Oct 27, 20202 min

The Group of Companies Doctrine

Updated: Nov 2, 2020

-- By Advocate Ankita Sarangi--

Before understanding the Group of Companies doctrine, we must first pay attention to the doctrine of privity of contract, the basic law that states that any third party to a contract or a non signatory to an agreement is not bound by its terms and they cannot enforce rights under the same. There are certain exceptions to the rule and that ushers in the Group of Companies Doctrine which is popularly used in the context of Arbitration proceedings. There can be certain exceptions to the doctrine of privity of contract where it is possible to treat the "alter ego" of a company to be the company itself. When parties enter into contract they often include a clause stating that their Representatives, successors and assigns (Any entity acquiring or succeeding to substantially all or in general all of the assets and business of the Company either by operation of law or otherwise), can be compelled to arbitrate any dispute arising, get the benefits or be bound by any resulting awards instead of the original signatory. One needs to bear in mind what clauses to include at the time of drafting the contract if they want to avoid the doctrine being attracted in future.

However it needs to be distinguished from the Doctrine of Piercing the Corporate Veil, although their objectives may sound similar, theoretically.

The doctrine emerged for the very first time in the famous Dow Chemical case where ICC decided that the parent company, Dow Chemical Company (USA) should become a party to an agreement applying to its subsidiary Dow Chemical (France). This was for the first time applied in India in the case of Chloro Controls India v. Severn Trent Water Purification, (2013) 1 SCC 641 which laid down a composite transaction test whose definition was later expanded in a notable judgement by the Supreme Court in Mahanagar Telephone Nigam v. Canara Bank (Civil Appeal Nos. 6202-6205 /2019) which held that subsidiaries shall be bound by an arbitration agreement entered into by the parent, observing that merely having common ownership or control was not enough to bind the affiliates, subsidiary or a parent as non-signatory group companies. Instead, certain additional elements such as common intention, whether non-signatory companies are benefiting from the contract or performance of the contract in question by non-signatories needs to be taken into consideration.