“Group of Companies” Doctrine & Post-Negotiations in the Context of an Arbitration Agreement

[Achyutha GM and Pranika Correa are students at the Gujarat National Law University]

The Supreme Court’s decision in Reckitt Benckiser (India) Pvt. Ltd. v. Reynders Label Printing India Private Limited on 1 July 2019 is a bittersweet journey for the doctrine of “group of companies”. The Court’s refusal to implead the foreign subsidiary saw the doctrine to its true spirit. However, a blanket ban on the usage of post-contractual negotiations to represent intention to be bound by an arbitration agreement was a dangerous interpretative rule to reaffirm. This post seeks to analyse the decision with the essentials of the doctrine and makes a case for a more liberal approach while interpreting contracts and arbitration agreements.

In a petition filed before the Supreme Court of India for appointment of a sole arbitrator, Reckitt Benckiser (India) Private Limited, the Applicant sought to implead Reynders Ttiketten NV, Respondent No. 2, the Belgian subsidiary of Reynders Label Printing India Pvt. Ltd. (hereinafter “Reynders India”), Respondent No. 1 into the arbitration proceedings.

A contract was executed between Applicant and Reynders India on 1 May 2014 for printing labels and providing packaging material. With respect to this, negotiations regarding the terms of the contract took place between one Mr. Frederik Reynders, alleged promoter of Reynders Ttiketten NV, and Reckitt Benckiser. In terms of clause 9, according to Reckitt Benckiser, Reynders Ttiketten NV had assumed liability of indemnifying Reckitt Benckiser against any claims, losses, damages and expenses howsoever incurred or suffered by them. However, Reynders Ttiketten NV was not a signatory to clause 13 – the arbitration agreement which provided for arbitration under the laws of India in Delhi. Hence, Reckitt Benckiser sought to implead Reynders Ttiketten NV by relying on the doctrine of “group of companies”.

Reckitt Benckiser contended that Mr. Frederik Reynders was acting on behalf of Reynders Ttiketten NV (parent company of Reynders India) and as a result of his involvement in the negotiation process, they had assented to arbitrate. They further contended that Reynders Ttiketten NV was the disclosed principal on whose behalf the Reynders was executing the contract and that they were aware of the indemnity being extended to Reckitt Benckiser.

Per Contra, Reynders Ttiketten NV contended that the two companies were distinct legal entities, operating independently in different offices sharing a common parent entity, viz., Reynesco NV. Mr. Reyner’s involvement in the alleged promotion was vehemently denied by Reynders Ttiketten NV owing to his lack of association with it. Further, he was an employee of Reynders India, thus acting in that capacity during negotiations. Hence, the main issue of contention to be decided by the Court was whether the conduct of the parties indicated an intention to bind Reynders Ttiketten NV to the arbitration agreement.

The doctrine states that a company entering into an arbitration agreement within a group of companies may bind its non-signatory affiliates based on certain circumstances and their involvement in the contractual relationship. This legal proposition was recognised in India by the Supreme Court in Chloro Controls. Further, it was recently concretized by the court in MTNL v. Canara Bank when the doctrine was applied to implead a non-signatory to an arbitration agreement. The doctrine, in addition to existing theories of contract, agency, corporate veil piercing, etc., assists courts in binding non-signatories to arbitration agreements by analysing their relationship within its corporate structure. When the circumstances are established, the group of companies constitute the same economic reality despite their distinct juridical identities, warranting the impleadment of the non-signatory. Hence, where a commonality of intention to bind both signatories and non-signatories is extracted, the doctrine finds its application.

The court found mettle in Reynders Ttiketten NV’s contention and concurred that Reckitt Benckiser had failed to discharge its burden to prove Reynders Ttiketten NV’s consent to arbitrate, and thereby for the limited purpose of clause 9, could not be a part of the arbitration proceedings. Further, the Court concluded, based on the exchanges between the parties, that Reynders Ttiketten NV had no involvement in the contractual relationship.

Another issue of contention was regarding Reckitt Benckiser’s reliance on subsequent conduct of the parties to bind Reynders Ttiketten NV to the arbitration agreement. The Court, relying on its earlier decision (Godhra Electricity Co.  v. State of Gujarat, [1975] 1 SCC 199) noted that such negotiations cannot be used to bind Reynders Ttiketten NV to the arbitration agreement entered into by the other two parties.

Analysis – A more favourable approach

The award in Dow Chemical v. Isover Saint Gobain reflects the industry standard for application of doctrine of “group of companies”. Some companies within the Dow Chemical Group entered into agreements with Isover Saint for distribution of thermal isolation equipment. When actions were brought by four of such companies against Isover during the contractual relationship, the preliminary objection of jurisdiction was raised. This was because two of the four companies, namely Dow France and Dow USA, were non-signatories to the arbitration agreement. While examining whether these companies were bound by such an agreement, the Tribunal considered the circumstances in three stages: negotiation, performance and termination of the contract.

First, regarding the negotiation, the Tribunal concluded that Dow France was involved as they were at the centre of the contractual relationship and Dow USA was involved, as such a relationship could not have been formed if not for their approval of usage of trademark. Second, with regard to performance, Dow France had been the one to ensure the execution of the contract and Dow USA was involved as its trademarks had to be used for the contractual activities and no special license agreement had been concluded. Third, regarding the termination of the contract, the Tribunal reiterated that both the companies were involved at this stage as well.

The cardinal rule derived from Dow Chemical’s case for application of the doctrine is not just the existence of the group of companies, but the involvement of such companies in negotiation, performance and termination of the contracts. Such a role implies the consent of the non-signatory to arbitration proceedings because it proves the common intention of the group of companies to be considered as a contracting unit.

Although there has been no allusion to the award, the Supreme Court has adopted a similar analysis to get in line with international practice. The Court in this case based its rejection of the applications under section 11 on the absence of involvement of Reynders Ttiketten NV in the negotiation, performance and termination of the contract.

In reaching this conclusion, notably the court refused to substantiate the intention to arbitrate using post-contractual negotiations. These negotiations are generally excluded by the courts to prevent a risk of change in the meaning of the contract. Since an arbitration agreement has to be interpreted to effectuate the common intention of the parties, these negotiations may, in certain instances, be used to determine such intention. For instance, if the transport clause that the parties have used in their contract is not clear as to which of them should bear the transport risk, the fact that the seller took out a transport insurance policy in his own name may indicate that he believed himself to bear the transport risk. For another instance, where a party has claimed in one forum that disputes are subject to arbitration, and then subsequently objects to an arbitral tribunal’s jurisdiction.

An arbitration agreement, being a commercial contract, is governed by principles of contract law. Hence, it is fitting to look into the interpretative approach offered by the Convention on International Sale of Goods. Under Article 8(3) of the Convention, subsequent conduct of the parties must be given due consideration in determining the intent of the parties. This conduct singularly reflects the intention of the parties at the time of conclusion of an agreement. To allow a holistic background for interpretation of contracts, the Convention departs from parole evidence rule as opined in the CISG Advisory Council Opinion No. 3, a mandatory requirement while interpreting any commercial documents extracting the true intention of the parties. The import of CISG is of international nature as it was written in the form of a convention-code. This principle particularly has wide resonance because it identifies essential elements to help determine the intention of the parties.

The Supreme Court’s observation in excluding post-negotiations was warranted in the present circumstances as it revealed neither an intention of the parties to bind Reynders Ttiketten NV to the arbitration agreement nor Reynders Ttiketten NV’s intention to be bound by it. Although such negotiations have traditionally not been used in the course of interpretation of contracts, they have substantial bearing on deciphering parties’ intention at the time of conclusion of contracts. Hence, an adoption of these principles into the realm of arbitration agreements is a welcomed approach for future international commercial transactions.

Achyutha GM & Pranika Correa

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