Introduction
Arbitration is being expeditiously accepted as a mechanism of dispute resolution due to the respect it gives to parties’ autonomy and consent. Though the presence of a written arbitration clause in the agreement is the general rule to bind parties to arbitration, the courts have delineated a few exceptions to the rule. One such exception is the group of companies or the alter-ego doctrine whereby a non-signatory can be compelled to enter arbitration when there is a mutual intent of the parties; the relationship of a non-signatory to a party which is a signatory to the agreement; the commonality of the subject matter; the composite nature of the transaction; and the performance of the contract.
An arbitral tribunal derives its power from the arbitral agreement itself, however, the Group of Companies Doctrine vitiates party consent and violates the concept of privity of contract. In such a scenario, the Delhi High Court in Arupri Logistics Private Limited vs Vilas Gupta and Ors and Taurus India Limited vs Vilas Gupta and Ors (“Arupri”) recognised the significance of consensus ad idem and demarcated the contours of the jurisdiction of the tribunal to bind the parties to the arbitration. It highlighted the paramountcy of party consent and curtailed the autonomy of the arbitral tribunal to implead non-signatories of the contract to an arbitral proceeding.
This article delves into the reasoning of the Delhi High Court in the Arupri judgement and analyses the applicability of the group of companies doctrine in various cases. The authors further argue against the applicability of the group of companies doctrine in relation to arbitration proceedings in order to preserve party autonomy on which the essence of arbitration as a dispute resolution process is based.
Factual Matrix
The respondents conducted family business through the agency of companies one of them being Taurus India Limited (“TIL”). One of the respondents moved the Company Law Board on the grounds of oppression and mismanagement of TIL. However, during the pendency of the proceedings before the Board, the parties entered into a Memorandum of Family Settlement, which bifurcated the family into two groups and divided the property and assets between them.
TIL agreed to sell an industrial plot to Arupri Limited vide a conveyance deed. However, as per the terms of the Memorandum, the building on the industrial land was to be taken over by Group 1. The respondents invoked arbitration to cancel the conveyance deed and wind up and distribute the assets of TIL. The arbitrator impleaded Taurus India Limited and Arupri in the proceedings for having a vital interest in the matter as any order/award passed will bear consequences on them. However, the High Court overturned the views of the arbitrator.
Reasoning of the Court
Power of Arbitral Tribunal to implead non-signatories
While referring to the case of V.G. Santhosam & Ors. vs. Shanthi Gnanasekaran & Ors. and Abhibus Services India Pvt. Limited & Ors. vs. Pallavan Transport Consultancies Services Ltd, the Court examined the power of the Arbitral Tribunal under Section 17 of the Arbitration and Conciliation Act 1996 (“the Act”) to implead a non-signatory in an arbitration proceeding. The Court held that by the amendment of 2016, the arbitral tribunal had been bestowed with similar powers vested with the Courts under Section 9 of the Act in terms of framing interim measures. The Court opined that the power to implead a party and thus, subject it to the ultimate decision and award that may be rendered by the arbitral tribunal cannot be conceived to be a component of the power to frame interim orders under Section 17.
Global framework
Secondly, the court went on to examine the international stance of law on the said issue. The International statutory framework respects the party’s consent even while impleading third parties to an arbitral proceeding. The UNICTRAL Arbitration Rules on one hand enable an arbitral tribunal to implead more than one party to an arbitral proceeding by providing all parties, including the additional party, a chance to be heard and on the other hand hold that the joinder should not be allowed since it can be detrimental to any party/parties to the arbitration proceeding.
Swiss Rules of International Arbitration, 2021 states that any request for the joinder of third parties shall be determined by the tribunal only post consultation with the parties and considering all relevant circumstances. London Court of International Arbitration Rules allows the joinder of a third party upon the written consent of the non-signatory and signatories to the arbitration agreement. Singapore International Arbitration Centre Rules acknowledge the consent of a third party and all concerned parties for impleading the non-signatory and also bestow a non-signatory to join the arbitration by an application to the tribunal. It also provides all the parties including the third party the chance to be heard and after assessing all the circumstances, the tribunal shall take its decision.
In Bay Hotel & Resort Ltd and Another vs. Cavalier Construction1, a main contractor made sub-contracts and each sub-contractor blamed the other. The Privy Council held that though courts are empowered to join additional several parties, arbitral tribunals are deprived of this power since it would vitiate the party’s autonomy. Besides, it would diffuse the agreement of the parties to have their own tribunal for their own disputes.
Analysis
Party consent and autonomy are the pillars on which the foundation of arbitration stands. An arbitration proceeding finds its genesis from the arbitration agreement itself and is therefore required to be conducted within the four walls of the agreement. In Sukanya Holdings Pvt. Ltd. vs Jayesh H. Pandya & Anr., a dispute arose between various parties with respect to the same transaction. Consequently, an arbitration petition was filed in which the relief was claimed from parties who never contracted to the arbitration agreement, The Apex Court clearly stated that courts are devoid of the power to refer non-signatories of the arbitration agreement to the arbitral proceedings. It further delineated that Section 8 of the Act cannot be invoked in a situation where a suit germinates from a subject matter beyond the purview of the arbitration agreement or from parties who are not signatories to the agreement.
However the Supreme Court in Chloro Control Limited vs. Severn Trent Water Purification Inc. and Ors. (“Chloro”) held that “As per the group of companies doctrine an arbitration agreement entered into by a company, being one within a group of companies, can bind its non-signatory affiliates or sister or parent concerns if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates.”
Similarly, in the case of IVRCL Limited. v. Gujarat State Petroleum Corporation Limited And Anr it was held that by impleading a non-signatory to the arbitration proceeding, the tribunal has presumed jurisdiction over the petitioner, and once it has presumed its jurisdiction it would persist to have jurisdiction until the final award is passed. The court upheld the arbitral tribunal’s decision to implead the petitioner to the proceedings regardless of it not being a signatory to the arbitration agreement by applying the alter-ego principle. Further, in Vistrat Real Estates Pvt. Ltd. v. Asian Hotels North Ltd. it was held that once a valid arbitration agreement exists between the parties, the issue of whether a third party is to be impleaded in the proceeding is for the arbitral tribunal to decide.
UNICTRAL Arbitration Rules, on which the Act is based, permits third-party to implead with the consent of the concerned parties only. Internationally, the joinder of third parties to an arbitral proceeding vitiates party consent and hence is allowed at the option of the third party. For example, Article 13 of the SCC Arbitration Rules 2023 allows the parties to request the tribunal for impleading a third party. The tribunal can implead a third party provided SCC has jurisdiction over the parties in dispute including the additional party to be impleaded. In this scenario as well the consent of the additional party has to be taken.
Overall, the Indian stance with regard to impleading third party seems to be derailing from the position of international laws and needs overhauling.
Arupri judgement- a step ahead or a leap behind?
The court in the present judgement, in line with the international standards, upheld party autonomy and consent in arbitration, thereby respecting the spirit of arbitration. It took a step ahead from the dissected Indian stance on the doctrine. With the growth of arbitration in India, this judgement paves the way for the Indian arbitral regime to be in consonance with the global principles.
While it could be argued that joinder of a third party can be vital in certain cases to prevent parallel arbitral proceedings, multiple awards and securing arbitral tribunal autonomy, it should be duly noted that once an arbitral award is made it becomes binding on all the parties under Section 35 of the Act. The only way it could be set aside is by virtue of an appeal to a Court. However, the grounds on which an award can be set aside are very limited in scope and hence the non-signatory will be left with no remedy if the Court refuses to set aside the award.
After investing a fair share of time and cost in the arbitral proceeding, the aggrieved non signatory party will have to initiate litigation to free himself of the arbitral award. This would ensue in roping all the parties in a prolonged and tedious process de novo thereby dissolving the essence of arbitration.
The authors believe that the ethos of arbitration which is structured on party consent tussles with the group of companies doctrine which entangles a third party to an arbitral proceeding and binds it to the consequent order under the veil of a common commercial interest or a tight corporate group structure.
Concluding Remarks
Group of companies doctrine grants an overarching power to the arbitral tribunal to implead non-signatories to the proceedings, thus stifling consent. Despite the Supreme Court upholding the group of companies doctrine in the Chloro judgement, various courts have taken conflicting stances thereby creating a dichotomous atmosphere concerning the position of law. In its latest decision of the Apex Court in Cox and Kings vs. SAP India Private Limited and Ors, the court felt it is imperative to discuss this issue before a larger bench. The Arupri judgement is seen as a welcoming move at the ripe time, wherein the court attempted to crystallise the fragmented position of law and expressed its concerns about the applicability of this doctrine. The court defined the powers of the tribunal with respect to its authority to bind parties to the proceedings, thereby creating fringes to its powers which it should not trespass. The court highlighted the importance of ad idem in arbitration and opined impleading non-signatories would be violative of the ethos of arbitration as it would amount to throttling party consent and foisting them to resort to a process that they did not agree to.
REFERENCES
1. [2001] UKPC 34
(This article has been authored by Nandika Seth and Himanshu Gupta, third-year students at NMIMS School of Law)
CITE AS: Nandika Seth and Himanshu Gupta, ” Party Autonomy Conundrum vis-a-vis Arbitration” (The Contemporary Law Forum, 16 October 2023) <tclf.in/2023/10/16/party-autonomy-conundrum-vis-a-vis-arbitration> date of access