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ANALYSIS OF THE DOCTRINE OF GROUP OF COMPANIES

INTRODUCTION

Disputes resulting from contracts between more than one party are settled confidentially through arbitration. By agreeing to the arbitration agreement, each party waives their right to sue and agrees that any disputes will be resolved via an arbitrator appointed by the arbitration agreement’s rules. In general, arbitration may only be entered into by parties who have agreed to it by signing a legally enforceable contract.

In United Steelworkers of America v American Mfg. Co.[1], the court’s decision demonstrated that arbitration is largely contractual. A court must first prove that the parties have agreed to arbitrate the particular issue at hand before it may intervene and force a reluctant party to participate. By signing or stamping the arbitration agreement or the main contract that contains an arbitration clause, parties frequently express their explicit desire and readiness to resolve disputes through arbitration.

The ‘group of companies’ theory was recognised and put into practice by the Supreme Court of India in 2013 in the landmark decision Chloro Controls India (P) Ltd. v Severn Trent Water Purification Inc.[2] Since then, the Apex Court has applied this paradigm in other rulings, often deviating from its initial objective and intent to decide. In the decision of Cox and Kings Ltd. v SAP India (P) Ltd.[3], the Supreme Court determined that it was critical to assess the doctrine’s applicability in India through a larger bench to discover its legal base, scope, and application under the Indian arbitration law. To address the issues and difficulties raised in Cox and Kings in light of this development, the following text examines the evolution and application of the concept in significant Supreme Court judgements. Before starting this investigation, it’s crucial to look at the doctrine’s premise and background.

THE GROUP OF COMPANIES DOCTRINE

According to the theory of a group of businesses, an arbitration agreement will, under certain circumstances, be expanded to include subsidiary enterprises within a group of companies. This theory accepts the possibility that a group of companies might operate as an economic unit with linked linkages and shared interests. The theory empowers arbitral tribunals and courts to treat each firm in a group as a single entity rather than as the independent legal entities that they are. It makes it possible for issues to be consolidated within the organisation and allows arbitration to be used to resolve them rather than going to court. When using the idea of groups of companies, it is important to carefully consider the connections and interconnections between the organisations in issue. It frequently requires proof of a close relationship between the parties who signed the arbitration agreement or the main contract and the affiliate businesses.[4]

Compare this idea to the alter egos or corporate veil doctrines, which are different legal theories sometimes used to overlook the unique legal identities of businesses. The Doctrine of Group of Companies focuses on extending the reach of arbitration agreements inside a company’s organisation while having an identical impact. It largely refers to the area of arbitration.

TEST FOR THE GROUP OF COMPANIES DOCTRINE

The criteria for assessing whether the arbitration agreement may be enlarged to include subsidiary firms under the theory of groups of companies includes an analysis of the connections and linkages between the entities within a corporate group. Even if the specific criteria may change depending on the jurisdiction and applicable legislation, certain general factors are taken into account in this analysis:[5]

  1. Control or Influence: One crucial factor is the degree of control or influence the parent company has over its subsidiaries. Evidence of this control may include things like ownership, voting rights, financial support, or the nomination of significant staff.
  2. Unity of Purpose: Another consideration is whether the businesses in the group have a shared set of objectives. A common business strategy, synchronised making decisions, cooperative activities, or pooling of resources are some ways to show this.
  3. Interdependence: Significant is also how reliant on one another each firm in the group is. This may be assessed by looking at the level of financial integration, centralised management, shared resources or amenities, or cohesive company operations.
  4. Common Commercial Interest: Whether the organisation’s collective efforts lead to a shared corporate interest or mutual advantage is a crucial consideration. Shared agreements, teamwork, internal business transactions, or the division of risks and benefits are a few instances of this.

It is important to keep in mind that this list of factors is not all-inclusive since the application of the concept of a group of enterprises demands a contextual analysis of the specific circumstances and facts of each case. Court or arbitral tribunals will meticulously scrutinise the facts and arguments presented by the parties to determine whether the conditions for adopting the doctrine are met.

JUDICIAL RESPONSE

The Doctrine of a Group of Companies has a substantial role in Indian case law, although not explicitly mentioned in the Indian Arbitration and Conciliation Act. Given that the theory initially appeared in the light of Indian arbitration law in the Chloro Controls case[6], an analysis of the facts and circumstances that led the Apex court to consider embracing this doctrine is relevant.

In the Chloro Controls case, a dispute arose between Capital Controls (Delaware), an American company, and Chloro Controls Pvt. Ltd., an Indian company owned by Mr Madhusudan Kocha and his corporate group. They planned to establish a business partnership to distribute chlorination equipment in India. The entities and Mr Kocha created a joint venture named Capital Controls (India) Pvt. Ltd. to do this by collaborating with Capital Controls (Colmar) Co. Inc., a sister business of Capital Controls (Delaware). Severn Trent Services (Delaware) Inc. divided these two businesses into separate entities. These Companies have entered into several contracts, some of which have conflicting dispute resolution clauses. In addition, a shareholder’s agreement with an arbitration provision was signed by Mr Kocha, Capital Controls (Delaware), and Chloro Controls Pvt. Ltd. However, the joint venture and Capital Controls (Colmar) made all other arrangements.

The parties to the commercial partnership began to have disagreements when Severn Trent started offering its machinery via a different business than the joint venture. Chloro Controls Pvt. Ltd. responded by filing a lawsuit in an attempt to get an injunction. Capital Controls (Delaware) and Severn Trent invoked the arbitration clause in the shareholder’s agreement to argue that all the agreements constituted a “composite transaction” subjecting those who are not signed to the arbitration clause by the group of enterprises theory. Therefore, the Supreme Court was urged to rule on whether non-signatory organisations can use the arbitration provision and if all issues arising from the agreements can be settled at one arbitration session.[7]

When the Supreme Court addressed Section 45 of the Arbitration and Conciliation Act, 1996[8], it understood the phrase “any person claiming through or under him” to give a legislative basis for extending arbitration agreements to those who are not signed under the Act.  (Which relates to Part II’s foreign commercial arbitrations). The Court ruled that the shareholder’s agreement’s dispute resolution provision applied to any disputes arising “under and in connection with” the shareholder’s agreement, subjecting them to arbitration. The joint venture (Chloro Controls (India) Pvt. Ltd.), which was the primary focus of the shareholder’s agreement and signed all subsidiary agreements, was also found to be a party “claiming through or under” a signatory (Chloro Controls (Delaware)) by the court, and Severn Trent was also found to be a party “claiming through or under” all the signatories. The Supreme Court relied on the phrase “party and any person alleging through or under him” in Section 45 of the Act[9] to accept and apply the group of enterprises concept in the overall scheme of Indian arbitration law.

CONCLUSION

The link between the “group of companies” theory and the topic of international arbitration is intricate. Even though certain tribunals and courts have accepted this concept, the majority of them have a more dubious outlook. In embracing the “group of companies” idea, Indian courts have strayed from their predecessors, particularly in common-law countries. It should be noted that this variance alone does not invalidate the Indian strategy. The Indian approach towards the “group of companies” philosophy has as its fundamental and practical purpose the unification of related concerns into a single forum.

The “group of companies” doctrine, however, seems to have been used by Indian courts outside of its intended scope, potentially undermining the fundamental principles of consent in international arbitration. The Indian Supreme Court should study the theory to see if it has a consistent basis in Indian law and, if so, to establish precise rules for its use.

Author(s) Name: Aaryavart Chourasia (Dharmashastra National Law University, Jabalpur)

Reference(s):

[1] America v American Mfg. Co. (1960) 363 US 564

[2] Chloro Controls India (P) Ltd. v Severn Trent Water Purification Inc. (2013) 1 SCC 641

[3] Cox and Kings Ltd. v SAP India (P) Ltd. (2022) SCC OnLine SC 570

[4] Gauri Anand and Akanksha Sinha, ‘’Group Of Companies’ Doctrine: An Analysis In The Context Of Arbitration’ (Mondaq, 28 November 2022)<https://www.mondaq.com/india/arbitration–dispute-resolution/1217422/group-of-companies-doctrine-an-analysis-in-the-context-of-arbitration&gt> accessed 14 June 2023

[5] Chloro Controls India (P) Ltd. v Severn Trent Water Purification Inc. & Ors (2013) 1 SCC 641

[6] Ibid

[7] Dhruv S. Patel, ‘The Group of Companies Doctrine: Defending an Endangered Species of the Indian Arbitration Law’ (SCC Blog, 19 October 2022) <https://www.scconline.com/blog/post/2022/10/19/the-group-of-companies-doctrine-defending-an-endangered-species-of-the-indian-arbitration-law/>accessed 19 June 2023

[8] The Arbitration and Conciliation Act 1996, s 45

[9] Ibid