Consent is a cornerstone of arbitration proceedings. Theoretically, an arbitration proceeding cannot be invoked without the consent of the parties. International and national instruments mandate the requirement of a written arbitration agreement for referring a dispute to arbitration. However, this rule has undergone a sea-change and is no more an absolute rule. The present article discusses mechanisms for compelling a non-signatory to participate in arbitration proceedings in cases of multiple agreements binding multiple parties.
Alter Ego, Group of Companies’ Doctrine, Non-signatory
The jurisprudence surrounding Arbitration Law has undergone a sea-change. A plethora of judgments have discussed the issue relating to the lifting of corporate veil and claims brought against a group of companies in arbitration proceedings. Owing to the complex structure of transactions, parent companies are often non-signatories to arbitration agreements. For the arbitrators, a motion to join the non-signatories as parties to the arbitration proceedings creates a dichotomy between the two guiding principles of arbitration, i.e., maintaining the ‘consensual nature’ of arbitration and maximizing the practical efficacy of an award by making it binding on the correct and related party. To reach the financial resources of large shareholders, claimants sometimes initiate arbitration proceedings against the parent company. Considering prevailing business models and complexity in contracts, many theories have been developed to extend arbitration agreements to non-signatories (parent companies), such as ‘implicit consent’ and ‘piercing the corporate veil,’ among others. Assessment of the factual matrix for application of these doctrines by Indian courts has resulted in muddled jurisprudence.
The present article discusses this concept with reference to recent judicial pronouncements, pondering over how the irregular assessment of facts in these cases has led to contrasting opinions over disputes involving a similar question of law and similar factual matrices.
Related Party And Multiple Contracts
The debate about non-signatories remains broadly unsettled and has surfaced as one of the most pervasive problems in international arbitration. As a general norm, a party’s right to participate in an arbitration is exclusively determined on a contractual basis. Any legal or financial interests that a party may have as a result of the arbitration are principally irrelevant unless there is an agreement to arbitrate beforehand.i.
The question of considering the extension of an arbitral agreement to a non-signatory arises when there is an element of commonality that weaves together the relationship between the various contracts involved. A situation when a single contractual transaction ensures involvement of different companies at different stages of the transaction to make it a commercially effective model of operation.
In addition to the aspect of jurisdiction, the enforcement mechanism of arbitral awards is built around the bedrock principle of party autonomy . Consequently, the violation of this principle is amongst the few prescribed grounds recognized for non-enforcement of arbitral awards.
Principles enunciated under Arbitration Law have attempted to respond to these challenges by developing a wide range of theories and legal constructs. The overarching idea behind all these theories is that a non-signatory will be bound by an arbitration agreement if it has impliedly consented to it or by operation of the contract. This principle accommodates the need for complex business transactions and commercial realities.
POSITION OF NON-SIGNATORIES IN ARBITRATION PROCEEDINGS
As against the general presumption, there are circumstances wherein the non-signatories may be held to be parties and are bound and benefitted by consequences of the same. Various legal theories, inter alia , alter ego, agency, group of companies, implied consent are invoked.
“Alter Ego,” as defined in most jurisdictions , is when one party entirely dominates the affairs of the other party, it is appropriate to disregard the separate identity of the two companies and rather treat them as a single entity. To establish the requirements of “Alter Ego,” it is important to furnish convincing evidence that one entity dominates the day-to-day actions of another, and that the former has exercised his power to work fraud or another injustice on a third party or to evade statutory or other obligations.
Another circumstance to invoke an arbitration clause against/by a non-signatory is the existence of a “contract of agency” . By the creation of “agency” , the principle bestows upon the agent a certain character. To some extent, the agent is to be the alter ego of the principal. It is well settled that in cases where the signatory is an agent of the principal, and the agreement was executed on his behalf, the principal can be compelled to arbitrate even if he is not a signatory to the main agreement or the ancillary agreement containing the arbitration clause. Barcelona Traction, Light and Power Company Ltd. (Belgium v. Spain) , is considered to be a landmark case, wherein the International Court of Justice applied the doctrine of “alter ego” and compelled the non-signatories to arbitrate by disregarding the corporate façade. Reiterating the same principle, the apex court in the case of Chloro Controls (India) (P) Ltd. laid down the agent-principal relationship as one of the two grounds to compel non-signatories to arbitrate.
Another significant yet difficult approach for binding non-signatories to an arbitration agreement is the “group of companies” doctrine. The doctrine is founded upon the principle of good faith and the inadmissible abuse of the separation of legal entities. Under this principle, after establishing sufficient threshold of nexus, non-signatories of a contract can be considered parties to the associated arbitration clause based on roughly comparable factors to those relevant to alter ego analysis. This “group of companies” doctrine was also invoked in cases where there was a complex group structure with strong financial and organizational nexus.
For the first time, pursuant to the French Arbitration Practice, the “group of companies” doctrine was applied in Dow Chemical v. Isover-Saint-Gobain to compel a non-signatory to an agreement to arbitrate. The court observed that the principal company (non-signatory) applied absolute control over the subsidiary company (signatory). Irrespective of their distinct judicial identities, the group of companies in question acted as the alter ego of the principal company and constituted one economic entity. Presently, this case is the primary authority on the application of the doctrine. The ‘requirements’ of the doctrine laid down in the case of Dow Chemicals were reiterated by the Supreme Court of India in MTNL v. Canara Bank .
The doctrine of “alter ego” is conceptually no different from the concept of piercing the corporate veil. To analyse if the parties are working as an agent-principle or an alter-ego, it is material to disregard the corporate façade and lift the corporate veil to understand if the non-signatories have sufficient nexus with the dispute and can be bound by the arbitration clause. These doctrines are applicable to disregard the corporate personality only when it is found that the corporate form is being used to perpetuate fraud or a wrongful purpose.
THE PRO-ARBITRATION STANCE OF INDIAN COURTS
The apex court, for the first time in the case of Sukanya Holding Pvt. Ltd. , discussed the position of the non-signatory in arbitration proceedings. The Court held that a non-signatory to the arbitration agreement could not be referred to arbitration as no provision in the Act prescribes the same. Amendment to the Arbitration and Conciliation Act, 1996 was made to bring the statute in consonance with the UNCITRAL Model Law (UML) and the New York Convention (NYC) . The court observed that the UML and the NYC have not considered this issue, leaving no common ground to consider when it will be justified to extend the arbitration agreement to non-signatories.
This issue regarding the silence of UML and NYC was addressed recently by the US Supreme Court in the case of GE Energy Power Conversion . The Court opined that nothing in the NYC prohibits the court from extending the application of an arbitration clause to a non-signatory, neither during the proceedings nor during the time of enforcement of an arbitral award. Hence, the non-signatories may enforce the arbitration agreement under the domestic doctrines, inter alia “equitable estoppel”, “group of companies” . The silence of the NYC is held to be dispositive here because nothing in the text of the Convention can be read otherwise, prohibiting the extension of the arbitration agreement to a non-signatory.
Subsequently, the Supreme Court of India in Chloro Controls , accepted the “Group of Companies” doctrine evolved in Dow Chemical , and provided an exceptional scenario wherein a non-signatory could be included in arbitration. The judgment of Sukanya Holdings was not considered to have precedential value in this case as it was a foreign seated arbitration in the context of Section 8 of the Arbitration Act. After these judgments, the Arbitration Act was amended in 2015 to apply the ratio of Chloro Controls even to domestic arbitrations. It replaced the word “party” with “a party to the arbitration agreement or any person claiming through or under him.”
Recently, in Shapoorji Pallonji and Co. Pvt. Ltd. , the dispute arose with respect to the execution of work and rendering the service agreed to in the contract between the parties. The petition arose under Section 11 of the Arbitration Act for joinder of the parent company as one of the parties to the arbitration proceedings.
The Delhi High Court, while piercing the corporate veil, observed that the subsidiary company was a special purpose vehicle for executing the impugned project and had no other purpose but to facilitate the contract. It was also observed that the subsidiary company was not organized and staffed differently and independently by the parent company. This signified that both the companies had a common string of finances and human resources. With this, the court safely concluded that the doctrine of “alter ego” was applicable in the instant case.
In the cases wherein the respondent company is a mere puppet of the parent company (non-signatory), such parent company is liable to be bound by the Arbitration Agreement. Subsidiaries being run by common officers, treated as the same profit centres, and sharing common office space, were considered to be a few circumstances which justified the piercing of the corporate veil . These principles were developed in ICC arbitral awards, which were then recognized and applied by the Supreme Court of India in various internationally seated and domestic arbitrations.
On the contrary, in Ahlcon Parenterals India , the claims against the sister entities were disallowed by the arbitral tribunal on the ground that the sister entities were not a party to the contract. There was substantial evidence placed on record to establish the connection between the impugned sister companies. However, the Delhi High Court did not re-evaluate the evidence and supplant its opinion over that of the Arbitral Tribunal. In such cases, the Principle of Agency in contract law can be invoked to allow the claims of non-payment against the non-signatories. This would thus relieve the innocent parties from the burden of proving the elements of “group companies” doctrine to include such sister entities in the fruits of the arbitration award.
Commercial entities have embraced arbitration as an accessible and often preferred means of dispute resolution. Taking a pro-arbitration stance, precedents have developed sufficiently to accommodate commercial reality. The apex court has evolved the horizon of domestic arbitration by adopting the doctrines based on ‘implied consent’ or on ‘disregard of separate legal person/entity.’ However, differed analysis of similarly placed facts has led to varying conclusions. Hence, it is important that while adjudicating the role of non-signatories in arbitration proceedings, tribunals examine the liaisons between the corporations and the level of control exercised by one company over another. To ensure certainty, it is important that the application of the doctrine be adamant and coherent.
The number of disputes regarding the non-signatories has constantly increased and the existing jurisprudence requires substantial development. Judicial precedents depict a divide between rhetoric and actual practice, which is based on ‘consent’ as a bedrock principle of arbitration. There is a need for a shift from a consent-based mechanism, to a dispute-based mechanism. Under dispute-based mechanism, tribunals can be authorised to assume jurisdiction against non-signatories, if the dispute demands so. This will make arbitration coherent and inclusive towards non-signatories, which will be better equipped to facilitate contemporary commerce whereas the restrictive approach might result in the ineffectiveness of arbitral proceedings.
i Stavros Brekoulakis, Chapter 8: Parties in International Arbitration: Consent v Commercial Reality. in David and others (eds), The Evolution and Future of International Arbitration (International Arbitration Law Library, Volume 37, Kluwer Law International 2016) 119.