Explained: Group of Companies Doctrine

In arbitration, an agreement is given high importance. This is because an agreement shows the consent of the parties. There should be a valid agreement with an arbitration clause, then only arbitration can be chosen as a dispute resolution method. The parties should have signed the agreement.

A general concept is that every company is a separate legal entity even if it is a parent company or a subsidiary company. This means that a contract binding on one company cannot make its parent company or subsidiary company binding. It’s different in a case where the doctrine of group of companies is used.

The doctrine of groups of companies says that an arbitration agreement entered by parties can also make its sister or parent company liable without being a signatory to the agreement. The doctrine is used when the intention demonstrates that the parties intended to bind non-signatory affiliated. This is determined by courts by keeping various factors and actions in mind. Both international arbitration tribunal and Indian courts have given various judgments regarding it.

The first case, which talked about the doctrine, was the case of Dow Chemical vs. Isover Saint Gobain. The brief facts of the case are a subsidy of Dow chemical had few agreements, a dispute happened between Subsidy Company and Isover. The Dow chemical filed for arbitration resolution, the respondent argued that Dow Chemical is not a signatory to the agreement and it does not have the right to file for arbitration.

The tribunal’s order was in favor of Dow chemical and then the Doctrine of groups of Companies was used for the first time in an international tribunal. Things considered while using the doctrine were whether the agreement contained an arbitration clause and there should be a common intention of the parties to bind the other party within the arbitration clause. In India, the Supreme Court in the famous case of Chloro Controls vs Severn Trent water purification first used the doctrine. The 3-judge bench of the Supreme Court accepted the doctrine of groups of companies.

In the judgment, it is said that the doctrine has developed in the international context but some countries haven’t accepted the doctrine like Switzerland.  The court said that the corporate structure of the companies clearly demonstrates an intra legal relationship. They have a contractual relationship as they have many contracts.

The court has taken the help of the New York Convection[1] where it is clearly said that if there is any defined legal relationship then it is enough to allow parties to go for arbitration for settlement of the dispute. The court ordered that “Though heavy onus lies on the person seeking such reference, multiple and multi-party agreements between the parties to the arbitration agreement or persons claiming through or under such parties is neither impracticable nor impermissible.”[2]

After this judgment, the court in India has applied this doctrine in various factual scenarios.  Will further discuss few case law to better understand the doctrine and how it’s applied.  

Another case is Cherian Properties vs Kasturi & Sons Ltd and Ors. This judgment is important because it has enunciated the legal principles of the Cholor Controls case. The appellant in this case was of the view that the principle, doctrine of group of companies, which was used in Cholor Controls case will only be applicable in the factual scenario, where there is a joint venture and mother agreement.

They were also an argument that it is only applicable in international arbitration not in domestic arbitration. Justice Chandrachud laid down a list of factors that should be seen while using the doctrine of a group of companies. The factors are

  • Relationship between the parties signatory and non-signatory
  • The commonality of Subject matter
  • Nature of the transaction

One of the recent judgments, which used the doctrine of a group of companies, is Ameet lal Chand vs Rishabh Enterprises. Its case is of 24th July 2017, supreme court. The facts of the case are Rsihabh Enterprises entered into 4 agreement, for the construction of a solar plant at Dongri, Utter Pradesh.  

  1. M/s Juwi India for the supply of equipment and materials on 1st February 2012
  2. M/s Juwi and for engineering, installing and commissioning contract on 1st February 2012
  3. M/s Astonfield for sale and purchase agreement on 5th March 2012. (without arbitration clause )
  4. Dante Energy for the lease of equipment on 14th March 2012.

Rishabh enterprise was not happy with the products of M/s Astinfield, they also alleged that they selling fraud products at over rate price.  They filed a civil suit in Delhi high court for fraud and misrepresentation. They even wanted that all the 4 agreements shall be declared void, and recover the amount.

The appellants wanted to refer the matter to arbitration, under section 8 but the court rejected it, Hence the case went to Supreme Court. The main issue before the court was that weather the non-signatory parties be binding under domestic arbitration. The Chloro Controls case was a foreign seated arbitration.

The Court while deciding the case kept 2 things in mind principles laid down in Chloros Controls Case and the 246th Report of the law Commission[3]. Then the court said all four agreements are inter-connected. After seeing all the clauses of the agreement Equipment Lease agreement is the main agreement and the other 3 agreements are interlinked.

Hence even if anyone agreement didn’t have an arbitration agreement, it can integrally be connected with the main agreement. The court ordered that all the agreements can be taken to the arbitration tribunal. The court further added that where there are several agreements, which are interconnected, then all the parties could be made amenable to the arbitration tribunal.[4]

With an increase in arbitration as a dispute resolution method, this doctrine is going to play a very vital role in cases to come. The best part of it is that the doctrine will be applicable depending upon the facts and actions of non-signatory parties. It will be a factual scenario of the case that will play an important role.

After many judgments of the Supreme Courts and different high courts, it is clear that the judiciary wants this doctrine in use. Many scholars believe that it is against the principle of contract and agreement, where the company is made binding without its consent. Others believe that interpretation of consent can also be done by the actions of the companies. Hence I am also of the belief that if this agreement helps in giving fair resolution to a company it should be allowed.

[1] United Nations Convention on the Recognition and Enforcement of Forign Arbitral Awards (New York, 10th June 1958)

[2] Chloro Controls Ltd vs Severn Trent Water Purification, Civil Appeal No. 7134 of 2020, 28th September 2012.

[3] Government of India, Law Commission of India, report no. 246, Amendment to the Arbitration and Conciliation Act 1996, August, 2014.

[4] Shweta Sahu & Ashish Kabra, Supreme Court’s Dictum on Reference of Non- Signatories to Abritration in Domestic Arbitrations, Nishith Desai Associates, May 11, 2018.

Author: Manav Patel, student at Institute of Law, Nirma University.

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