Supreme Court clarifies Group of Companies Doctrine in Arbitration: Reckitt Benckiser vs. Reynders Label Printing (2019)

Introduction

Date of the Judgment: 01 July 2019
Citation: Not Available (as per the provided document)
Judges: A.M. Khanwilkar, J. and Ajay Rastogi, J. (Bench of two judges)
Can a company that didn’t sign an arbitration agreement be forced into arbitration just because it’s part of the same group as the company that did? This is the core question the Supreme Court of India tackled in this case. The court examined whether the “group of companies” doctrine could be applied to bring a non-signatory company into arbitration proceedings. The judgment was delivered by a two-judge bench comprising Justice A.M. Khanwilkar and Justice Ajay Rastogi.

Case Background

Reckitt Benckiser (India) Private Limited (the applicant) entered into an agreement with Reynders Label Printing India Private Limited (Respondent No. 1) on May 1, 2014, for the supply of packaging materials. The applicant sought to include Reynders Ttiketten NV (Respondent No. 2), a company based in Belgium, in the arbitration proceedings, arguing that it was the parent/holding company of Respondent No. 1 and part of the same “group of companies.” Respondent No. 2 denied being the parent company and stated that both companies are subsidiaries of a common holding company, Reynesco NV. The applicant claimed that Respondent No. 2 was involved in the negotiation process and was a disclosed principal.

Timeline:

Course of Proceedings

The applicant filed an application under Sections 11(5), 11(9), and 11(12)(a) of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator. The primary issue was whether Respondent No. 2, a non-signatory to the arbitration agreement, could be impleaded in the arbitration proceedings. Respondent No. 1 did not object to the appointment of a sole arbitrator for disputes between itself and the applicant, but contended that it would be a domestic commercial arbitration, not an international one. Respondent No. 2 refuted the claims of being a parent company and denied any involvement in the negotiation, execution or performance of the agreement.

Legal Framework

The Supreme Court considered the following legal framework:

• Sections 11(5), 11(9) and 11(12)(a) of the Arbitration and Conciliation Act, 1996: These sections deal with the appointment of arbitrators by the Supreme Court or a person or institution designated by it.
• Section 11(6) read with Section 11(6A) of the Arbitration and Conciliation Act, 1996: These provisions limit the court’s role to examining the existence of an arbitration agreement.
• Section 7(4)(b) of the Arbitration and Conciliation Act, 1996: This section defines an arbitration agreement as a document signed by the parties or an exchange of letters, telex, telegrams, or other means of telecommunication which provide a record of the agreement.
• The “group of companies” doctrine: This doctrine, as expounded in Chloro Controls India Private Limited Vs. Severn Trent Water Purification Inc. and Ors. and Cheran Properties Limited Vs. Kasturi and Sons Limited and Ors., allows for non-signatory affiliates within a group of companies to be bound by an arbitration agreement in certain circumstances.

The Court noted that the “group of companies” doctrine is intended to facilitate the fulfillment of a mutually held intent between parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories. The court emphasizes that the true essence of the business arrangement must be found, and an intent to bind a non-signatory must be unraveled from the layered commercial arrangements.

Arguments

Applicant’s Arguments:

• The applicant argued that Respondent No. 2, though a non-signatory, was bound by the arbitration agreement due to the “group of companies” doctrine.
• It contended that Respondent No. 2 was the parent/holding company of Respondent No. 1 and was involved in the negotiation process.
• The applicant asserted that Mr. Frederik Reynders, who was involved in the negotiations, was acting on behalf of Respondent No. 2.
• The applicant relied on emails and other correspondence to show that Respondent No. 2 was aware of and participated in the agreement, particularly concerning the indemnity clause.
• The applicant claimed that the arbitration agreement was an integral part of the agreement executed between the applicant and respondent no.1 on its behalf and on behalf of its disclosed principal, namely, respondent no.2.

Respondent No. 1’s Arguments:

• Respondent No. 1 did not object to the appointment of a sole arbitrator for disputes between itself and the applicant.
• It contended that the arbitration would be a domestic commercial arbitration and not an international one, as Respondent No. 2 was not a party to the agreement.

Respondent No. 2’s Arguments:

• Respondent No. 2 refuted the claim that it was the parent/holding company of Respondent No. 1.
• It stated that both companies were part of the Reynders Label Printing Group, with a common parent entity, Reynesco NV.
• Respondent No. 2 denied any involvement in the negotiation, execution, or performance of the agreement.
• It argued that Mr. Frederik Reynders was not associated with Respondent No. 2 and was an employee of Respondent No. 1.
• Respondent No. 2 contended that it had no privity of contract with the applicant and no intention to be bound by the arbitration agreement.

Sub-Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether respondent No.2, a non-signatory to the agreement dated 1st May 2014, executed between the applicant and respondent No.1, could be impleaded in the proposed arbitration proceedings merely because it is one of the group companies of which respondent No.1 also is a constituent.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

• Chloro Controls India Private Limited Vs. Severn Trent Water Purification Inc. and Ors. [(2013) 1 SCC 641] (Supreme Court of India): This case established the “group of companies” doctrine, stating that in certain circumstances, an arbitration agreement entered into by a company within a group can bind its non-signatory affiliates.
• Cheran Properties Limited Vs. Kasturi and Sons Limited and Ors. [(2018) 16 SCC 413] (Supreme Court of India): This case followed and applied the doctrine expounded in Chloro Controls India Private Limited, emphasizing that modern business transactions often involve multiple layers and agreements, and the intent of the parties should be considered.
• Godhra Electricity Co. Ltd. and Anr. Vs. State of Gujarat and Anr. [(1975) 1 SCC 199] (Supreme Court of India): This case was cited to support the argument that post-negotiations would not bind a party to an arbitration agreement.

Legal Provisions:

• Sections 11(5), 11(9) and 11(12)(a) of the Arbitration and Conciliation Act, 1996: These provisions deal with the appointment of arbitrators by the Supreme Court or a person or institution designated by it.
• Section 11(6) read with Section 11(6A) of the Arbitration and Conciliation Act, 1996: These provisions limit the court’s role to examining the existence of an arbitration agreement.
• Section 7(4)(b) of the Arbitration and Conciliation Act, 1996: This provision defines an arbitration agreement as a document signed by the parties or an exchange of letters, telex, telegrams, or other means of telecommunication which provide a record of the agreement.

Table of Authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Chloro Controls India Private Limited Vs. Severn Trent Water Purification Inc. and Ors. [ (2013) 1 SCC 641 ]* and Cheran Properties Limited Vs. Kasturi and Sons Limited and Ors. [ (2018) 16 SCC 413 ]* to explain the “group of companies” doctrine. However, it distinguished the facts of the present case, stating that the applicant failed to establish that Respondent No. 2 had the intention to be bound by the arbitration agreement.
• The Court cited Godhra Electricity Co. Ltd. and Anr. Vs. State of Gujarat and Anr. [ (1975) 1 SCC 199 ]* to support the argument that post-negotiations would not bind respondent no.2 to the arbitration agreement.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The lack of evidence that Mr. Frederik Reynders was associated with respondent no.2 or had authority to act on its behalf.
• The fact that respondent no.2 was not a signatory to the arbitration agreement and had no direct involvement in the negotiation process.
• The principle that a non-signatory can only be bound by an arbitration agreement if there is clear evidence of their intention to be bound.

Sentiment Analysis of Reasons:

Fact:Law Ratio:

Logical Reasoning:

The Court emphasized that the burden was on the applicant to establish that Respondent No. 2 had an intention to consent to the arbitration agreement. The court found that the applicant had failed to discharge this burden.

The Court stated: “For, the burden is on the applicant to establish that respondent No.2 had an intention to consent to the arbitration agreement and be party thereto, maybe for the limited purpose of enforcing the indemnity clause 9 in the agreement.”

The Court also noted: “If the main plank of the applicant, that Mr. Frederik Reynders was acting for and on behalf of respondent No.2 and had the authority of respondent No.2, collapses, then it must necessarily follow that respondent No.2 was not a party to the stated agreement nor had it given assent to the arbitration agreement.”

The Court further observed: “Suffice it to observe that respondent No.2 was never involved in the negotiation process concerning the stated agreement dated 1st May, 2014.”

Key Takeaways

• The “group of companies” doctrine does not automatically bind non-signatory affiliates to an arbitration agreement.
• There must be clear evidence of the non-signatory’s intention to be bound by the arbitration agreement.
• The burden of proof lies on the party seeking to implead a non-signatory in arbitration proceedings.
• Post-negotiation conduct does not bind a party to an arbitration agreement.
• The court’s role in Section 11 applications is limited to examining the existence of an arbitration agreement.

Directions

The Supreme Court appointed Mr. Justice Badar Durrez Ahmed (Former Chief Justice, Jammu & Kashmir High Court) as the sole arbitrator to conduct domestic commercial arbitration at New Delhi between the applicant and Respondent No. 1.

Development of Law

The ratio decidendi of this case is that the “group of companies” doctrine cannot be applied to bind a non-signatory to an arbitration agreement without clear evidence of their intention to be bound. This judgment clarifies the scope and limitations of the doctrine, emphasizing the need for a clear intention to be bound by the arbitration agreement. The court reiterated the principle that the burden of proof lies on the party seeking to implead a non-signatory in arbitration proceedings.

Conclusion

The Supreme Court dismissed the application against Respondent No. 2, holding that it could not be impleaded in the arbitration proceedings. The court, however, appointed a sole arbitrator for domestic commercial arbitration between the applicant and Respondent No. 1. This judgment clarifies the application of the “group of companies” doctrine, emphasizing the need for clear evidence of a non-signatory’s intention to be bound by an arbitration agreement.

Category

• Arbitration Law
  • Group of Companies Doctrine
  • Non-Signatory Arbitration
  • Appointment of Arbitrator
  • Section 11, Arbitration and Conciliation Act, 1996
• Arbitration and Conciliation Act, 1996
  • Section 11, Arbitration and Conciliation Act, 1996
  • Section 7, Arbitration and Conciliation Act, 1996

FAQ

Q: What is the “group of companies” doctrine in arbitration?

A: The “group of companies” doctrine allows a non-signatory company within a group to be bound by an arbitration agreement signed by another company in the same group, under certain circumstances.

Q: Can a company be forced into arbitration if it didn’t sign the arbitration agreement?

A: Generally, no. A company can only be forced into arbitration if it is a signatory to the agreement or if there is clear evidence of its intention to be bound by the arbitration agreement, such as through the “group of companies” doctrine.

Q: What does this judgment mean for businesses?

A: Businesses need to be cautious about assuming that all companies within a group are automatically bound by an arbitration agreement signed by one of them. Clear evidence of intent to be bound is required for non-signatories.

Q: What is the role of the court in appointing an arbitrator?

A: The court’s role is limited to examining the existence of an arbitration agreement. It cannot delve into the merits of the dispute at the stage of appointing an arbitrator.

Q: What if a company participates in negotiations but doesn’t sign the agreement?

A: Participation in negotiations alone is not sufficient to bind a non-signatory to an arbitration agreement. There must be clear evidence of an intention to be bound.