While PQR satisfies the criteria laid down by Cox of the existence of the group of companies, the question remains: can it be made a party to the arbitration despite no notice of the underlying contract which referenced the separate arbitration agreement? Further, considering that all the subsequent dealings were concluded orally upon PQR’s involvement makes the joinder more complex.


Analysis


This situation is peculiar but not impractical. India has adopted the ML and chosen option I of Article 7(3), which provides that “an arbitration agreement is in writing if its content is recorded in any form, whether or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means.” Further, Article 7(6) provides that a “reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract.” Therefore, since the SC has approved the existence of such oral/tacit arbitration agreements, such situations can arise in the future before the courts.


In Cox, wherever the apex court referred to the application of GoCD, it considered a situation where the arbitration agreement is contained in the underlying contract and the company sought to be joined has notice of the terms of the contract. For instance, in paragraph 127, the court considers a situation where “the involvement of the non-signatory in the performance of the underlying contract in a manner that suggests that it intended to be bound by the contract containing the arbitration agreement is an important aspect.” Similarly, in paragraph 121, the court explains joinder of a non-signatory in a situation where the company, “by being actively involved in the performance of a contract, may create an appearance that it is a veritable party to the contract containing the arbitration agreement.” In paragraph 119, the apex court referred to the judgement of MTNL v. Canara Bank (MTNL) to substantiate the joinder of non-signatories. However, in MTNL, the parties had notice of the arbitration agreement as telex exchanges and board meeting records duly enclosed the arbitration clause, and most importantly, all the parties in MTNL participated in the arbitration proceedings before the sole arbitrator, therefore showing implied consent to participate in arbitration. Therefore, this case is of no avail in our peculiar situation.


This, though inadvertently, gives an impression that the SC did not make any observation concerning a situation where, owing to the practice and longstanding conduct of the parties, transactions are concluded orally without any explicit reference to the arbitration clause or the underlying contract referencing the arbitration clause. Therefore, a question arises whether a non-signatory who has no notice of the arbitration clause can be joined to the proceedings just because it satisfies the criteria laid down in Cox.


Requirement of Mutual Intention


It is trite law that arbitration is a creature of consent and the consent must be clear and unambiguous. As Ilias Bantekas argues, common law jurisdictions tend to conflate mutual intention to abide by the underlying contract with the mutual intention to abide by the arbitration clause which is “misplaced” and “technically incorrect”. This is also in line with the bedrock principle of separability which ensures that the underlying contract and the arbitration agreement remain separate. Moreover, in both contract and equity law, a crucial concept is that intention cannot be considered valid without complete knowledge of all relevant facts. This is due to the inherent risk of misinformed consent, which is deemed invalid in the eyes of the law. The idea of informed consent combined with the bedrock principle of separability maintains clarity and integrity in contractual relationships.


The principle of knowledge governance, which assumes that there is sufficient communication of relevant information including contractual information such as the existence of contracts and arbitration agreements, cannot solely salvage our peculiar situation since the assumption of attribution of knowledge, at best, can work in inter-firm situations between superior and subordinates, and cannot be automatically applied in intra-firm situations such as ours without any specific instance of such communication and knowledge transfer. Moreover, the application of a purely managerial doctrine, which was primarily developed for corporate governance and trade purposes, on arbitration agreements will be problematic given the consensual nature of arbitration and the requirement of clear and mutual intention.


So, if Cox is the last chapter of the grand novel of GoCD, it is the author’s understanding that PQR cannot be joined to the arbitration agreement simply because there was no mutual intention to participate in the arbitration proceedings. However, if the novel does not end, we might still expect developments on a case-to-case basis.

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