Arbitration and Conciliation Act, 1996:ss. 2(1), 8 –‘Group of companies’ doctrine as expounded in Chloro Control case – Examination of scope and applicability of the doctrine in Indian jurisprudence – Issue as regards whether the parent company, which is not signatory to the arbitration agreement should be joined to this arbitration petition regardless of the fact that petitioner entered into an agreement with only the subsidiary – Held: The ratio of the Chloro Control case alludes to the subjective intention of parties to be bound by arbitration agreement when the parties have clearly not been signatory to the agreement – Concepts like single economic entity are economic concepts difficult to be enforced as principles of law – Areas which were left open by this Court in Chloro Control case has created certain broad-based understanding of this doctrine which may not be suitable and would clearly go against distinct legal identities of companies and party autonomy itself – Law laid down in Chloro Control and the cases following it, appear to have been based, more on economics and convenience rather than law which may not be the correct approach – In view thereof, the matter referred to a larger bench to expound on the intricacies of the Group of Companies doctrine and answer the questions framed – Reference to larger Bench.
Referring the matter to larger Bench, the Court (Per N.V. RAMANA, CJI (for himself and A.S. BOPANNA. J.)
HELD:
1.1 The ratio of the Chloro Control’s case alludes to the subjective intention of parties to be bound by arbitration agreement when the parties have clearly not been signatory to the agreement. Reconciling the two is difficult and requires exposition by this Court. [Para 36][208-D-E]
1.2 It may be noted that the doctrine, as expounded, requires the joining of non-signatories as ‘parties in their own right’. This joinder is not premised on non-signatories ‘claiming through or under’. Such a joinder has the effect of obliterating the commercial reality, and the benefits of keeping subsidiary companies distinct. Concepts like single economic entity are economic concepts difficult to be enforced as principles of law. [Para 37][208-E-F]
1.3 The areas which were left open by this Court in Chloro Control case has created certain broad-based understanding of this doctrine which may not be suitable and would clearly go against distinct legal identities of companies and party autonomy itself. The said exposition in the saidm case clearly indicates an understanding of the doctrine which cannot be sustainable in a jurisdiction which respects party autonomy. There is a clear need for having a re-look at the doctrinal ingredients concerning the ‘group of companies’ doctrine. [Para 38][208-G-H]
1.4 An arbitration agreement may be binding on parties, whether signatories or non-signatories, provided there is sufficient legal basis to bind them. Most legal bases for binding non- signatories to an arbitration agreement are of contractual origin, like agency, etc. Jurisprudence has shown that arbitration being a creature of contract, does not sit very well in binding non-signatories. [Para 45][211-H; 212-A]
1.5 The group of companies doctrine must be applied with caution and mere fact that a non-signatory is a member of a group of affiliated companies will not be sufficient to claim extension of the arbitration agreement to the non-signatory. [Para 46][212-FG]
1.6 It is appropriate to refer the aspect of interpretation of ‘claiming through or under’ as occurring in amended Section 8 of the Arbitration Act qua the doctrine of group of companies to a larger Bench to provide clarity on this aspect. The law laid down in Chloro Control and the cases following it, appear to have been based, more on economics and convenience rather than law. This may not be a correct approach. The Bench doubts the correctness of the law laid down in Chloro Control and cases following it. [Para 47][213-F-G]
1.7 This Court deems it appropriate to refer this matter to a larger Bench to expound on the intricacies of the Group of Companies doctrine and answer the following questions whether phrase ‘claiming through or under’ in Sections 8 and 11 could be interpreted to include ‘Group of Companies’ doctrine; and whether the ‘Group of companies’ doctrine as expounded by Chloro Control Case and subsequent judgments are valid in law? [Para 50][214-B-C]
Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. (2013) 1 SCC 641 : [2012] (13) SCR 402 – Correctness doubted.
Govind Rubber Ltd. v. Louis Dreyfus Commodities Asia (P) Ltd. (2015) 13 SCC 477 : [2014] (12) SCR 488; Dow Chemical France, the Dow Chemical Company v. Isover Saint Gobain ICC Case No. 4131; Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya (2003) 5 SCC
531 : [2003] (3) SCR 558; Roussel-Uclaf v. G.D. Searle & Co. Limited and G. D. Searle & Co. [1978] F. S. R 95; The Mayor and Commonalty & Citizens of the City of London v. Ashok Sancheti [2008] EWCA Civ 1283; Ameet Lalchand Shah v. Rishabh Enterprises (2018) 15 SCC 678 : [2018] (6) SCR 1001; Cheran Properties Ltd. v. Kasturi & Sons Ltd. (2018) 16 SCC 413 : [2018]
(4) SCR 1063; Reckitt Benckiser (India) (P) Ltd. v. Reynders Label Printing (India) (P) Ltd. (2019) 7 SCC
62 : [2019] (8) SCR 966; Mahanagar Telephone Nigam Ltd. v. Canara Bank (2020) 12 SCC 767 : [2019] (11) SCR 660; Peterson Farms Inc. v. C & M Farming Ltd. [2004] EWHC 121 (Comm); Tanning Research
Laboratories Inc v. O’Brien (1990) 169 CLR 332; Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1; Shah Faesal v. Union of India (2020) 4 SCC 1:[2020]
(3) SCR 1115
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