The place of arbitration agreements in corporate structuring?
Arbitration agreements can have significant implications on complex corporate structures, particularly in dispute resolution, jurisdictional challenges, and enforcement of awards. Identifying the correct parties involved and managing costs are critical considerations. Due to the complex nature of the commercial transactions, it has become necessary to identify the role of all the parties involved in the transaction. The Issue becomes more complicated when any foreign entity is involved.
Why the structured interwoven companies?
A plethora of business transactions today have evolved into complex structures of multi-faceted sub-transactions. Multiple parties enter into several distinct, yet interconnected and interdependent agreements towards achieving a common commercial goal. The issue arises generally when multi party and multi contract arbitration in involved. Where there is multi party arbitration, it may be because there are several parties to one contract or it may be because there are several contracts with different parties that have a bearing on the matter in dispute. The distinction between the two is that where there are several parties to one contract, like joint venture or some other legal relationship of similar kind and the contract contains an arbitration clause, when a dispute arises, the members of the consortium or the joint venture may decide that they would like to appoint an arbitrator. In distinction thereto, in cases involving several contracts with different parties, a different problem arises. They may have different issues in dispute. Each one of them will be operating under different contract often with different choice of law and arbitration clause and yet, any dispute between the employer and the main contracttor is likely to involve or affect one of more of the suppliers or subcontractors, even under other contracts.
Tactics and strategy woes?
Every so often, however, one or more of these interconnected agreements will lack an arbitration agreement, whereas the others will contain similar/related arbitration clauses. Disputing parties may then initiate parallel litigation and arbitration proceedings against each other. It is important to consider that when several parties are involved in a dispute, it is usually considered that the dispute should be dealt with in the same proceedings rather than in a series of separate proceedings. In general terms, this saves time, money, multiplicity of litigation and more importantly, avoids the possibility of conflicting decisions on the same issues of fact and law since all issues are determined by the same arbitral tribunal at the same time. In proceedings before national courts, it is generally possible to join additional parties or to consolidate separate sets of proceedings. In arbitration, however, this is difficult, sometimes impossible, to achieve this because the arbitral process is based upon the agreement of the parties.
Resolving the resolution process?
In complex corporate structures involving multiple entities, business relationships, and cross-border transactions, disputes may arise between various parties within the structure. Navigating disputes within a complex corporate structure may involve multiple arbitration agreements with different terms and jurisdictions, which could complicate the resolution process. The issue would further increase when the parties who are involved in the transactions but are not the party to the arbitration agreement executed by the corporate entities.
More tactics?
One disputing faction would most likely request the relevant State Court to refer all the parties to one tribunal. Conversely, the other faction would resist any request for arbitral reference on grounds that it is a non-party to the arbitration agreement; and/or oppose a composite reference on grounds that the parties have clearly entered into several separate agreements. Given the increasing complexity and growth of commercial transactions today, it has become apparent that even third parties who are not signatories to a contract can sometimes benefit from and be bound by its terms. To address this, Arbitral Tribunals and courts in various jurisdictions have determined that such non-signatories may be required to participate in arbitration based on several grounds, including apparent agency, piercing of the corporate veil, alter ego, third-party beneficiary, and estoppel. These approaches help manage the complexities of modern commercial disputes involving multiple agreements and parties. Among these grounds, the “group of companies” doctrine has garnered significant attention. Originally conceptualized and developed in French law, this doctrine allows Arbitral Tribunals and courts to extend the arbitration agreement to include members of a company group connected to the principal contract, under specific circumstances. While similar to doctrines such as piercing the corporate veil and alter ego, the group of companies doctrine is uniquely designed for arbitration contexts.
In the recent Supreme Court decision of Cox and Kings Ltd. v. SAP India (P) Ltd., the Court reiterated that non-signatory parties can be bound by an arbitration agreement, harmonizing the legal principles that had emerged from previous rulings. The Court based its decision on a combined reading of Sections 2(1)(h) and 7 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), making it clear that the definition of “parties” includes both signatories and non-signatories.
The SC agreed with this approach and emphasized that the Group of Companies (GOC) Doctrine could be applied when there is mutual intention of all the parties to settle their disputes through arbitration. The Supreme Court affirmed that the factors set out in Discovery Enterprises are an effective ‘bright-line’ test to confirm consent. Importantly, Cox and Kings held that the GOC Doctrine does not dilute party autonomy in any way. The Supreme Court clarified that Section 7 of the Arbitration Act permits a party to establish its consent to be bound by an arbitration agreement in multiple ways, not solely by signing. In other words, the GOC Doctrine is consistent with Section 7 as the absence of a signature is not conclusive.
This ruling is significant for arbitration in India, especially where international non-signatories are involved in domestic arbitrations. Some of the key takeaways from the case are:
- Non-signatory inclusion: Non-signatories can be bound by an arbitration agreement, and the Arbitral Tribunal has the authority to determine this. When a non-signatory party actively participates in fulfilling commercial obligations closely related to the core subject matter, it indicates that the party, first, intended to be bound by the arbitration agreement, and second, is not an outsider to the dispute involving the signatory parties. The involvement of the non signatory may create an appearance that it is a veritable party to the contract containing the arbitration agreement, or its conduct “may be in harmony with the conduct of other members of the group” leading the counterparty to believe that the non signatory was a veritable party.
- Jurisdiction complexities: If a non-signatory international party is involved, questions may arise regarding which court has jurisdiction over interim measures or arbitrator appointments. For example, while a domestic arbitration between “X” and “Y” may fall under the jurisdiction of the Commercial Court or the High Court, the involvement of “Z” (an international party) could shift jurisdiction to the Supreme Court.
- Impleadment issues: If a court defers the decision on whether to include a non-signatory until the arbitration award, the non-signatory might be deprived of rights such as seeking interim reliefs under Section 9 of the Arbitration Act. Hence under such circumstances, the role of the Tribunal shall be crucial in identifying the parties for adjudicating the disputes without the multiplicity of proceedings.
- Identification of non signatory: The Supreme Court observed that for invoking this principle, the non-signatory should have had a “positive, direct, and substantial involvement in the negotiation, performance, or termination of the contract.” Incidental involvement is insufficient to bind a non-signatory. The Court also held that the burden is on the party seeking joinder to “prove a conscious and deliberate conduct of involvement of the non-signatory based on objective evidence.”
Binding non-signatories to arbitration—bringing India on par with international practice, Durga Priya Manda and V.P.Singh 27th Dec 2023 available at https://www.scobserver.in/journal/binding-non-signatories-to-arbitration-bringing-india-on-par-with-international-practice/
This judgment strengthens India’s arbitration landscape by providing clarity on the joinder of non-signatories, though practical challenges remain when dealing with international parties in domestic arbitrations. For businesses and legal practitioners, the case underscores the importance of carefully considering the involvement of non-signatory parties in arbitration agreements and the jurisdictional implications that follow. The issues with respect to the involvement of non signatories to an arbitration agreement were into discussions and debates, however, the SC has settled the same by deciding the validity of the international doctrine. Such jurisprudence is essential to clarify the challenges and issues in the complex commercial transaction where multiple parties are involved.