The Unseen Economic Effects of Inclusion of Non-Signatories Into An Arbitration: Analysis of Chloro Chemical Judgement

-Digvijay Singh

Introduction

The genesis of arbitration can be traced back to the principles of economics, which have shaped its constitution as a discipline. Arbitration was developed as a means to address disputes in a manner that promotes cost-cutting, enhances efficiency, and provides a viable alternative to litigation. By embracing arbitration, parties involved in disputes aim to ensure the adoption of sustainable practices.

One of the primary reasons behind the establishment of arbitration as a discipline is cost-cutting. Traditional litigation processes can be lengthy, complex, and expensive. They often involve extensive court proceedings, legal representation, discovery processes, and other associated expenses. In contrast, arbitration offers a more streamlined and cost-effective approach to resolving disputes. The arbitration process typically involves a neutral third-party arbitrator or a panel of arbitrators who facilitate the resolution of conflicts through a structured and less formal procedure. What, in turn this leads to is the creation of a system of adjudication where there are winners and losers but a system of application where people negotiate in a manner that it creates benefits as transaction costs are reduced.

This process was severely impacted by a recent supreme court judgement in the case of Chloro chemicals, where the Supreme Court of India adjudicated that a third party could also be a part of the arbitration through the “group of companies” doctrine. This has serious legal ramifications but in this piece I elucidate how the same would have deep economic ramifications as well.

The Economics of Group Companies Doctrine

The Group of Companies doctrine plays a crucial role in defining the legal responsibilities, liabilities, and contractual obligations of these entities, especially when it comes to binding non-signatory entities within the corporate group. Under this doctrine, the actions or agreements of one entity within a corporate group can be attributed to another related entity, even if the latter is not a signatory to the particular agreement or arbitration clause in question.

In India, this doctrine has been recognized and applied by the courts in various cases to ensure fairness and justice within corporate structures. It allows for a approach to arbitration by considering the entire corporate group as an interconnected unit rather than treating each entity in isolation. This approach is especially relevant when disputes arise within corporate groups, as it enables the arbitration process to encompass all relevant entities and parties involved, regardless of whether they are direct signatories to the arbitration agreement. When an arbitration meant for two encompasses that realm and starts to include the third party, the entire premise of arbitration falls apart as a third party by judicial intervention is being impeded. The same is also the source of added transaction costs.

The Coase theorem posits that two parties, when faced with a dispute, can negotiate and reach an optimal solution if transaction costs are minimal, and there are incentives for both parties to cooperate.

However, the inclusion of a third party under the Group of Companies doctrine can complicate the negotiation process and blur the lines between the original parties involved. The doctrine treats interconnected entities within a corporate group as a single economic entity, potentially disrupting the dynamics of the negotiation and hindering the ability of the original parties to reach an amicable solution.

When a third party is brought into the arbitration process, it may alter the power dynamics and incentives for cooperation between the original disputing parties. The presence of a third party introduces additional interests, perspectives, and potentially conflicting objectives, which can complicate the negotiation process and impede the search for an optimal solution.

Furthermore, the inclusion of a third party may increase transaction costs and hinder the efficiency of the negotiation process and this also leads to reduction in the bargaining power allotted to each party. So let’s say in a arbitration matter of 100 crores between two parties, party A impedes party C which is a subsidiary of Party B, the transaction costs which in an ideal case would have been minimal increase because of the introduction of a third party, moreover one of the principles of arbitration is amicability between the parties and if a third party is impeded the the parties are not in an arbitration based on their free will but are forced to co-operate which would lead to them act vindictively towards each other and not-cooperate and defeat the purpose of an arbitration hence party B would turn hostile towards the demands of party A to co-operate and understand the nuances of the same leading to them not cooperating.

This also leads to a creation of tradeoffs where the party has to choose whether they wish to cooperate with each other and reduce transaction costs or if the parties will go into the nuances of arbitration and implicate one other and their subsidiaries as the incentive to co-operate is seriously hampered.

Cost-Benefit Analysis

In any economic parlance, the most sensible outcome is when the benefits are more than the costs; this makes the decision more viable and creates fiscal prudence. If an arbitration agreement which was engaged upon in the first place to ensure that the benefits are more than the cost is defeated as this judgment of the hon’ble supreme court increases the cost of the arbitration matter as well as the time devoted to such arbitration.

So, if a firm or a party were to derive a rational arbitral award at the end of the arbitration between two parties, the inclusion of a third party into such an award would lead to increased transaction costs and increased time, taking away the premise of swift dispute resolution which is the essence of arbitration.

This becomes even more problematic as the government of India tries to promote India as a seat of arbitration, which would have ensured a great flow of revenue into the Indian markets as arbitration matters today generally go to Singapore and Hong-Kong for the sake of arbitration would have been settled in India, this was also an opportunity for the Indian government to ensure that India becomes a credible jurisdiction with a stability in it’s laws an jurisprudence to create a conducive environment for firms and institutions to rely upon only increasing the visibility and access to such global firms and institutions but one of the repercussions of this judgement is that it reduces the reliability of the Indian legal system and tags it as non-uniform and arbitrary.

Moreover, while the third parties can be included into arbitration but the relief provided to them is limited, hence the third party does not gain anything significant by being dragged into the arbitration proceedings but they do face economic repercussions as their market value is tarnished and they have to engage in unwarranted litigation.

Amazon Future Arbitration

In 2019, Amazon acquired a stake in Future Coupons, a subsidiary of India’s Future Group, which owned popular retail chains such as Big Bazaar and Reliance Retail. While reliance was not a third party to this arbitration, it was dragged by amazon and this led to a bitter situation. The dispute has garnered significant media coverage and public attention, affecting the public perception of the involved companies which also had an impact on their shares triggering investors about the resilience of these companies and also increased the time of arbitration creating gigantic costs. This also created a situation where day to day operation of the third party were affected. This happened when reliance has not consented to such arbitration. Eventually more bodies like the SEBI and CCI also got involved taking the matter to the hon’ble supreme court and defeating the motive of the arbitration.

International Jurisprudence

The understanding of global arbitration jurisprudence has gained significant attention from legislatures and judiciaries worldwide. This issue has been a subject of discussion in major financial centers, including the United Kingdom and Singapore. In the case of The City of London v. Sancheti (2008), the UK rejected the notion that mere association is sufficient grounds for including a third party in arbitration. They disagreed with the idea that a non-signatory could be considered a party based on the theory of a single economic unit.

Similarly, in Singapore, a prominent arbitration hub, the concept of a group of companies has been excluded from arbitration agreements, and non-signatory entities cannot be compelled to participate in arbitration. Singaporean jurisprudence has expressed reservations regarding the theory of a single economic entity, which forms the foundation for including non-signatory parties in Indian jurisprudence. Since the jurisprudence remains unchanged and untouched from the sphere of courts, leading arbitration hubs in the world. As a result, many international businesses and parties choose Singapore as their preferred seat for resolving cross-border disputes through arbitration some of the most difficult arbitrations happened in Singapore for example Sanum Investments Ltd. vs. Laos (2016), PT First Media TBK vs. Astro Nusantara International BV (2014), Epic Games Inc. vs. Apple Inc. (2021). This stability has ensured that global business giants consider Singapore as a business destination. hen arbitration laws and jurisprudence are stable and well-established, businesses and investors have a clearer understanding of how disputes will be resolved in the event of a disagreement. This predictability and certainty reduce the risks and uncertainties associated with cross-border transactions and investments, making it easier for parties to engage in international trade and commerce.

The Way Forward

The ratio propounded by the chloro chemicals judgement has rightly been put into question by the hon’ble supreme court. This puts emphasis on the lacunae present in the judgement where the courts have deviated from the original meaning and framework of the Arbitration and conciliation act to a framework where a third party could in impeded. In some instances, it could result in increased liability for the non-signatory third party, potentially impacting their financial position. Conversely, it could also lead to the enforcement of rights and obligations against non-signatory third parties, ensuring that all entities within a group bear the economic consequences diluting their status as a legal person and divergence from the established principles of corporate law increasing economic uncertainties and opening up a pandora’s box.

A system works perfectly when there is a certain level of certainty in the market. he participation of non-signatory third parties in arbitration should ideally be based on their voluntary consent and agreement. Parties should engage in negotiations and discussions to seek the consent of all relevant entities involved in the dispute, ensuring that they understand the implications and consequences of participating in arbitration. This perhaps is based on the framework of coase theorem.

Conclusion

As we recognise the problem and the courts as well lay down the significant jurisprudence for the same. it is important to address the lacunae in the judgment and reconsider the implications of including non-signatory third parties in arbitration. Parties should engage in negotiations, seek voluntary consent, and uphold the principles of certainty, fairness, and cooperation in order to preserve the integrity and effectiveness of the arbitration process.

The author is a student of Gujarat National Law University, Gandhinagar.

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