Introduction
The Group of Companies Doctrine (hereinafter, “GOCD”) seeks to bring together all parties that are closely connected and relevant to a disputed composite transaction involving multiple parties and agreements In doing so, its primary purpose is to ensure the accountability of all parties materially involved in the concerned transaction, while simultaneously reducing the multiplicity of proceedings and the risk of contradictory or conflicting decisions.
In India, the discourse around the GOCD began with the case of Chloro Controls v Severn Trent Water Purification (hereinafter “chloro controls”), wherein the Supreme Court incorporated the doctrine into Indian arbitral jurisprudence. The court held that if there is a direct relationship between the signatory and non-signatory, a common subject-matter forms the dispute, there is a composite transaction, and that referring the matter to arbitration would achieve the ends of justice, then the same would call for an application of the doctrine [¶69].
Larger questions regarding the uncertainty of the applicability of this doctrine, given its possible violation of party autonomy, were posed before a 5-judge bench. Adding to this uncertainty, is the doctrine’s alleged clash with the separate legal entity doctrine, an essential pillar of corporate law jurisprudence. The separate legal entity doctrine, first established in the case of Saloman v. Saloman, resulted in the recognition that each corporation has a legal existence separate from its owners, be it individuals or other parent corporations.
Thus, this article addresses the overarching question of whether the GOCD contradicts the doctrine of separate legal personality. After answering this question in the negative, the article notes how there has been considerable support for the doctrine of estoppel over the GOCD and attempts to reconcile the two doctrines.
Whether the Doctrines Differ and Have the Effect of Negating Each Other?
The Group of Companies Doctrine has often been taken to mean that members of the same group of companies are no longer treated as separate legal entities and are rather seen as one economic entity to allow for their inclusion in arbitration proceedings. Due to this understanding, the doctrine has been seen as one that violates an essential pillar of company law and has been heavily criticised in this regard.
However, the 5 judge bench decision of Cox & Kings, in December 2023 has done a laudable job at clarifying the current Indian position on the doctrine. More importantly, it has clarified the relationship shared between the two doctrines in a manner that allows for harmonized application. The court delved into an analysis of whether the GOCD exists independently under arbitration law or whether corporate law principles such as piercing the corporate veil give the same its existence, is required.
To depict how the same could be given its existence through the corporate veil/separate legal entity doctrine, one could attempt to add GOCD to the existing list of situations which allows for lifting or piercing of the corporate veil, such as fraud, situations where the subsidiary company is acting only for the benefit of the parent company, and so on. Additionally, since scholars have articulated that the alter ego doctrine (essentially, the opposite of the corporate veil) can be used to bind non-signatories to arbitration agreements, viewing GOCD as an extension of the doctrine, could be a possibility. However, others argue that GOCD has been given its existence through arbitral jurisprudence and there is no conflict or relation between the GOCD and the separate legal entity doctrine.
The 5-judge bench traced back the origin of the GOCD to two beginnings. Firstly, consent-based theories (involving agency, novation, assignment and operation of law) serve the purpose of inferring consent from the behaviour of parties, given the fact that it is absent/not self-evident from the agreement. Secondly, non-consensual theories (such as lifting the corporate veil/alter ego doctrine), are applied in instances of non-signatories to an arbitration agreement, despite the fact that there exists a clear and defined intent to arbitrate.
It is at this juncture, that the Court distinguished between both these doctrines. It articulated that the purpose of lifting the corporate veil was to assess the substantive legal liability of a given entity. On the other hand, the primary purpose of the GOCD is to identify whether there exists a common intention amongst parties to bind the non-signatory to the arbitration agreement. Hence, to determine the same, the corporate affiliation of the distinct legal entities is analysed [¶98].
A similar view was affirmed by the Court in Cheran Properties [¶25] and subsequently, Cox & Kings 2023, wherein the court observed that the alter ego principle, which overlooks the distinctiveness of a corporation and the intentions of the involved parties, is driven by overriding considerations of equity and good faith [¶104]. On the other hand, the GOCD aids in discerning the parties’ intent to ascertain the actual parties to the arbitration agreement, without disrupting the legal identity of the concerned entity. Hence, the alter ego doctrine cannot serve as the foundation for implementing the GOCD and in reality, finds its application for varying purposes.
However, common law jurisdictions continue to disregard the applicability of the GOCD under the pretext that it is not founded upon consent. In cases such as Bridas SAPIC v Government of Turkmenistan,the State of Turkmenistan exercised complete control over the signatory company Turkmenneft. Herein, although all elements were present for the applicability of GOCD, the court proceeded to extend the arbitration agreement through the alter ego doctrine.
Moreover, US has developed the doctrine of arbitral estoppel, which prevents a party from refusing its obligation to arbitrate, if it has benefitted directly from the contract containing the arbitration agreement it is not a part of. Such a perspective highlights the fact that companies continue to have a legal existence separate from one another and can still be bound by GOCD due to their conduct which is then used to decipher their intent.
However, given the interlinkages between the doctrine of estoppel and GOCD and the approaches adopted by different jurisdictions, there may be significant confusion in jurisprudence. However, this article will argue that estoppel, in its core and essence, forms a part of the GOCD as the two are fundamentally related and must not be viewed as conflicting doctrines. This approach will assist in streamlining the growing literature on non-signatories and the GOCD.
Reconciling Estoppel and the Group of Companies Doctrine
Several doctrines in this discourse surrounding non-signatories tend to overlap when it comes to establishing consent. This overlap, may be used to argue that the doctrine of estoppel, in reality forms a part of the GOCD. Essentially, the GOCD relies on past conduct in the role of “active participation” to establish mutual intent. The doctrine of estoppel also uses the past conduct of non-signatories to bind them to arbitration agreements. Thus, through this reliance on past conduct it is argued that GOCD, does incorporate elements of estoppel into its application.
While some have argued that rather than relying on the GOCD, Indian courts must move towards an application of doctrine of estoppel, this argument must be rejected in light of the 2023 Cox & Kings judgement. This article recognizes that Indian courts have often applied the GOCD in an erroneous manner, to corporations that did not constitute a group of companies and the same has led to a resistance against the GOCD. However, the same cannot be used to justify the elimination of the GOCD or to encourage application of the doctrine of estoppel instead.
The Court has made clear in the 2023 decision that the GOCD will be applied after ascertaining the factual scenario of a case, to then establish consent (albeit implicitly). Thus, any argument that GOCD does not account for consent and therefore, the doctrine of estoppel must be relied on, would not hold true. The Court’s recent decision thus, must be relied on to support the acceptance of GOCD into Indian arbitration.
Lastly, although the idea of applying estoppel to establish benefits derived by non-signatories, is noted, it is argued that benefits derived may be subjective and abstract in nature. Thus, it may, at times, be more suitable to apply estoppel in the sense of past conduct (denoting active participation) which provides for more certainty and supports the application of the GOCD. With this, the article aims to reiterate that the doctrine of estoppel and GOCD must not be viewed as mutually exclusive doctrines. Rather, the elements of estoppel must be built into the GOCD, to support India’s move to a pro-arbitration jurisdiction, in alignment with the 2023 Cox & Kings decision.
Conclusion
The Apex Court’s judgement in Cox and Kings 2023 indicates India’s willingness to recognise multiple manifestations of implicit consent occurring within contractual agreements while at the same time, preventing the misapplication of company law jurisprudence in arbitration. Recognising the same has done away with confusing precedents on whether parties can be included in the arbitration agreement by mere existence of a composite transaction, and whether the same goes against the party autonomy, which existed as a result of the court’s decision in Chloro and Cox and Kings 2022.
Considering elements such as the mutual intention of the parties and the active involvement of the non-signatory in the performance of the contract, this paper establishes that applying GOCD would not amount to violating consent or party autonomy. Given India’s recognition of the GOCD, it may be favourable for courts to consider applying the doctrine of estoppel as an element of the GOCD, as argued in this paper and would push for the acceptance of GOCD on a global level.
Author(s)
Aditya Krishnan
Student at JGLS, Sonipat
Isha Khurana
Student at JGLS, Sonipat