Tidying the Muddled Indian Jurisprudence of Group of Companies Doctrine through Arbitral Estoppel

The Indian jurisprudence on binding non-signatories to an arbitration agreement has seen significant development over the years, starting from the decision in Indowind Energy v Wescare (I) Ltd, where the Supreme Court refused to lift the corporate veil and bind non-signatories to an arbitration agreement, to Chloro Controls v Severn Trent, where the group of companies doctrine was applied by the Supreme Court which entailed binding non-signatory affiliates or sister concerns if the facts exemplify the mutual intent of the parties to bind such non-signatory entities. Though various contractual and non-contractual means were recognised by the Supreme Court in Chloro Controls to bind non-signatories, subsequent judgements by Indian courts have confined themselves primarily to the group of companies doctrine as evident from the line of decisions in Ameet Lalchand Shah v Rishabh Enterprises, Cheran Properties v Kasturi and MTNL v Canara Bank.

Recently, the Supreme Court in its decision in ONGC v Discovery Enterprises alluded to the application of the doctrine of estoppel to bind non-signatories to an arbitration agreement, citing a recent article by John Fellas in the New York Law Journal. Though the Supreme Court’s predominant focus in this case remained on the group of companies doctrine to set aside an interim award, this may pave the way for future decisions to develop the doctrine of estoppel to bind non-signatories. This is important in light of the inconsistent and specious stands taken by Indian courts while applying the group of companies doctrine by, inter alia, attempting to retrofit it to any given set of facts and failing to inquire into the intent of the parties, which is sine qua non in order to bind non-signatories.

In the present post, the author argues why the doctrine of estoppel is a much needed tool for reforming the muddled Indian jurisprudence on the issue of binding non-signatories to an arbitration agreement in view of the fact that the doctrine of estoppel is already well ingrained in the common law system of India. 

The Need for Arbitral Estoppel in Indian Jurisprudence

The limitations of the applicability of the group of companies doctrine have been writ large in India.

The decision in Chloro Controls derived the justification for applicability of the group of companies doctrine by relying on the phrase ‘claiming through or under’ contained in section 45 of the Arbitration and Conciliation Act 1996 (‘Arbitration Act’) which relates to the power of courts to refer a matter to arbitration where the arbitral seat is not in India . This doctrine was later extended to India-seated arbitrations in Ameet Lalchand owing to the amendment brought by the Indian legislature in 2015 whereby the phrase ‘claiming through or under’ was added to section 8 of the Arbitration Act.

However, the fixation with the group of companies doctrine in India has led to its application under provisions other than sections 8 and 45 which do not contain such a phrase (see Purple Medical Solutions v MIV Therapeutics). This has caused unwarranted confusion as the Supreme Court has failed to clarify that the application of the group of companies doctrine is not contingent upon the existence of such phrasing in a provision.

Another illustration of the problematic application of the group of companies doctrine is the erroneous application of the doctrine by Indian courts to parties that were not even part of the same corporate group, such as in Ameet Lalchand (supra) and RV Solutions v Ajay Kumar Dixit, on the basis that the parties formed part of the same composite transaction.

Further, the purpose of applying principles such as the group of companies doctrine is to determine and establish implied consent to be bound by an arbitration agreement. The presence of implied consent is a question of fact which has to be established based on the documents on record and the conduct of the parties. Ironically, when applying this doctrine, Indian courts often neglect the factual inquiry into the existence of implied consent (See SEI Adhavan v Jinneng and Magic Eye Developers v Green Edge Infra).

India’s Tryst with Doctrine of Estoppel

The concept of binding non-signatories to an arbitration agreement on the basis of the doctrine of estoppel has its roots in American jurisprudence which has been developed through judicial precedents. It can be broadly classified into two categories, ie, (a) equitable estoppel (or direct benefits estoppel), which is a common law doctrine stemming from the principles of equity and fairness, and (b) intertwined estoppel, which is intended to preserve the efficacy of an arbitration proceeding.

Being a common law jurisdiction, the usage of the doctrine of estoppel in contractual interpretation is not alien to Indian courts. The principles of ‘approbate and reprobate’ and/or ‘blowing hot and cold’ are well-recognised concepts which have been consistently applied by Indian courts to interpret commercial contracts. In fact, the Supreme Court in Shyam Telelink Ltd. v Union of India relied on the American principles of equitable estoppel to interpret a statutorily regulated commercial contract and held that a party is prevented from taking inconsistent positions in respect of a contract under which it has knowingly accepted benefits.

In the context of arbitration, last year the Delhi High Court in Shapoorji Pallonji v Rattan India, had relied on American precedents, highlighting the applicability of the doctrine of estoppel to bind non-signatories to an arbitration agreement.

Thus, the foundation to extend the application of the principle of equitable estoppel to the interpretation of arbitration agreements is laid in India. 

In matters involving closely related parties, transactions and/or claims, the application of intertwined estoppel instead of the group of companies doctrine may provide a better justification for binding non-signatories forming part of a composite transaction in the interest of preserving the efficacy of the arbitration. Further, applying a hybrid form of equitable estoppel and intertwined estoppel may also aid Indian courts in determining implied consent by examining whether any benefits were knowingly received by a party and analysing how closely these benefits were related to the signatories, transactions or claims in question.

Thus, the foregoing demonstrates the need for Indian courts to employ principles such as arbitral estoppel rather than rely on the straitjacket application of the group of companies doctrine in every factual scenario.

Conclusion

Binding non-signatories to arbitration agreements when the situation demands it is a necessary and pragmatic approach in light of the increasing uncertainty about the identity of a company. It also brings together all the relevant parties to a contractual claim or breach in a single forum and prevents a multiplicity of proceedings.

However, the prevalent misapplication of the group of companies doctrine by Indian courts is a desperate indication to explore other routes to bind non-signatories. Principles of arbitral estoppel have proven to be a successful approach in America and its seeds are already embedded in India’s common law system. Further, the doctrine of group of companies and arbitral estoppel are not mutually exclusive and may be applied to a factual scenario together with other contractual and non-contractual principles.

While the Supreme Court in ONGC (supra) and the Delhi High Court in Shapoori Pallonji (supra) have given this approach a direction, it is now up to future judicial decisions to develop it further and extend its proper application to arbitration agreements which is the need of the hour in view of the growing complications of modern commercial agreements and transactions.

Ameya Vikram Mishra is an Associate in the office of Justice A.K. Sikri, former Judge of the Supreme Court of India and International Judge, Singapore International Commercial Court.