Supreme Court Upholds 'Group Of Companies' Doctrine Stating Arbitration Agreement Can Bind Non-Signatories

Supreme Court Upholds 'Group Of Companies' Doctrine Stating Arbitration Agreement Can Bind Non-Signatories

Earlier, a three-judge bench led by then CJI NV Ramana had referred the matter to a larger bench

A Constitution Bench of the Supreme Court has held that an arbitration agreement can bind non-signatories as per the ‘group of companies’ doctrine.

The bench comprising Chief Justice of India DY Chandrachud, Justice Hrishikesh Roy, Justice PS Narasimha, Justice JB Pardiwala, and Justice Manoj Misra stated, "The 'group of companies' doctrine must be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements."

In the Cox and Kings Ltd v. SAP India Pvt Ltd case, the Court explained it was not necessary that only the signatories to the arbitration agreement were bound by the arbitration agreement. The written arbitration agreement did not mean that non-signatories would not be bound by it. That’s if there’s a defined legal relationship between the signatories and the non-signatories and the parties intended to be bound by it by the act of conduct.

While pronouncing the judgment, CJI Chandrachud said, "The signature of the party in the agreement is the most profound expression of consent of the person to submit to jurisdiction. However, the corollary that persons who have not signed aren't part of the agreement may not always be correct.”

The Court added that non-signatories, by their relationship with the signatory parties and their commercial involvement in the subject matter, were not total strangers to the arbitration agreement.

The judgment stated:

a. The definition of parties under Section 2(1)(h) read with Section 7 of the Arbitration and Conciliation Act, 1996 includes both signatory and non-signatory parties.

b. The conduct of non-signatories could be an indicator of their consent to be bound by the arbitration agreement.

c. The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties.

d. Under the Arbitration Act, the concept of the parties is distinct from the concept of parties ‘claiming through or under’ a party to an arbitration agreement.

e. The underlying basis for the application of the 'group of companies' doctrine rests on maintaining the corporate separateness of the group of companies while determining the common intention of the parties to bind non-signatories to the arbitration agreement.

f. The principle of 'alter ego' or 'piercing the corporate veil' cannot be made the basis for the application of the ‘group of companies’ doctrine.

g. The principle of 'group of companies' has an independent existence as a principle of law, which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act.

h. To apply the 'group of companies' doctrine, the Courts or tribunals must consider all the cumulative factors as laid down in Discover Enterprises. Resultantly, the principle of a single economic unit cannot be the sole basis for invoking the ‘group of companies’ doctrine.

i. The persons claiming ‘through or under’ can only assert rights in a derivative capacity.

j. The judgment in the Chloro Controls India Pvt. Limited vs. Seven Trent Water Purification Inc. case is erroneous to the extent that it held that 'non-signatories' can be roped in by invoking the phrase ‘parties claiming through or under’ as the said phrase is used to bind successors-in-interest of party in a derivative capacity.

k. The 'group of companies' doctrine must be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements.

l. At the referral stage, the referring Court must leave it to the arbitral tribunal to decide whether non-signatories are bound by the arbitration agreement.

Meanwhile, Justice Narasimha penned a separate but concurring judgment.

In May 2022, a three-judge bench led by then CJI NV Ramana referred the matter to a larger bench. He observed that some aspects of the ‘group of companies’ doctrine required reconsideration, doubting the decision in the Chloro Controls case and the subsequent decisions following it.

In the Mahanagar Telephone Nigam Ltd. vs. Canara Bank, (2020) 12 SCC 767, case it was observed that the ‘group of companies’ doctrine could be utilized to bind a third party to arbitration if a tight corporate group structure constituting a single economic reality existed.

The matter pertains to an application filed under Section 11 of the Arbitration Act by Cox and Kings seeking the appointment of arbitration in international commercial arbitration in a dispute related to SAP India. The issue was where the German holding company SAP India could be roped in for arbitration.

The bench noted that the ‘group of companies’ doctrine must be applied with caution and the mere fact that a non-signatory was a member of a group of affiliated companies was not sufficient to claim an extension of the arbitration agreement.

The judges stated that the ratio in Chloro Controls was based on economic convenience rather than the correct application of the law. They referred the matter to a larger bench relating to the interpretation of 'claiming through or under' as occurring in amended Section 8 of the Arbitration Act qua the doctrine of the ‘group of companies’.