Abstract
The fundamental rules upholding the intention of the parties to abide by the terms of the contract is diluted in arbitration proceeding to grant remedy to the parties if the commercial and legal relation of the third party, with the party to the arbitration proceeding is established. The judicial opinion has evolved to consider the necessities of the case and to recognize third party rights in limited cases. Whether The acceptance and recognition of the rights of third party through group of companies doctrine will serve the ends of justice for corporates and prosper Arbitration as alternate dispute resolution (ADR) method is explored in the paper.
Arbitration agreements are essentially contracts entered into by corporate entities to govern the commercial matters between them. In contracts, intention of the parties is of key consideration. A contract is created by the common intention of the parties to enter into legal obligation, and the intention is inferred when the parties to an agreement conform to the rules of law for formation of contracts [1]. Under similar factual matrix between one set of parties there might exist a legally binding contract while between the other a mere dialogue or negotiation. Along with intention another important limb of the contract law rests in the Doctrine of Privity of Contract. The Indian Contract Act, 1872 does not per se use the phrase ‘Privity of Contract’[2], but recognizes the principle of privity in its various provisions as the general principle throughout enumerating the rights and liabilities of ‘parties’ against each other and ‘their’ right to sue for breach.
The Hon’ble Supreme Court in M.C. Chacko v. State Bank of Travancore[3] supported Privy Council’s extension of the concept of privity to India[4] but overtime the courts have carved out a number of exceptions to the rule of privity, whereby in some cases even a stranger or a third party to the contract gets a right to implead or be impleaded in a suit pertaining to the contract.
Arbitration being a form of contract, the general principles of contract govern arbitration agreements as well. Arbitration clauses are usually drawn in wide terms, to ensure that all disputes that arise out of or in connection with a particular contract or contractual relationship are referred to arbitration [5]. The principle of privity applies to arbitration agreements also whereby only signatory parties to the agreement are subjected to arbitration. When the party is a company of a group it is needless to say that each company[6] being a separate legal entity, only the signatory company is bound by it. However, in certain circumstances it is evident that despite distinct juridical identity the companies in a group form the same economic reality and warrant a departure from the rule of privity. The ‘Group of Companies Doctrine’ provides the exception in such circumstances.
Article 8(3) of the Convention on International Sale of Goods (CISG) lays emphasis on determining the intention of the parties through a holistic interpretation of a contract. The Group of Companies Doctrine can be invoked where the true intent of the parties reflects that a non-signatory to the Arbitration Agreement is a necessary party to the contract and therefore needs to be impleaded and be made bound by it.
The Group Of Companies Doctrine
This doctrine states that an entity entering into an arbitration agreement within a company which is a part of a group of companies may bind its non-signatory associate or parent company provided that it is established that the non-signatory company was intended to be a necessary party or was materially involved in the performance of the contract thereby establishing the contractual relationship with the non-signatory. Authors opine that “The only entities bound by the contract and the arbitration clause are the companies that have participated in the conclusion and the execution of the agreement.”[7]
The Doctrine was first recognized by the International Court of Justice while deciding the Barcelona Traction case between Belgium and Spain[8]. The doctrine evolved and gained recognition by the landmark judgment in Dow Chemical v. Isover Saint-Gobain[9]. In this case, an arbitration agreement was entered into by two Swiss Companies, Dow Chemical AG and Dow Chemical Europe and one French Company Isover Saint Gobain. The two Swiss Companies along with some other companies constituted a larger group called Dow Chemicals. The parties had agreed that the Swiss Companies would supply equipments to the French company which would manufacture certain products. These products where then to be delivered to French Subsidiary of Dow Chemical Group or any other subsidiary of Dow Chemicals, even though they were not parties to the contract.
When disputes arose pertaining to some quality issues regarding the goods manufactured by Isover, (the French company) arbitration was initiated by Dow Chemical AG, Dow Chemical Europe, Dow Chemical France and Dow Chemical against Isover. Isover raised a preliminary issue of jurisdiction and contended that since Dow Chemical France and Dow Chemical were non-signatories to the arbitration agreement, the arbitration tribunal could not pass the award in this case.
The Arbitration Tribunal while determining the preliminary objection raised by Isover Saint divided the circumstances surrounding the contract into three stages – negotiation, performance and execution of the contract. With respect to all three stages the court held that Dow France and Dow Chemicals were involved in all the three stages.[10] Therefore by a true construction of the contract the tribunal concluded that although the subsidiary in France and Dow Chemicals ,the group were not signatories to the contract but by application of the Group of Companies Doctrine, the arbitration proceedings could be sustained and the contract could be extended to the non-signatories also. Thus, the Tribunal extended the scope of arbitration agreement to Dow Chemical France and Dow Chemical, majorly on the ground that the concerned companies formed a single entity in reality all being a part of a larger group ie. Dow Chemical Group and that they actively participated at all stages of the contract and were pivotal in its performance.
The cardinal principle derived from Dow Chemical’s case for application of the doctrine is that it is not just the existence of the group of companies, but the involvement of such companies in negotiation, performance and termination of the contracts that attracts the application of the doctrine. The tribunal stated, “une réalité économique unique – a group of companies constitutes one and the same economic reality – despite the legal independence of the individual entities from one another – where the circumstances of the contract’s conclusion, its performance, its (possible) subsequent termination, and the degree of control executed among the group companies warrants such an inference”[11].
The international consensus with respect to the doctrine varied widely. Even after France recognizing the doctrine, the other jurisdictions were still suspicious and reluctant to adopt the same.
The English court in Peterson Farms Inc v. C&M Farming Ltd[12], out rightly rejected the application of the doctrine stating that it is not a part of the English Law. The observation of the United Kingdom Supreme Court in Dallah Real Estate and Tourism Holding Company case[13] also shows its reluctance towards the doctrine.
However, along with France, the Egyptian jurisdiction has supported application of the doctrine. In Sarhank v. Oracle Corporation[14], a tribunal of Cairo held that, “Despite their having separate juristic personalities, subsidiary companies to one group of companies are deemed subject to the arbitration clause incorporated in the contract because contractual relations cannot take place without the consent of the parent company owning the trademark by, and upon which transactions proceed.”.
Position In India
In India the Apex Court in Chloro Controls Pvt. Ltd. v. Severn Trent Water Purification Inc. &Ors[15] while deciding the issue raised as to whether a non-signatory could prefer arbitration under S. 45 of the Arbitration Act, held that the language of S. 45 uses the term “any person” indicating the legislative intent that the persons other than the parties could also claim through or under a party to the arbitration agreement. The court approved the Group of Companies doctrine to allow non-signatories to be part of the arbitration proceedings. The court pointed out that the application of the doctrine rests on the requirements that
- The intention of the parties is such as to bind the non-signatory also
- There is direct relationship of the non-signatory with the signatories
- There must be commonality of subject matter and a composite transaction the performance of which involves the non-signatory along with the signatory
The doctrine was further concretized in the case of MTNL v. Canara Bank[16] and Cheran Properties Limited case [17] when the doctrine was again deliberated upon by the court to make a non-signatory a party to the arbitration proceedings. The Delhi High Court[18] and the High Court of Madras[19] have also applied this doctrine to implead non-signatories in cases where the circumstance warranted such impleadment.
Position Of Multi Party Arbitration In India
In Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya &Anr.[20] the Supreme Court held that once the suit has commenced between parties some of whom are parties to the arbitration agreement and some are not, then in such a situation the court cannot refer the matter to arbitration. The court reasoned its judgment on the ground that bifurcation i.e. one part is to be decided by the court and the other part by the Tribunal would only cause delay and such a bifurcation is not permissible.
In Deutsche Post Bank Home Finance Ltd. v Taduri Sridhar &Anr[21] the factual matrix of the case was such that there were two contracts, the first was a contract for sale between the seller and the purchaser and the other was a loan agreement between the purchaser and a bank. Dispute arose with respect to the former agreement and the purchaser in the arbitration proceedings prayed for the bank also to be impleaded as a party. The Apex court in this case, rejected the purchaser’s plea stating that the bank was a third party to the present proceedings and therefore, could not be impleaded in the proceedings.
The law on this point further developed whereby the apex court adopted a liberal view in the case of P.R. Shah Shares and Stock Brokers v. B.H.H. Securities[22]. In this case the court discussed two situations:
- A has separate claims against two persons B and C. There is an arbitration agreement subsisting between A and B but no such agreement between A and C. In such a situation the court held that C who is a third party cannot be impleaded in the arbitration proceedings between A and B.
- Under the similar factual matrix as above if there is an arbitration agreement between A and B as well as another arbitration agreement between A and C, in such a situation A can have a joint arbitration against both B and C together in the same proceeding. There would be no legal impediment to add B and C as parties to the same arbitration proceeding instituted by A.
The court further held that if in the second situation such joint proceeding is not permitted then that would lead to multiple proceedings, causing unnecessary delay and if conflicting decisions come out as a result of multiple proceedings it would amount to annihilation of justice.
In Indowind Energy Ltd v. Wescare (I) Ltd & Anr[23] the apex court refused to appoint an arbitrator under Section 11 of the Act in a proceeding where a non-signatory, albeit an alter ego of the signatory, was requested to be added as a party. The Court opined that one who was not party to the arbitration agreement could not be whimsically brought into arbitration proceedings.
The judicial opinion expressed in catena of cases reflects that the primary question to be considered is to find whether the party can be impleaded as a party or not. The law is still evolving in this respect and its evolution will go a long way in the process of providing corporations freedom in terms of doing business and choosing arbitration as a method of dispute resolution. The judicial constrains are well understood considering the fact that arbitration though needs to be promoted and facilitated still arbitration agreement being primarily a contract the idea of consent can not be diluted beyond a certain limit.
Further Swiss court and English Court have denied the third party the remedy under the arbitration agreement merely due to the reason that there was legal or commercial connection to one of the parties[24]. Thus, the facts and circumstances of the case and the necessity to the parties will entitle the third parties to remedy under the arbitration agreement and give impetus to arbitration clause as a dispute resolution clause in the corporate transactions.
Author(s):
Priya Vijay, Asst. Professor of Law at National University of Study and Research in Law, Ranchi.
Afkar Ahmad, Associate Professor of Law at G D Goenka University, Gurugram.
References:
[1] Pollock & Mulla-The Indian Contract Act, 14 Edition pg.31.
[2] Jamuna Das v. Ram Avatar, 1911 II Ind Cas 91.
[3] 1970 SCR (1) 658.
[4] Supra note 2.
[5] Redfern & Hunter on International commercial Arbitration, 6th Edition, 2015.
[6] Dow Chemical France v ISOVER Saint Gobain (France) ICC Case No. 4131/1982 (Interim Award).
[7] Bernard Hanotiau, L’arbitrage et les groupes de sociétés, Gaz. Pal. p. 16, para. 54(5).
[8] Barcelona Traction, Light and Power Company, Limited, arrêt, C.I.J. Recueil 1970, p. 3. Available at: http://www.icj-cij.org/files/case-related/50/050-19700205-JUD-01-00-EN.pdf.
[9] Dow Chemical v Isover Saint-Gobain ICC No. 4131/1982.
[10] Para. 2.45.
[11] Para. 2.50
[12] Peterson Farms Inc v C&M Farming Ltd [2004] ArbLR 50
[13] Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan: MANU/UKSC/0075/2010.
[14] 404 F.3d 657 (2nd Cir. 2005).
[15] Chloro Controls (I) P. Ltd. Vs. Severn Trent Water Purification Inc. and Ors. (28.09.2012 – SC) : MANU/SC/0803/2012
[16] (2020) 12 SCC 767.
https://www.livelaw.in/law-firms/law-firm-articles-/mtnl-canara-bank-arbitration-and-conciliation-act-196565
[17] Cheran Properties Limited vs. Kasturi and Sons Limited and Ors.-MANU/SC/0427/2018
[18] VLS Finance Ltd. Vs. BMS IT Institute Private Limited – 2015 SCC OnLine Del 9292; Dorling Kindersley (India) Pvt. Ltd. Vs. Sanguine Technical Publishers & Ors – 2013 SCC OnLine Del 2319.
[19]SEI Adhavan Power Private Limited and Ors. v. Jinneng Clean Energy Technology Limited and Ors.
[20] Sukanya Holdings Pvt Ltd v Jayesh H Pandya &Anr (2003) 5 SCC531.
[21] Deutsche Post Bank Home Finance Ltd v Taduri Sridhar &Anr(2011) 11 SCC 375
[22] PR Shah Shares and Stock Brokers v BHH Securities (2012) 1 SCC 594
[23] AIR 2010 SC 1793
[24] Peterson Farms Inc. v C & M Farming Ltd [2004] EWHC 121.
