The Doctrine of Group of Companies — In Re: Amazon India v. Future Coupons

This blog post traces the origin and evolution of the Doctrine of Group of Companies and the legal position on the same in India, in order to determine the applicability of the doctrine to Future Retail Limited, which is engaged in a legal battle with Amazon India over the sale of its business undertakings to Reliance Retail.

Factual Background of the Case

A division bench of the Delhi High Court in the ongoing legal tussle between the Future Group and Amazon, declined to invoke the Doctrine of Group of Companies (“the Doctrine”) in enforcing the emergency arbitral award passed by the Singapore International Arbitration Centre (“the SIAC Award”) which put on hold the subsequent deal involving the acquisition of certain business verticals of the Future Group, including Future Retail Limited (FRL), by Reliance Retail. The Doctrine is of importance as the non-signatory corporate entity (FRL) is a prized asset of the Future Group, which is being eyed by two retailing behemoths with a presence in India, to aid their respective inorganic expansion ambitions.

The only difference being one of the two suitors (Amazon), being barred by the Foreign Direct Investment (FDI) policy on multi-brand retail which provides for prior approval of the government for such investments (Approval Route), adopted a backdoor entry to enable its goal of expanding its operations in India by purchasing a 49% stake in another Future Group company — Future Coupons Private Limited (FCPL). The Shareholders Agreement (SHA) between Amazon and FCPL conferred on Amazon the right to purchase promoters’ shareholding in Future Retail at any point in time between the third and tenth year from the date of execution of the SHA. The deal also gave Amazon an indirect stake (of 3.58%) in FRL, as FCPL is a shareholder in FRL[1]. The second suitor, Reliance Retail, made a direct offer to acquire some Future group companies, including FRL, for almost 25,000 crore rupees.

One of the contentions of the Future Group is the non-applicability of the SIAC Award on Future Retail as it was never a party to an arbitration agreement signed with Amazon, and the arbitration clause can thus, only bind FCPL. Although the Delhi High Court refused to invoke the Doctrine, this article attempts to establish the applicability of the Doctrine in the present case.

What is the Doctrine of Group of Companies?

The Doctrine is invoked when a corporate entity which is a non-signatory to an arbitration agreement is made a party to an arbitration. An arbitration clause stands on the foundation of consent between parties with a commercial relationship who agree to resolve disputes arising from such relationship, through arbitration. Thus, the Doctrine seeks to disregard the foundational basis of arbitration i.e., consent of the parties. An arbitration agreement, as defined under Section 7 (2) of the Arbitration and Conciliation Act, 1996, includes a standalone agreement or a clause in a contract to refer disputes arising between contracting parties to arbitration. Inclusion of a non-signatory which did not explicitly agree to be a part of arbitral proceedings, is basis its commercial relationship with the signatory corporate entity, as well as its importance in effecting the contract between signatories, therefore resulting in it being bound by an arbitral award passed pursuant to arbitration.

The Origin of the Doctrine of Group of Companies

The Doctrine has its origin in a maritime arbitration between Map Tankers and Mobil Tankers [2] in the year 1980, when the Society of Maritime Arbitrators (SMA) held that a non-signatory’s standing in arbitral proceedings is based on the existence of a close corporate and operational relationship between the parties as well as with the subject-matter[3].

The Doctrine was further solidified in an arbitral award passed by the International Chamber of Commerce (ICC) in the arbitral proceedings between Dow Chemical France & Ors. and Isover Saint Gobain (the “Dow Chemical Arbitration”[4]). The ICC in invoking the doctrine, overlooked the ‘Separate Legal Entity’ status granted to a body corporate. It was held that all entities in a corporate group form a part of the same economic reality. The ICC also considered the inclusion of non-signatories by virtue of them being veritable parties to a contract which contained arbitration clauses, owing to their role in concluding, performing, or terminating the said contract. This condition was to go hand-in-hand with the existence of mutual intention of all parties who agree to resolve disputes through arbitration, to bind even non-signatories to such agreements, subject to such non-signatories being a part of a larger corporate group including a signatory’s sister and parent concerns. Therefore, the twin conditions that need to be satisfied for the invocation of the doctrine include:

1.) A non-signatory party’s role in concluding, performing, or terminating a contract with an arbitration clause.

2.) Mutual intention of all disputing parties to bind non-signatories.

The Application of the Group of Companies Doctrine in India

The Doctrine’s application in India can be traced back to the year 2012 when the Supreme Court rendered a decision in the case of Chloro Controls India Pvt. Ltd. v Severn Trent Water Purification Inc. and Ors. The Apex Court while invoking the Doctrine, held that such invocation can only be in exceptional cases, and subject to the fulfillment of three conditions. The trinity of these conditions include:

1. ) A direct relationship between the non-signatory and the signatory
2. ) A direct commonality between the arbitration agreement’s subject-matter and the non-signatory
3. ) Existence of a composite transaction with multiple agreements having a singular objective, where the effective performance of the principal agreement is subject to the aid, execution, and performance of ancillary agreements, the responsibility for enforcement of such ancillary agreements being on the non-signatory.

The Apex Court, citing the decision in the Chloro Controls case, held in Cheran Properties v Kasturi & Sons Ltd. & Ors., “The effort (in applying the Doctrine) is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory.”

The Bombay High Court, in the case of Kotak Mahindra Bank v. Williamson Magor & Company Limited and Anr. held that the Doctrine existed to fulfill the mutual intention of parties who entered into multiple agreements, enfolded into an umbrella agreement. Additionally, the subject-matter of all such enfolded agreements were common so as to give rise to a mutual intention to bind the parties of the enfolded agreements, to arbitration.

What is a Group of Companies?

A group of companies (GOC), also referred to as a corporate group, is a collection of companies that are controlled by a single entity, with the former being termed subsidiaries and the latter a parent company. Thus, a GOC is treated as a single economic entity. The Single Economic Entity doctrine envisages a relationship wherein business decisions of a subsidiary are jointly made with its parent[5].

The Apex Court, in ‘Mahanagar Telephone Nigam Ltd. v Canara Bank’ (“the MTNL case”), elaborated on what constituted a group of companies. The Court held that a group of companies is a tight group structure with strong organizational and financial links which renders the group to be considered a single economic reality. This contrast differentiates it with separate legal entities within a group and thus creates an exception to the rule of privity of contract where contractual rights and corresponding obligations are conferred only on parties to a contract.

The Applicability of the Doctrine to Future Retail

The Shareholders’ Agreement (the ‘FRL SHA’) entered into among FRL, FCPL, and certain existing shareholders including Mr. Kishor Biyani, who form a part of the promoter group of FRL, conferred on FCPL certain special shareholder rights which were to be exercised for the benefit of Amazon. These rights were granted on the basis of stock warrants held by FCPL, which when exercised, would result in a 7.3% stake (in terms of voting power) in FRL. The special rights, among others, included Board observer nomination rights and affirmative voting rights in relation to disposal of material assets of FRL, issuance of share capital, etc.

Thus, the FRL SHA can be considered the ancillary agreement whose performance is essential for the enforcement of the principal agreement i.e., the Shareholders’ Agreement among FCPL, Amazon, and FRL’s promoter group (the ‘FCPL SHA’). This essentiality of performance of one agreement for the enforceability of the contractual rights granted by another, as per the Apex Court’s decision in the Chloro Controls case, satisfies the third condition of casting responsibility of the execution of an ancillary agreement on a non-signatory, thus making them so vital in a composite transaction so as to deem their inclusion as a signatory to an arbitration agreement which they had not originally entered into. Secondly, the investment in FCPL, which as per the FCPL SHA was to flow down to FRL, indicates the direct commonality between the subject-matter of the FCPL SHA and FRL (the non-signatory). Finally, FCPL’s shareholding in FRL as well as the common promoter group between the two entities, suffices to establish a direct relationship between the non-signatory and the signatory.

The Supreme Court, in the MTNL case, enumerated the particular applicability of the Doctrine in cases where “… the funds of one company are used to financially support or re-structure other members of the group”

An assumption as to inclusion of a non-signatory is also made based on its conduct, wherein such conduct evidences an intention to arbitrate. The absence of any contentions raised by FRL’s independent directors or any other personnel with managerial or decision-making powers during the signing of the FCPL SHA, despite such SHA containing clauses involving FRL, shows an implicit consent to be bound by the SHA and all provisions thereof, including the arbitration clause. Thus, the Doctrine of Assumption is also a precursor to the application of the Doctrine of Group of Companies.

Closing Remarks

Despite corporate law jurisprudence conferring a distinct legal identity on companies, instances such as the present litigation between Amazon and the Future Group rightly call for a way around this legal principle. As is enunciated by the Supreme Court as well as various High Courts, the Doctrine of Group of Companies is put in place and used in circumstances where the inclusion of a non-signatory is essential to effectuate a composite transaction. All evidences in the present case point to the applicability of the Doctrine by way of fulfillment of essentials laid down by the Apex Court in various case laws.

References:

[1] ‘What Are Amazon’s Options After CCI’s Suspension of Deal with Future Coupons’, 21st December 2021, BusinessToday.in

[2] Map Tankers, Inc v Mobil Tankers Ltd., SMA 1510 (1980)

[3] Andre Pereira Da Fonseca, Status of Non-signatory Parties in Maritime Arbitration — London and New York Compared, Ab Instantia, Ano 7 2017, P.129

[4] ICC Case №4131, Y.C.A. Vol. IX (1984), 131

[5] Mahesh Buland, ‘A Study of Single Economic Entity Doctrine in Context of India’ IJLMH Vol.2 Issue 1 (ISSN:2581–5369)