Cox and Kings Judgment: Revisiting the Group of Companies Doctrine

[Natasha Matange and Dharmvir Brahmbhatt are 4th and 5th year students at Gujarat National Law University, Gandhinagar]

Arbitration has been growing as a method of dispute resolution in recent years both in India and abroad. It is more formal than mediation, yet has certain procedural similarities to litigation. The essence of arbitration is rightly considered to be consent. It is recognised by international conventions, and is required to constitute the existence of a valid arbitration agreement. In the general practice, parties that are signatories to the contract are considered to have given consent to the arbitration proceeding. This is in line with the principle of privity of contracts. However, for the first time in the Dow Chemicals case, the supremacy of consent was diluted by International Chambers of Commerce (“ICC”) when the group of companies doctrine (“doctrine”) was evolved by the ICC. This doctrine was imported by the Supreme Court of India, and since then it has evolved and mutated through various judgements. The doctrine breaches various well-established principles. Firstly, the doctrine violates section 7(3) of the Arbitration and Conciliation Act, 1996 (“Act”) which provides that the arbitration agreement has to be in writing. Secondly, the doctrine blatantly violates the sacrosanct doctrine of separate legal personality laid down in the case of Salomon v. Salomon. Thirdly, it destroys the cornerstone of arbitration which is consent. And lastly, it also breaches the principle of privity of contract. This has led to the rejection of the doctrine in a multitude of both common and civil law jurisdictions.

Recently, a three-judge bench of the Supreme Court in the case of Cox and Kings v. SAP India (“Cox and Kings”) questioned the very existence of the doctrine. The court also questioned if the phrase “claiming through and under” in section 8 and section 11 of the Act could be interpreted to include the doctrine. The matter was ultimately referred to a larger bench. This post attempts firstly, to point out the pitfalls with the way the doctrine has been interpreted in India. The authors argue that side-lining the principles, that are fundamental to arbitration and made arbitration a popular method of dispute resolution, will be the death knell for arbitration. Secondly, it attempts to import learnings from the international fora to determine the scope of the expression “claiming through or under”.

Chaotic application in Indian jurisprudence

The doctrine in India was expounded in the Chloro Controls Private Limited v. Severn Trent Water Purification Inc. and Others (“Chloro Controls”). This doctrine was, at that time, formulated keeping in mind that there must be a legal relationship between the non-signatory and the party to the arbitration agreement. It was only on the basis of this pre-existing legal relationship that the non-signatories in a group of companies could benefit from the arbitration proceedings. Though this lowered the threshold of consent in arbitration agreements, a heavy onus was placed on the non-signatory party to show that they were placing claims under or through a signatory, as under section 45 of the Act.

This application of the doctrine has since then been expanded and mutated in a plethora of judgments, starting with the Ameet Lalchand Shah v. Rishabh Enterprises (Ameet Lalchand”). The Supreme Court in this case applied the ratio of Chloro Control to a factual matrix which clearly was under section 8 of the Act even though the judgment of Chloro Control was passed in reference to section 45 of the Act. The court in Ameet Lalchand Shah held that since all the agreements (those signed by non-signatories) were entered in the pursuance of a single project and were connected to the main agreement from which the arbitration had germinated, non-signatories will also be parties to the arbitration.  This principle was formulated in the Cheran Properties Limited v. Kasturi and Sons Limited and Others (“Cheran Properties”) wherein it was held that an arbitral award could be enforced against a non-signatory, even though it did not participate in the proceedings. This notion of enforceability extending to non-parties is immensely concerning as it shuts down the opportunity for the non-signatories to be heard and to properly defend against the claims. The same was also recognized by the England and Wales High Court in the case of Golden Ocean Group Ltd v Humpuss Intermoda Transportasi Tbk Ltd in which the court said that it would be unfair to hold a party bound by the decision of the proceedings if such party has not had the opportunity to participate fully in the proceedings. The court further said that in the case of an arbitration award, it will be even more unusual for a non-party to be subject to estoppel as a privy since, due to the private and secret character of arbitration, he will typically have neither the opportunity to intervene nor access to the materials in the reference.

The judgment in Mahanagar Telephone Nigam Ltd. v. Canara Bank (“MTNL”) further expanded the scope of doctrine by introducing the concept of “single economic reality” making it even more nebulous. By emphasising on principles such as that of a single economic reality, the Supreme Court corroded the very essence of arbitration – party autonomy. It has failed to take into consideration the fact that most transactions today are of “composite” nature. The current economic reality is that capital freely flows from the parent company to the subsidiary, or between sister companies. This would imply that each contract containing an arbitration clause would be binding on all companies in that group irrespective of the factual matrix attached to the dispute. The argument of ‘single economic reality’ was also put forth in the case of Bank of Tokyo Ltd. v. Karoon. It was contended that distinguishing between parent company and subsidiary company would be highly technical because they were one economically. Robert Goff LJ in that case while rejecting this contention very famously observed that “but we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be bridged.

Therefore, in the opinion of the authors. the aforementioned judgments of the Indian courts do not ‘elaborate’ on the doctrine, but rather mutate it in a horrendous manner. Therefore, there is a necessity to re-evaluate the doctrine.

“Claiming through and under”

One of the issues raised by CJI N. V. Ramana in his judgment in Cox and Kings was “Whether the phrase “claiming through or under” in Section 8 and 11 could be interpreted to include the ‘Group of Companies Doctrine’?” To answer this question, assistance must be taken from how the phrase “claiming through or under” has been interpreted by courts across the world.

The phrase “claiming through and under” has been dealt with by the English Court of Appeal in the case of City of London v. Ashok Sancheti in which the court thwarted all attempts to expand the scope of the phrase “claiming through and under” present in the section 82(2) of the English Arbitration Act to include the doctrine. However, the High Court of Australia in the case of Rinehart v. Hancock Prospecting (“Rinehart”) has taken a divergent view from the English Court. The majority judgment in Rinehart essentially extended the binding nature of arbitration agreements to non-signatories. The majority judgment in Rinehart interprets the phrase “claiming through and under” to convey a notion of derivative cause of action or ground of defense derived from the party itself. Edelman J in the Rinehart case dissented, stating that there is no legal basis for the meaning of ‘party’ to be extended to include third parties to submit its independent claim or defence to arbitration without actually having consented to the same.

What is therefore now required is for the Supreme Court to consider the diverging decisions of courts across the world, evaluate both the consensual and non-consensual theory of contracts and then decide upon the scope of phrase “claiming through or under”.

Conclusion

The decision of the Supreme Court to refer the group of companies doctrine for review to a larger bench is laudable as it addresses the implications of the changes brought about to the doctrine by the judgments in Cheran Properties and MTNL. Paying heed to the concerns raised by Justice Surya Kant in Cox and Kings, there is a need to find a balance between the need to revise the doctrine and the need to ensure that fragmented dispute resolution does not lead to dissonance in judgments on the same matter.

In the authors’ opinion, the initial approach to the doctrine reflected a proactive approach in fixing the problem induced by parallel disputes progressing on intertwining issues and contracts. It well noted the need to ensure that all disputes pertaining to a particular matter should be addressed in a single forum. Yet, the application of the doctrine undermines the foundational requirements of arbitration – party autonomy and requirement of consent.

This is an opportune moment for the Supreme Court to determine that the doctrine can no longer be entrenched in the Indian arbitral jurisprudence. The lacunae of speedy and unfragmented dispute resolution can be addressed on a case to case basis while respecting the principle of consent, bringing about an effective balance.

Natasha Matange & Dharmvir Brahmbhatt

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